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Ireland could learn from Icelandic bank crisis

Iceland makes eighth interest rate cut this year
Iceland's Prime Minister goes on strike
Icelandic prosecutor opens probe into failed bank

REYKJAVIK (AFP) - Iceland managed its economic crisis better than Ireland by not rescuing its bloated bank sector with ruinous loans, economists said as on Tuesday it emerged from the depths of a deep recession.

The economies of the two island nations were both booming up until the middle of the last decade but completely imploded two years apart.

Iceland was first, its economy dragged down by the collapse of its three major banks in October 2008.

In a similar fall from grace, Ireland imploded a few weeks ago when its state guarantee for the banks scuttled the public finances and forced Dublin to ask for a bailout from the European Union and International Monetary Fund.

Because Icelandic banks were disproportionately large compared to the country's economy -- their assets were once worth 11 times Iceland's total gross domestic product (GDP)--, the tiny country did not have the option of bailing out the banks and had to let them fail.

"That alone has made for a very different result within the two countries," said Tryggvi Herbertsson, an economics professor at the University of Reykjavik and an aide to former Prime Minister Geir Haarde.

"Ireland is now over-leveraged (with debt) and their banking system continually weak. The difference in Iceland is that our banking system is clean and once the debt has been written off, we have a healthy banking system but in Ireland the system is broken," he told AFP.

Influential Nobel-prize winning economist Paul Krugman of the United States was among the first who, at the end of November, suggested Iceland in fact was better off than its European neighbour.

"Bankrupting yourself to recovery! Seriously," Krugman wrote in a New York Time column.

"In a nutshell, Ireland has been orthodox and responsible -- guaranteeing all debts, engaging in savage austerity to try to pay for the cost of those guarantees, and, of course, staying (with) the euro," the Nobel laureate wrote.

"Iceland has been heterodox -- capital controls, large devaluation, and a lot of debt restructuring," he said, summing up that as things stand now "heterodoxy is working a whole lot better than orthodoxy."

On Tuesday, Iceland -- a volcanic island of 320,000 inhabitants -- emerged from a deep and lengthy recession, with official statistics showing 1.2 percent economic growth in the third quarter.

According to the latest European Commission estimates, Iceland's public deficit will be at 6.3 percent of GDP this year.

That compares to a whooping 32 percent for Ireland, 20 percent of which can be attributed to its support for the stricken banking sector. Irish national debt will in turn soar to 100 percent of GDP, well above Iceland's.

Iceland, which at the end of 2008 was the first country to fall prey to the global financial storm, was destined to become a financial pariah, its absence from the eurozone and the European Union worsening its situation.

But the recession, however painful with thousands facing the danger of foreclosure and more than 4,800 people leaving, "has been shallower than expected and no worse than in less hard-hit countries," the IMF said in October.

Devaluation of the krona "significantly increased our export business and got us ahead of our competitors which, without a doubt, helped us through this difficulty and continues to drag us along and eventually out," euro-sceptic Finance Minister Steingrimur Sigfusson told AFP.

Official estimates forecast Iceland's economy is not out of the woods just yet, with GDP dropping 3.0 percent this year before growing 1.9 percent in 2011.

Last Updated (Wednesday, 08 December 2010 12:12)


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