Wednesday, January 21, 2009

Britain doesn’t have the luxury of Iceland’s “solution”

UK cannot take Iceland's soft option

"The British government faces an excruciating choice. It cannot let Royal Bank of Scotland and its fellow mega-banks go to the wall. Yet it risks being swamped by the massive foreign debts of these lenders if it takes on their dollar, euro and yen exposure by opting for full nationalisation. The parallels with Iceland are disturbing. But Iceland at least had the luxury of letting banks default – shifting losses on to the rest of the world. It refused to honour foreign debts. The UK cannot go down that route because it would set off an asset price death spiral. So whatever the temptations, Chancellor Alistair Darling cannot copy Iceland."

Posted by drewster @ 12:25 AM (1138 views)
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10 thoughts on “Britain doesn’t have the luxury of Iceland’s “solution”

  • “the British Government had taken far too long to resort to quantitative easing – printing money – and had wasted months with fiscal frippery as debt deflation throttled the banks.”

    So was Blanchard right all along? That’s a depressing thought for me. Maybe I just don’t understand debt because I’m not a debtor.

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  • stillthinking says:

    we can can copy Iceland, that’s the whole problem, we -can- copy Iceland, just a much bigger flamboyant version.

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  • mountain goat says:

    Not allowing failed financials to fail is a mistake. The game is up but GB thinks he can keep it going by propping them up. The bailouts will go on and on because houseprices and other asset prices have only started falling. It will cost well over £1 Trillion and will destroy the wealth of this country. These are not loans that will come good in 10 or 20 years time. The value is lost never to return. People who made bad investment decisions, now holding bad debt, are being protected. By supplying the easy credit in the first place they caused this problem. This will go down as the greatest heist in the history of the UK.

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  • Stillthinking,

    I agree entirely. Britain could easily do an Iceland, but it will be disastrous for us. In the past I’ve drawn comparisons with the currency crises in Mexico (1994) and Argentina (c.2001), but at least in those countries there wasn’t nearly as much debt. The more I think about it, the less I can see a clean way out of this.

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  • MG it is easy to propose letting financials as a solution but it would help if you would describe how you envisage that solution would have played out.

    Personally I don’t think there is any obvious solution other than going back in time and reversing the gross mismanagement not just of this labout govt but to an extent of the conservatives before them.

    I am becoming concerned that the govt is losing contol of matters, which I susppose suggests it ever had things under control in the first place. Clealry it didn’t.

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  • mountain goat says:

    Bellweather – letting companies go bankrupt means auditors go in and value things to market. Valuable assets get sold off to healthy firms. The current bailouts are about maintaining the UK status as a financial centre. What I am saying is that game is up if the banks are insolvent. Trying to maintain a status that is not sustainable is something markets are very good at punishing. Just think George Soros…

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  • But MG the problem there is no market, or the market is so small that we would all be crushed by the effective devaluation. This is not a sellers market, it’s not even a buyers market. Our country is supported by its effective assets, by valuing them in the current climate and selling them at close to nil (which is all the decimated market would offer us) would destroy us.

    If everyone were to follow the same course (is this the soros position?) , you might have a point but the countries that continue the con trick would be the ones buying up the assets and would be the ones boosted by what would be our permanent demise.

    The argument you put for some reason reminds me of the CND argeument that we should unilaterally disarm

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  • mountain goat says:

    At the end of the day the financial system got too complicated and too many players walked away with £million bonuses after manipulating the system, leaving a rotten house of cards that can’t be fixed. Clear the decks I say, let them all go to the wall and new healthy companies emerge where they are needed.

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  • mountain goat says:

    Bellwether – “This is not a sellers market”

    I think now is a fair market. In the past few years it was a fraudulent market. The whole debt bubble that funded the housing boom was done by fraud, valuing junk as AAA. Now it is what it always was, junk.

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  • MG your email is just repulsion at what happened. We are all repulsed but conclusions formed in extreme reaction tend to be unstable. You have not actually addressed my point 7.

    I’m saying that at a larger scale there is no effective market for what is of value. Financials and assets are currently valued at close to zero which is as absurd as the ridiculous corrupt, inflated valuations previously attached to them. You are confusing a fallow period so something new can grow with scorching the earth. You are being as extreme as the inflationsists and you are proposing it unilaterally.

    Not everything held is rotten just a lot of it, people and companies will work to pay back debt.

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