Once a joke, Iceland may get the last laugh

BRIAN MILNER Report on Business
The experts have started writing off Ireland, with its shattered banks, flatlined economy and disillusioned populace, as a long-term basket-case with dim recovery prospects. Maybe they should

That would be Iceland, which has just posted economic growth of 1.2 per cent in the latest quarter. That’s pretty feeble, even by European standards. But it comes after nearly two years of contraction. And to bring even more Christmas cheer to its resilient but still suffering citizenry, inflation fell last month to 2.6 per cent from 3.3 per cent in October, the lowest level since 2004. And the benchmark interest rate has dropped to a more manageable 4.5 per cent.

At the height of the global financial crisis that destroyed its massively overleveraged banks, shredded its economy and drove the government to the brink of bankruptcy, Iceland’s official interest rate soared to 18 per cent.

So the Irish can take heart. It is possible to force international creditors to eat some losses, restructure debt and survive the destruction wrought by greedy, short-sighted bankers, foolish governments and even inept central banks.

Of course, Icelanders had one small advantage over the euro zone’s basket cases – their own currency and an independent monetary policy. When the krona collapsed, plenty of Icelanders moaned that they should have opted to join the EU long ago. But capital controls revived their battered currency, which has climbed more than 20 per cent against the euro in the past year. As much of their trade is conducted in euros, this has helped fatten export gains, which have underpinned the economic recovery.

Like Ireland and Greece, Iceland had to get a bailout to survive the worst of the storms. But unlike the Europeans, Iceland did not pour good money after bad in a futile effort to rescue its zombie banks. Iceland simply pulled the plug on banks that had no means of saving themselves. Bank bondholders will be lucky to get 25 cents back on the dollar. But that’s the pain investors must bear for buying a story that was always too good to be true.

And it’s the same path the Europeans will eventually have to follow, if they ever want to get out of their current predicament