Islandia, 10 urte beranduago. Turismoaren garrantzia

Sarrera gisa, ikus Islandiatiko albisteak eta Islandiatiko albisteak (2)

Segida:

Olafur Margeirsson‏ @IcelandicEcon¹

“Iceland, 10 years later”. The recovery after 90% of the banking system collapsed is quite a story

Iceland, 10 years later

https://www.patreon.com/posts/iceland-10-years-13787375

2017 abu. 11

Iceland, 10 years later

(Ikus Irudiak hemen: https://www.patreon.com/posts/iceland-10-years-13787375)

Now that we are all looking back and reflecting on the last 10 years since the start of the crisis, it is in order to look as

First, lets look at economic growth. After a debt-fuelled party of 4-10% annual growth, we hit the rock in 2009 and 2010.

(Irudia)

Unemployment skyrocketed:

(Irudia)

And public finances got hit pretty hard as the automatic stabilisers kicked in. IMF sometimes prides itself in having allowed Iceland to run a considerable public deficit in order to fight the crisis. But truth be told, the political instability was so severe (on an Icelandic scale, no Molotovs were thrown) that the governments since 2008 didn’t dare to tighten the belt too much. Even today, trust in politicians is at a historical low. Naturally, and thanks to the tourists as well, the economy recovered remarkably quickly. The tourists also boosted tax income, leading to a drop in the public debt as the economy recovered:

(Irudia)

Speaking of tourists, today we have the situation that the number of tourist arrivals in Iceland during the winter is much higher than during the summer 10 years ago. You can imagine the boost to effective demand!

(Irudia)

The banking crash in Iceland was nearly absolute. 90% of the banking system collapsed in less than 2 weeks. It truly is a remarkable feat carried out by the Central Bank of Iceland to keep the payment system running the whole time. But of course, the expansionary phase was remarkable as well:

(Irudia)

Naturally, as the banks were the majority of the stock market, that crashed as well:

(Irudia)

And the housing market bubble popped of course as well. Housing starts became a rare event after the bank-credit fuelled party the years before. Naturally, as the tourists needed to stay somewhere and hotels were full, AirBnB offers on the residential market along with the all but absent new supply of housing raised residential rents and housing prices. Consequently, many people today are of the opinion that there are more than enough tourists in Iceland as they are, by these people, considered being responsible for the lack of affordable housing for the everyday Icelander. If you ask me, expanding the supply of housing would be a better idea – along with the obviously needed infrastructure projects for the sector (roads, restrooms, pathways, etc.) – than to stop the tourists from coming.

(Irudia)

The currency was of course dumped on the FX market, causing the price of the US dollar to increase by more than 100% within a year.

(Irudia)

The central bank tried to stop the depreciation of the currency by raising interest rates (although far from the 500% interest rates that were tried in Sweden in the ’90s). A desperate attempt was made to peg the currency to the EUR but that peg broke down within one day. Some say that was just a veil and the real purpose had been to allow politically favoured people to escape the economy with their funds before the economy came to a total standstill. This has however never concretely been shown to be true, but this story is one of the shapes that the lack of trust towards politicians takes.

(Irudia)

Naturally, as the currency crashed, inflation spiked, driven by higher import prices. High inflation and currency devaluations are however nothing new in Iceland, simply because we have, historically, allowed the banking system to expand the economy’s credit and money supply way too much way too fast – with obvious consequences. 

(Irudia)

High inflation and high unemployment led, of course, to quite a shock to real wage growth.

(Irudia)

Finally, no narrative touching on Iceland’s economic crash and comeback is complete without the economy’s sectoral balance. 

I have yet to find a private sector in a developed economy that has ever managed to rack up a deficit equal to 30% of GDP within one year. The sad thing is that anyone with just an introductory understanding of Minsky’s financial instability hypothesis would have grasped how impossible it was this would continue. But most Icelandic economists, and the politicians they advised and advise, have never read it – but here is your chance. I know I’ve pasted this here before, but it simply needs to be highlighted how phenomenally strong the debt bubble in Iceland was. 

Notice the deleveraging since 2010. Again, it is thanks to the tourist industry, especially since 2013, that the Icelandic private and public sectors managed to reorganise their balance sheets after the crash. Kicking the tourists out, or allowing the ISK to become so strong they stop coming, would be crazy and risk making it quite impossible for the domestic private and public sectors to continue reorganising their balance sheets towards being more robust and recession proof. 

(Irudia)

Overall, Iceland got out of the worst of the crisis quite quickly. Yes, the shock was terrific: it is practically unheard of that 90% of the banking system collapses in matter of days. But the boost in external demand, driven by the tourist industry, which was in part taking advantage of the depreciation of the currency, kept the economy afloat. 

We shouldn’t, however, forget that the aftershock of the crisis in Iceland still lives on, even if economic growth has been strong and employment improved. This is especially visible when it comes to politics. The old traditional parties have lost their trust and new parties and movements have spawn and grown.

Gehigarriak:

Islandia eta DTM (Bill Mitchell-en eskutik) (1)

Islandia eta DTM (Bill Mitchell-en eskutik) (2)

Islandia eta DTM (Bill Mitchell-en eskutik) (3)

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