thoughts of the driverSteinn Eldjarn Sigurdarson on tech, tel, digital freedom and possibly his life..

I heard an interesting thing today, from an Icelandic economist, who recently joined the parliament. The Icelandic debts due to Icesave and other failed banks, valued at $5.8 billion, would be a huge burden on the Icelandic economy — paying these debts would require several years of reduced infrastructure (healthcare, education, social services), as well as selling some natural resources (at a time when it’s a buyers market, no less). He said, that if you take this debt as a proportion of the UK’s GDP, and and then multiply that percentage with the Icelandic GDP, the resulting number would be something rather trivial — around 300 million ISK (if I heard him correctly), which is equivalent to about 2.5 million dollars. Pocket change for a big country, right?

Now, because I thought this was pretty amazing, I went ahead and did some of my own calculations, and based on the GDP figures for Iceland and UK, as reported by Wolfram Alpha, and the (700.000.000.000 ISK = $5.8 billion) icesave-related debt, I decided to do some calculating.

As you can see here, I calculated that for an economy of the size of UK, to pay off the $5.8 billion, would be about the same load relative to the GDP, as if Iceland was paying off a debt of $39 million. Now, that’s obviously more than an order of magnitude away from what the Icelandic MP quoted (although him being an economist, and me being a programmer, I left the fields on my little calculator open for change!), it’s maybe not what I’d consider pocket change for the Icelandic government, as 0.21% of a country’s GDP shouldn’t be, but it’s a damn sight more possible than the possibility of paying more than 30% of a country’s GDP. To put the debt into more perspective, the entire Icelandic government budget for 2009 is $4.6 billion.

So, the idea of the exercise was pretty much to verify my MP’s claim, but on further examination, I figured out a couple of interesting things as well: what is currently happening to Iceland, if it were to happen to the UK, at the same scale the UK public would be asked to accept liabilities of around 864 billion dollars. Now, I’m not defending any bankers, but I’m pretty sure that UK public opinion on that kind of “bailout” would be rather divided, to say the least.

I Hope to get some reactions — especially in case I’ve made some drastic mistake somewhere (excuse: this was a quick hack at the end of the day, in order to procrastinate a bit!).

Today the currency of my native country of Iceland has fallen by 5.9% and the current EURISK rate stands at 118, whereas last summer it could be found hovering around 88, so the effective drop since then is about 34%.

According the reports found on foreign exchange sites such as fxstreet.com, this is written up to the current risk-aversion we see in global markets, and the fact the the Icelandic banks’ expansion of late was mostly fueled by high-risk investments and financing.

Couple this situation with an inflation of 9% for the last 12 months in Iceland, which is sure to increase rapidly due to the following facts:
1. Iceland has an import/export trade deficit of 2.5 billion euros in 2006 (that’s according to the 118 exchange rate). Divide that amongst the 300.000 inhabitants, and you have each persons debt increasing by 8.300 EUR per year.
2. The real-estate loan market is completely financed by index-linked loans, which are linked to the consumer price index (CPI) as published by Statistics Iceland institute (statice.is), which has by the way risen 27.5% in the last 5 years. These loans since 2004 have been primarily provided by the Icelandic banks, which are now offering them at around 6.5% interest linked to the CPI, which has risen over 6% per year for the last two years.
3. The CPI includes real-estate costs, so in effect there is a possibility for a (downward spiraling value) feedback loop.

I’m not an economist, and perhaps I’m getting a few things wrong, but overall it seems the economy of my little island, which has in the last few years been rocket-propelled by endless expansion of the banks, large industrial undertakings (aluminum plants, etc), and the recent few years of blooming investments worldwide, is not braking like the rest of Europe; suddenly but with ABS, but rather crashing quite uncomfortably into concrete barrier.