Bankruptcy of Iceland to the recovery of a model does not follow Ireland

Iceland is betting on its decision two years ago to force the bondholders to pay for the collapse of the banking system can help you recover quicker from Ireland.

Iceland's taxpayers face a debt burden smaller than their counterparts in Ireland, where the Government's guarantee of the financial system in 2008 failed this year, when banks approached insolvency. Icelandic budget deficit will be 6.3 percent of gross domestic product this year and will disappear by 2012, compared with a deficit of 32 per cent in Ireland, the European Commission estimates.

While analysts expect the recession of Iceland to extend until next year, the nation's exporters are benefiting from a decline of 28 percent in the krone against the dollar since September 2008. This reduction can help the nation of 320,000 people rebalance its economy faster than Ireland, which rule out euro membership of the currency devaluation. With the index of the shares of OMX Iceland to 17 percent this year, the gain of the third largest in Europe after Denmark and Sweden, Nobel laureate economist Paul Krugman said that Iceland may be an example of "bankruptcy you same recovery. "

"The difference is that in Iceland, which allowed banks to fail," said Iceland's President Olafur R. Grimsson in a Nov. 26 interview with Mark Barton. "These private banks and not to inject money into them to keep them going, the state does not assume responsibility for the private banks."

'Burning' Question

The island of bank debt remains with lenders, creditors have to recover 85 billion U.S. dollars. The decision of who should bear the cost of bank failures is becoming a "hot" issue in Europe, said Grimsson.

"Holders of senior bonds in some countries must accept that there may be haircuts or participate in reconstruction operations," said Michael Derks, chief strategist based in London FxPro Financial Services Ltd., in an interview. "It just does not add up otherwise, the senior bondholders will have to participate. There is no way around it."

Ireland and Iceland boasted growth rates above 5 percent from 2005 to 2007 when they opened their economies to international investment. Both then succumbed to a financial industry that exceeded their economies overheating. Iceland recession will be deeper this year than in Ireland, although the Atlantic island exceed member euros in 2012, the Organization for Economic Cooperation and Development said in a report published on 18 November.

A letter, six months

In 2009, the joke was: What is the difference between Iceland and Ireland. Answer: One of the letters and about six months. "In almost two years, the joke is on the wild," Krugman said in a column published on 24 November at the New York Times. "Right now, Iceland is actually a little better than in Ireland."

Ireland 85 million euros ($ 111 billion) rescue package came after weeks of negotiations in which German Chancellor Angela Merkel was forced to water down the demands that bondholders bear part of the cost of future bailouts, instead of piling all the burden on taxpayers.

Irish bank bonuses above increased 29 November, the day after the country's rescue was announced, as investors were spared the prospect of sharing losses with taxpayers. Bank of Ireland Plc 1,470,000,000 euros of floating rate senior notes due September 2011 gained almost 10 percent to 90 cents. Bondholders of Kaupthing Bank hf of Iceland, by contrast, will get about 26 cents per euro, according to brokerage Verdref HF high frequency.

"Heterodoxy is working"

While the Bank of Ireland bonds rose, the euro fell to 1.3 percent against the dollar, its lowest since Sept. 21. Speculation that the European Central Bank can delay emergency funding support for the euro today. The single currency gained 0.4 percent against the dollar to trade at 1.3197 at 10:47 pm in London.

Krugman says "orthodox" Ireland's answer - to push through austerity measures and the guarantee of bank liabilities to remain in the euro - in contrast to the "unorthodox" solution Iceland - the currency devaluation, debt restructuring banking and capital restrictions put in place. "Heterodoxy is working much better than orthodoxy," said Krugman.

Iceland will be a budget surplus for the year 2012, compared with a deficit of Ireland, 9.1 percent of GDP, the European Commission estimates. Unemployment in the euro member will remain at 13.6 percent this year and next, compared with a peak in 2011 of 8.1 percent in Iceland, OECD data.

"Tremendous burden"

Iceland, which began accession negotiations in the EU this year, is experiencing a "durable recovery," meaning "forward to pick up steam" next year, the IMF said in an October report. Iceland's government said he had no choice but to let the lenders. Before its collapse, the banks had debts equal to 10 times 12 billion U.S. dollars of GDP of Iceland.

"Trying to rescue a banking system that is too large is a tremendous burden," said Finance Minister Steingrimur Sigfusson, in an interview in Oslo. "It was a question that we rescue the banks, but they were too big."

Irish bank failure would fall most of the rest of the euro region in the crisis, said Valdimar Armann economist based asset management company Reykjavik GAMMA. "The banks are too caught up in the European network of banks," he said.

European banks had 509 billion U.S. dollars in claims against Ireland in late June, the BIS data show. euro-region governments assess the extent to which potential investors should take the depreciation on a case by case from 2013, finance ministers, said on 28 November.

Kaupthing, Landsbanki Islands hf and Glitnir Bank hf not two years ago after being unable to guarantee short-term financing. Kaupthing called liquidation committee of 26 November, said it is to cope with 28,167 claims filed by creditors over 119 countries for a total of $ 63,000,000,000.