Asset freezes. Threats of litigation. Expressions of mystification about the intentions of a foreign government. The latest round with another axis of evil country? No: the current state of relations between the UK and Iceland. As we were saying before we were so rudely interrupted, Iceland is leading the way from a banking crisis to a sovereign debt crisis, and significant overseas impact is being felt in the UK given the presence of subsidiaries of Icelandic banks. The recent statements from Alistair Darling tell the story.
Author Archives: P O Neill
The crisis goes sovereign
With European countries in a rush to take banking sector liabilities onto the public balance sheet, they might want to take a look at where that route goes, in extremis: Iceland, as a banking crisis becomes a full blown macroeconomic crisis. Today has seen a bewildering series of events, even against the backdrop of a problem that had been viewed as unsustainable for a long time (gross external debt 550% of GDP). We have: Russia apparently emerging as the lender of last resort (which must indicate other requests that were turned down), and the adoption of a what looks like a crazily overvalued peg for the króna (130/euro official when it’s trading at 200/euro). The underlying cause is the huge size of the banking sector and its reliance on overseas liabilities relative to the size of economy — a situation that will have uncomfortable echoes in non-Eurozone eastern Europe.  Indeed, it’s only that Iceland is so small that the situation has not already caused more panic than it has.  But it’s a disturbing parable for the overall banking crisis.
Doha can wait
Gordon Brown does a nice job of grabbing the headlines with Peter Mandelson’s return to the Cabinet as Business Secretary. It’s hard to divine what this means for the European Commission. Catherine Ashton will take his place as Trade Commissioner and there’s nothing in her background that indicates that she’s as ready as Mandy was to push the WTO negotiations to the point of irritating the EU’s agriculture-intensive states. In any event, trade has slipped down the list of headlines with the global financial crisis and Mandy has a well-timed opinion piece in the Guardian that clearly crosses into Charlie McCreevy’s banking regulation turf, so it was likely drafted with one eye already on the next job.  In fact, the kind of protectionism that used to draw concern on trade issues has, at least in an intra-EU context, shifted to finance with banking guarantees and bailouts. As much as anything, Mandelson probably saw better of waiting around another year to push through a trade deal that no one cares about right now. But can he keep out of trouble in the new job?
Competitive guarantees
One of the diagnoses of why the Great Depression was so bad is that countries engaged in “competitive devaluation” — weakening their exchange rates to make exports cheaper, but when all try to do this, no one gains, and confidence runs out. One wonders today if Ireland has created a new version of this risk with the dramatic government announcement that it is providing a public guarantee to all liabilities of banks with their HQs in the Republic of Ireland. That means every debt that these banks have to anyone: to their depositors, interbank lenders, and bondholders.Â
Revisiting regulatory wisdom
When the dust settles on whatever form of banking bailout the US Congress eventually approves, attention will turn to reassessing the philosophy that got the US to this point. But perhaps Europe will have to revisit some conventional wisdom too. Consider the case of Benelux financial services giant Fortis, which if this evening’s reports are to be believed, will soon be getting some kind of bailout of its own, most likely with the Belgian and Dutch central banks taking on some of the bad assets. Fortis has been stuck for cash since it joined a Royal Bank of Scotland consortium bidding for ABN Amro against Barclays — the latter bid being trumped by the higher cash portion in the former. The consortium’s idea was to break up ABN Amro, whereas Barclays was bidding for the group as a whole. The Dutch central bank was uneasy about the breakup idea, but just over 15 months ago, it was seen as the brave new world of cross-border European banking. Now it looks like classic winner’s curse. Barclays lost but since got to pluck the meat from Lehman Brothers. And Europe gets sucked into banking bailouts, big time.
Vote of confidence?
The IMF has just released its latest assessment of Hungary (news release, detailed report). It’s interesting and sobering reading — this is a country where the budget deficit nearly hit 10% of GDP last year and which is still spending 4% of GDP a year on public debt service. In Ireland we know how this can end badly: if interest rates go up, debt service suffocates everything in the budget and you’re screwed. Anyway, one bit of uneasy reading comes from the assessment’s assurances that the banking system is “profitable and well-capitalized”. Isn’t this the assurance that is given to every banking system right before it tanks? The profits come from huge leverage and “well capitalized” is just relative to the usual standard for thinly capitalized banks.  So good luck to Hungary.  There is a tricky balancing act of getting the public debt under control while not destabilizing the system that has a big share of mortgages denominated in foreign currency. At least all the USA’s problems are in dollars.
A new job description for EU Commissioners?
That’s what Paul Adamson argues for in today’s Financial Times. The basis of the argument is that we should acknowledge that the commissioners are not a dispassionate executive branch of the European Union, but people who bring their country interests to their respective portfolios — so why not make this explicit and let the commissioners be the interlocutors of their countries with the EU policy apparatus? Example: Charlie McCreevy
Jumping the gun
In an action that may remind the White House why their ally can sometimes be exasperating even to them, Georgian President Mikheil Saakashvili apparently pre-empted an announcement that George Bush will attend  a special “Summit of Friends of Georgia” in late October – which would be within a fortnight of the US elections in November. White House press secretary Dana Perino was evasive when asked about the report (see e.g. the Georgian Times) at the just concluded daily briefing. Yet Saakashvili’s claim sounds plausible, not least because it’s the kind of thing that Dick Cheney would have promised during his visit there last week. It also indicates that John McCain is not planning to rely much on Bush in that crucial period — which is perhaps why they would have rather made the announcement at a time of their choosing (e.g. late on a Friday evening).
Happy talk
Russia-Georgia is likely to be one of the main foreign policy issues “debated” at the Republican National Convention in Minnesota. Dick Cheney is in Baku this evening and here is a statement from George Bush announcing a package of aid measures. It includes the assertion —
The people of Georgia withstood the assault from the Russian military
“Withstood”? Of course people were resilient. But does anyone doubt for a moment that if the Russians really wanted to take Tblisi, they could have? Anyway, in addition to a $1 billion package from the US which Congress will have to approve (and Barack Obama’s running mate Joe Biden will no doubt champion), Georgia is also expected to get a $750 million loan facility from the IMF, which if exercised would fairly quickly make it one of the Fund’s biggest borrowers.  One more thing about Cheney’s visit to Baku: President Aliyev never mentioned Georgia in the statements to the press. No doubt these things get more complicated the closer you are to them.
Lisbon treaty ratification still in the doldrums
With all attention on Georgia it’s easy to forget that the European Union remains mired in the institutional crisis created by the Irish No on the ratification of the Treaty of Lisbon. With Irish ministers drifting back from their holidays, the issue will be getting more attention. Today’s Irish Times reports on what the Irish officials trying to deal with the crisis will view as an unwelcome leak: that a delegation visited Denmark to understand the technical details of Denmark’s opt-outs from the Treaty of Maastricht — opt-outs which, ironically, the Danes had hoped to unwind by referendum to be a full player in Lisbon implementation until they got uneasy following the Irish vote.