Aliber zoega preludes to the icelandic financial crisis (2011)

Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Preludes to the Icelandic Financial Crisis 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Also by Robert Z Aliber THE MULTINATIONAL PARADIGM MANIAS, PANICS AND CRASHES (co-author) THE NEW INTERNATIONAL MONEY GAME Also by Gylfi Zoega LABOUR MARKET ADJUSTMENTS IN EUROPE (co-editor) 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 YOUR MONEY AND YOUR LIFE Preludes to the Icelandic Financial Crisis Robert Z Aliber and Gylfi Zoega 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Edited by Editorial and selection matter © Robert Z Aliber and Gylfi Zoega 2011 Individual chapters © Contributors 2011 No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978–0–230–27692–5 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library A catalog record for this book is available from the Library of Congress 10 20 19 18 17 16 15 14 13 12 11 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission List of Figures vii List of Tables xi Notes on the Contributors xiii Introduction Robert Z Aliber The Chapters in this Volume Gylfi Zoega 13 Privatization and Deregulation: a Chronology of Events Throstur Olaf Sigurjonsson 26 Part I International Organizations and the Central Bank of Iceland 41 International Monetary Fund, Article IV Consultations 2006 and 2008 43 OECD Economic Survey of Iceland, 2006 and 2008 50 Central Bank of Iceland Financial Stability Reports 2006–8 54 Part II Other Reports 75 Iceland – Macro Imbalances Trigger Negative Outlook Fitch Ratings 77 Iceland: Geyser Crisis Lars Christiansen 89 Financial Stability in Iceland Frederic S Mishkin and Tryggvi T Herbertsson 10 The Internationalization of Iceland’s Financial Sector Richard Portes and Frid¯rik Már Baldursson with Frosti Ólafsson 107 160 11 The Icelandic Banking Crisis and What to Do about it: the Lender of Last Resort Theory of Optimal Currency Areas Willem H Buiter and Anne C Sibert 241 12 Iceland on the Brink? Options for a Small, Financially Active Economy in the Current Financial Crisis Environment Daniel Gros 276 v 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Contents Contents 13 Events in Iceland: Skating on Thin Ice? Thorvaldur Gylfason 290 14 A Spending Spree Gylfi Zoega 296 15 Monetary Turbulence and the Icelandic Economy Robert Z Aliber 302 Part III 327 Lessons for Other Countries 16 Overbanked and Undersized: Lessons from Iceland Anne C Sibert 329 Appendix: Statistical Tables 341 Index 343 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 vi 3.1 Evolution of the banks’ share prices 33 7.1 Major banks’ refinancing risk 81 7.2 General government debt 84 7.3 Iceland: net external debt 85 7.4 Net external debt 85 8.1 Upswing driven by strong domestic demand 91 8.2 Energy and metal sectors are driving investments 92 8.3 Net exports have deteriorated and external imbalances are widening 92 8.4 Large imbalances even disregarding aluminium 93 8.5 Tight labour market is driving up wages 93 8.6 Even through the ISK is extremely strong inflation is rising above target which has forced Sedlabanki to hit the brakes 94 8.7 Public finances have not been tightened enough 95 8.8 Credit and money growth is spiking 96 8.9 Easy liquidity is inflating asset markets 96 8.10 Corporate and household debt is surging 97 8.11 External borrowing has exploded 97 8.12 International investment position has deteriorated 98 8.13 Crisis indicators – worse than Thailand, 1997 99 8.14 Fitch sparks market correction 101 8.15 Heading for a funding crisis? 102 8.16 Big gap between debt costs and equity income 103 8.17 Household debt: inflation linked 104 8.18 Very little impact through trade patterns 106 9.1 Current account GDP ratio 111 9.2 Current account breakdown (bISK) 111 vii 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 List of Figures 9.3 The partial relationship between volatility of the current account GDP ratio and size of countries 112 9.4 The ISK index 113 9.5 Annual growth of GDP (%) 114 9.6 The policy rate of the Central Bank of Iceland 114 9.7 Inflation, with housing and without housing (%) 114 9.8 General government surplus GDP ratio (%) 117 9.9 Net government debt GDP ratio (%) 118 9.10 Pension fund assets GDP ratio (%) 119 9.11 External debt GDP ratio (%) 121 9.12 Net international investment position GDP ratio (%) 121 9.13 External debt of the banking system GDP ratio 126 9.14 Foreign assets of the banking system (bISK) 126 9.15 Foreign lending (bISK) 127 9.16 Lending of the Housing Finance Fund (bISK) 139 9.17 Household borrowing from the credit system (bISK) 140 9.18 Share of foreign currency denominated corporate debt (%) 141 Development of CDS spreads of the Icelandic banks, year senior, basis points 146 9.20 Probability of a financial crisis based on CDS spreads 147 10.1 Credit system (% of GDP) 177 10.2 Glitnir Bank debt distribution 181 10.3 Kaupthing Bank debt distribution 181 10.4 Landsbanki debt distribution 181 10.5 Household debt service 184 10.6 Glitnir (borrowings/loans ϭ 0.77) 193 10.7 Kaupthing (borrowings/loans ϭ 0.81) 193 10.8 Landsbanki (borrowings/loans ϭ 0.41) 194 10.9 DnB NOR (borrowings/loans ϭ 0.35) 194 10.10 SHB (borrowings/loans ϭ 0.53) 194 10.11 Swedbank (borrowings/loans ϭ 0.6) 195 10.12 Return on equity, 2005–7 195 9.19 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 viii List of Figures 10.13 Tier ratios 197 10.14 CDSs for Icelandic banks, Nordic banks, Commerzbank, Jan 2006–Oct 2007 199 10.15 Bank consolidation 202 10.16 External debt position, 1990–2006 (at end of year and latest quarter) 210 External debt and assets, Q1/1998, Q2/2007 (at current prices) 211 10.18 Carry-to-risk ratio vs EUR/ISK exchange rate 212 10.19 Glacier bonds 213 10.20 Current account balance, 1945–2007 213 10.21 Components of current account, quarterly data in ISK (net current transfer is included in factor income) 214 10.22 ISK/EUR, ISK/USD, TWI 218 10.23 Correlation of various currencies with the ISK, daily changes (3m moving correlation) 218 10.24 Exchange rate volatilities 219 10.25 Real effective exchange rate (2000 ϭ 100) 220 10.26 OMX15 index volatility in ISK vs EUR 221 10.27 Interest rate differential with weekly data 226 10.28 Net position of banks in currency forward and options contracts 226 10.17 10.29 12-Month change in Consumer Price Index 228 10.30 CBI policy rate 228 11.1 Assets and liabilities of the three main banks compared to GDP (m.kr.) 246 Geographical breakdown of Icelandic bank assets, 2008Q1 247 11.3 Assets and liabilities of the three main banks (b.kr.) 247 11.4 CDS spreads for three Icelandic banks and iTraxx Financial Europe, 10/07/2006–10/07/2008 248 Official foreign reserves of the Central Bank as a percentage of GDP 253 Icelandic national accounts at constant prices (percentage change) 262 11.2 11.5 11.6 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 List of Figures ix Actavis, 177, 300, 313 see also pharmaceuticals adverse selection, 128–30, 132, 135–6, 148 agriculture, 169, 270, 293, 338 airline services, 203 Alfesca, 177 Aliber, Robert Z., v–vi, xiii, 1–12, 23–4, 302–26 aluminium sector, 37, 43–4, 47, 50, 58, 71, 78, 91–3, 161, 177, 207, 214, 217, 257–8, 262–3, 272, 293, 298, 300, 335 Karahnjukar hydropower project, 34, 37 see also metal sector AMECO, 279, 284, 286 see also European Commission Argentina, 12, 133, 136–7, 155n.22, 157n.42, 321 Armstrong, Harvey, 339 Arnason, Ragnar, 25n.4 Asgrimsson, Halldór, 36 see also Progressive Party Asia Asian Financial Crisis, 2, 5, 11, 19, 77, 84, 98–105, 127, 132, 134, 136, 155n.29, 156n.30, 158, 259, 294 countries of, 2, 12 savings in, 123 see also China; Korea; Japan; Thailand asset-backed securities (ABSs), 190, 199, 272 asset prices, 6–8, 18, 77–88, 108, 132, 143, 149, 264, 297–8, 304–7 falling, 9, 17, 23, 25n.8, 32, 55–62, 67–8, 77, 151: security on collateralized loans, 32, 130; stabilization, increases, 1, 7, 10–11, 14, 16, 18, 22, 24, 96, 318, 323, 325: above equilibrium values, 80 and the ‘transfer problem’, 307–15 see also asset price bubbles asymmetry of information, 128–30, 208 Australia, 1, 11, 78, 82, 84–5, 124, 162, 180, 209, 216, 218, 233, 236n.22, 238, 253, 337 Austria, 120, 337 automobile industry, 4–5 Bagehot doctrine, 204, 236n.20, 238, 240 balance of payments, 5–7, 86 ‘absorption approach’, see also current account; capital account; Keynes Baldursson, Fridrik Már, v, xiii, 20–3, 28, 30, 37, 40, 160–240, 275 Baltic states, 70, 172, 267 see also Estonia; Latvia; Lithuania Bank for International Settlements, 236n.25, 238, 309 bank run, 23–4, 129, 243–5, 249–50, 254–5, 271, 329–31 Banker, The, 123, 301n.4 banking system, Icelandic access to capital, 15, 54, 69, 71–2, 147, 180, 182 asset diversification, 65, 67, 73, 126 asset quality, 21, 58, 63, 64, 71–2, 116, 175, 179, 182 assets, 170 balance sheets, 14–15, 19, 23–4, 31, 44–9, 58, 60, 68, 80–1, 84, 89, 129–32, 135–7, 142, 148, 151, 201, 204, 206, 243–4, 254–6, 298–9, 318 capital gains, 4, 28, 187, 215 capital ratios, 65, 73, 171, 186–7, 192, 197–8, 200, 246 capital requirement, 5, 65, 142 capitalization, 4–5, 11, 68, 108, 125, 148, 173, 176, 192, 209–10, 221 343 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index Index banking system, Icelandic – continued chronology, 13, 26–40, 170 confidence, 44–50, 68, 70, 81, 109–10, 150, 153, 179 consolidation, 28–30, 83, 169–71, 201–2 contingency plans, 49, 57–9, 65–6, 70–1, 205 counterparty risk, 70, 245 credit ratings, 38, 56–7, 62, 64, 66, 69, 72, 102, 171, 180, 201, 257 credit risk, 16, 60, 64, 82, 128, 141, 145, 148, 161, 163, 182, 247 cross-ownership, 19, 21, 29–31, 59, 148, 160–1, 164, 179, 189 dependence upon wholesale money markets, 30, 46, 64, 97, 108, 148, 160, 178–80 deposit base, 69–70, 81, 161, 163, 180, 192 Depositors’ and Investors’ Guarantee Fund, 33 deregulation, 26–30, 123, 158, 201, 291 diversity, 191–2, 200 expansion, 22, 24, 30, 45–52, 62, 78, 97, 102, 118, 123, 160, 170–6, 185, 198, 202–4, 296, 299 expansion into Icelandic mortgage market, 140, 183 expansion into overseas markets, 30–1, 56, 67–8, 81, 108, 127, 148, 164, 182–3, 185 external debt, 63, 77–89, 95–9, 103, 126, 292 foreign exchange exposure, 61, 179, 185–6 foreign subsidiaries, 67, 148, 164, 171, 245, 251, 255, 260, 273n.7, 322–4 funding, 67, 69, 145, 192: maturity of funding, 180–1, 192–5, 241–5, 252, 258, 271, 292 globalization, 77–8, 123–5, 139, 155, 159–60, 163 implicit state guarantee, 22, 167, 173, 183, 291 insolvency, 16, 23–4, 32, 37, 135–6, 243–5, 250, 289, 302, 329, 332 instability, 18–24 lack of transparency, 20–1, 30, 49, 53, 59, 62, 65, 73, 84, 108–9, 148, 151, 160–1, 189, 200, 223, 232, 234 liberalization, 2, 15, 26–30, 34, 51, 107–8, 118, 122–3, 133–4, 138, 144, 155, 159–60, 164, 169–72, 179, 182, 201, 207, 231, 272, 290–1, 297 limited access to foreign credit markets, 67 liquidity, 15, 17, 38, 46, 48, 59–63, 65–7, 73, 78, 84, 87, 96, 101–4, 116, 126, 137, 147–50, 164–5, 172–5, 180–2, 200–4, 241–61, 270–2, 294: liquidity risk, 58–9, 145; liquidity buffer, 47, 49; liquidity ratios, 19, 65, 85 loan portfolios, 19, 61, 64, 67–8, 130, 179, 182–4 payment and settlement systems, 57, 63, 65, 70–1, 73 privatization, 2, 15, 22, 26–40, 117, 123, 160, 164, 168, 170, 201, 204, 207, 231, 291–2, 338 rapid growth, 30, 160, 164, 201 regulatory framework, 15, 20, 45, 50, 57, 63, 71 relationship with Icelandic Financial Supervisory Authority (FME), 116 reserve requirements, 37, 123 repercussions of collapse, 205 resilience, 233–4 return on equity (ROE), 171, 187–8, 193–7 risk indicators, 77 risk profile, 45, 48, 56, 67: diversification of risks, 30, 60, 67, 202 role of government in assuming debt burden, 104, 147 sale of foreign assets, 103 sector opened up to international capital markets, 15 shocks, capability to withstand, 71, 142, 180 size, 71, 334–8 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 344 ‘too big to fail’, 205 vulnerabilities, 71 banking system lending crash, 134 banking system, worldwide capital position, 67 counterparty mistrust, 66 losses, 66 banks Bakkavör Group, 177, 222 Barclays Capital, 146, 157 Bear Stearns, 244, 302, 321, 323 BN Bank, 35, 191, 202 Bunadarbanki 27–9, 34–5: Egla, 29 Commerzbank, 199 Credit Suisse, 332 Danske Bank, 19, 30, 36–7, 39, 154n.14, 157, 198, 236n.16, 332 DnB Nor, 192–8, 236n.16 FactoNor, 202 FBA Investment Bank, 28, 34, 201–2 FIH, 35, 38, 191, 202 FIM Group, 37, 191 Fisher Partners, 36 FL Group, 172, 189–90 Glitnir, 26, 28, 32–9, 142, 146, 153, 170–1, 177, 179–81, 183, 185–8, 190–3, 195–202, 218, 236n.12, 237n.38, 239, 245–8, 251–2, 256, 268, 273n.2–6, 274, 301n.4, 338: insolvency of, 32, 39; Islandsbanki, 28, 33–5, 202 Hauck & Aufheiser 29, 35: S–Group 29, 35 HBOS, 249 Icebank, 171, 202 ISB Luxembourg, 202 JPMorgan Chase, 302 Jyske Bank, 35 Kaupthing, 26, 28, 31, 33, 35–9, 142, 145–7, 153, 170–1, 176–7, 179–81, 183, 185–99, 201–2, 213, 221–2, 235n.6, 236nn.12, 27, 239–40, 245–8, 251–2, 255, 268, 273nn.2, 5, 6, 274, 301n.4, 326: Arion, 33; Edge, 37; Exista, 31, 172, 176, 189; insolvency of, 33, 39; Singer & Friedlander, 33, 35, 39, 191, 202, 255 345 Kreditt Banken, 202 Landsbanki, 21, 26–39, 142, 145–6, 153, 156n.34, 170–1, 179–83, 175–202, 236nn.12, 30, 245–8, 251–2, 256, 264, 268–9, 273nn.2, 5, 6, 309, 326, 338: Bridgewell, 191; Grettir Investments 31; Heritable Bank, 34, 202; Icesave, 33, 37–8, 180, 329; insolvency of, 32, 39; Kepler Equities, 36, 191, 202; liquidity policy, 147–8; Merrion Capital, 36, 191; New Bank of Iceland/Landsbanki (NBI hf), 33; Straumur, 31–2, 153, 171, 189, 221; Teather & Greenwood, 35, 191, 202 Lehman Brothers, 32, 38 Merrill Lynch, 25, 36, 179, 235n.5, 239, 323 Morgan Stanley, 236n.17, 240 NIBC, 37, 176, 190–1, 199, 205 Nordea Bank, 37 Nordic Investment Bank, 168 Norse Securities ASA, 202 Northern Rock, 244, 273n.2, 283, 302, 323 Samson ehf, 29, 34 Swedbank, viii, 192–3, 195–8, 236n.16 Swenska Handelsbanken (SHB), 192–8, 236n.16 UBS, 323, 332 Union Group, 36, 202 see also central banks barter economy, 122 Basel II standard, 116, 175 Baugur Group, 177 Belgium, 11, 24, 37, 84–5, 124, 321, 331–2, 337 Belkar, R., 236n.22, 238 Bernanke, Ben S., 154n.16, 155n.19, 157 BIS Triennial Central Bank Survey, 124, 178 Bishop, M., 26, 39 Bismarck, North Dakota, 333 see also United States of America Bjarnason, Vilhjalmur, 22 Bjorgolfsson, Björgolfur Thor, 29, 31 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index Index Bloomberg, 146, 195, 228, 235n.7, 236n.14 bond market, 57, 59, 66, 125, 162, 179–80, 183, 200, 202, 212, 220, 231, 233, 236n.36, 258 Icelandic, 173 spreads, 101 ‘borrowing short-term and lending long-term’, 30 Boycko, A.S., 26, 39 Brazil, 10, 12, 133, 156n.31, 303 Bretton Woods Agreement, 116, 168 see also IMF; World Bank Broda, Christian, 155n.24, 157 bubbles asset price bubbles, 2–3, 8–11, 18, 23–4, 36, 77–8, 296–8, 303, 322–6 credit bubbles, 1–2, 56, 303 see also Japan, Japanese Asset Price Bubble, 1986–91 Buiter, Willem H., v, xiii, 21, 23, 209, 237–8, 241–75, 329, 333, 339 Buenos Aires, 321 see also Argentina Calomiris, Charles W., 155n.19, 157 Calvo, Guillermo A., 155n.22, 157, 206, 239 CAMELS, 116, 175 Canada, 124, 180, 191, 253, 303, 331–2, 337 Canadian Journal of Economics, 340 capital inflows, 4, 5, 7–9, 23–4, 46, 133, 135, 144, 161, 207–8, 212, 224, 232, 240 capital account, see also current account; balance of payments ‘carry trade’, 20, 44, 64, 72, 146, 163, 206–7, 211–12, 217, 220, 225–6, 235, 238n.46, 240, 268, 298, 301 Cavallo, Domingo, 137 central banks Banco Central de Republica Argentina, 137 Bank of England, 242, 249, 255–7, 302 Bank of Latvia, 269 European Central Bank (ECB), 24, 32, 223, 238n.44, 242, 256–7, 273, 277, 279, 332 Federal Reserve (USA), 38, 155nn.21, 24, 158, 242, 256–7, 261, 302 Nordic central banks, 15, 147 Reserve Bank of Australia, 238, 253 Swiss National Bank (SNB), 256, 282–3, 331–3 see also Central Bank of Iceland (CBI) Central Bank of Iceland (CBI), vii, 6, 14, 34, 70, 94, 147, 150, 152, 174 criticism, 24 failure to recognize warning signs, 17 Financial Stability Reports 2006–08, 16–17, 54–73, 82, 90, 164 foreign currency reserves, 37, 46, 49, 67, 83, 101, 174, 205 independence from political pressure, 116, 170 Monetary Bulletin, 59, 62, 143, 174, 225, 235n.3, 236n.26, 238nn.45, 48, 239–40, 274–5, 301, 341–2 Monetary Policy Committee, 339n.1 money market involvement, 173–4 rules on foreign exchange balances, 61 stress tests, 62, 64, 72, 78, 81, 142 supervisory board, 174 see also inflation; interest rates; monetary policy, Icelandic Centre for Economic Policy Research (CEPR), 160, 239, 241, 274, 339 Centre for European Policy Studies (CEPS), 22, 289n.1, 309 Cheshire Guernsey Ltd, 37 Chile, 124 China, 112–13, 320 see also Hong Kong; Shanghai Christiansen, Lars, v, xiii, 19, 89–106 CMA, 339 Cockerell, L., 238 collateralized debt obligations (CDOs), 66, 81, 190, 199 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 346 Confederation of Icelandic Employers, 153, 291 confidence of Icelandic consumer, 46–7, 215 investor, 15, 19, 34, 44, 48, 50, 68, 70, 81, 81, 109–10, 136, 150, 153, 179, 230, 259, 295 construction sector, 22, 47, 55, 285–7 consumption, Icelandic domestic, 4, 44, 47, 104–5, 111, 165, 207 contagion, 105–6, 130, 189, 239, 254, 256, 259 emerging economies, 105 Scandinavian economies, 105 contingency plans, 58 corporate governance, 32 corruption, 3, 40, 107, 115, 135, 138, 166, 338 cost of capital, 19, 69, 72 Council of Europe, 168 Countrywide Financial, 302, 323 Coventry, 298 see also United Kingdom ‘credit crunch’ worldwide, 13, 66–7, 179, 297, 302, 321 credit default swaps (CDS), 37–8, 57, 145–6, 199, 236n.16, 247–8, 258, 299, 329, 339n.4 spreads, 37, 46, 59, 70, 146–7, 156n.41, 157n.41, 163, 165, 179, 199 credit market expansion, 23, 44 growth, 98 tightening, 9, 47, 69, 102 credit rating agencies, 56, 257 see also Fitch Ratings; Moody’s; Standard & Poor crises, financial Argentinean financial crisis, 2001–2, 136 Asian financial crisis, 1997, 2, 11, 77, 98–105, 127 economic crisis in Mexico, 1994, 2, 10 Ecuadorean financial crisis, 1999, 136 ERM currency crisis, 1992, 131 347 Japanese Asset Price Bubble, 1986–91, 1, 10–11 Russian financial crisis, 1998, 136 solutions to, 250–1 Swedish banking rescue, 1992–3 Turkish crisis, 2001, 98–104, 136 currency markets see under foreign exchange markets currency swap agreements, 15, 38, 46, 48, 253 current account, 111, 166 balance, 86 deficit (CAD), 5–9, 18, 20, 43–4, 59, 63–4, 77–80, 82, 89, 91–3, 106–10, 113, 144, 162, 176, 206–9 as a percentage of GDP, 98, 99, 111–12 reserve, 34 surplus, 111, 113 volatility, 112–13 see also capital account; balance of payments Cyprus, 277–84, 288 Czech Republic, 124 Danielsson, Jon, 339 Davidsson, P., 40 debt denoted in foreign currency, 55, 60, 68, 82, 87, 97, 101, 104, 131–2, 138–41, 182, 212 external debt, 8–9, 11, 16, 63, 77–80, 87, 95–7, 99, 120–1, 176, 208, 210, 216, 341 external debt ratio, 84, 95 government, 5, 70, 77, 83, 97, 108, 117–18, 147 household, 55, 80, 96, 97, 121, 131, 139–40: as a percentage of household income, 140, 183–4 as a percentage of Icelandic GDP, 96, 99, 138 price-indexed, 81 private credit, growth, 95–6 private sector, 48, 55, 79–80, 88, 96–7, 99, 141 see also mortgage market 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index Index demand foreign demand for securities, 7–10 Icelandic domestic, 5, 43–4, 63, 91, 113 Demirguc-Kunt, Asli, 155n.27, 157 De Nicolo, G., 156n.32, 157 demographics, 120, 176 Denmark, 1, 24, 35, 37, 71, 122, 147, 165, 168, 176, 191, 209, 242, 253, 273n.1, 289n.1, 295, 322, 332, 334, 337 Berlingske Tidende, 35 depository monetary banks (DMBs), 263–4, 341 Detragiarche, Enrica, 155n.27, 157 Diamond, Douglas, 155n.17, 157 ‘dollarization’, 131–2, 137–8, 155n.24, 156n.32, 157–8, 206, 224, 237n.42, 239 see also ‘euroization’ Dooley, Michael, 155n.29, 157 Drusebjerg, Henrik, 37 Easterly, William, 335, 339–40 East Timor, 334 Economist, The, 317 Ecuador, 136 education system, 16, 51, 107, 118, 167, 268, 295, 300 efficient market hypothesis, 18 Eggertsson, Thráinn, 154n.11, 157 Egilsson, V., 215, 239 Egla, 29 Eichengreen, Barry, 155n.21, 158 Eimskip, 177 electronics, 5, 65, 235n.2 Eliasson, Luovik, 326 emerging markets, 131 energy sector, vii, 58, 92, 169 geothermal energy, 192, 242, 258, 270 hydroelectricity, 4, 34, 161, 177, 207, 214, 242, 258, 270, 285, 293, 300, 308: Karahnjukavirkjun, 177 non-renewable resources, 270 renewable energy, 48, 177, 270 see also gas; metal sector; oil entrepreneurship, 15, 26, 90, 203 see also start-ups equities Iceland share prices, 1, 4, 15, 30, 44, 55, 60, 72, 96, 166, 173, 182: used as collateral, 17, 64, 68, 184 Icelandic stock market (ICEX), 96, 101, 109, 142, 153, 160, 172, 176, 220 leveraged share purchases, 56 Estonia, 291 ‘euroization’, 162, 206, 221–4, 234, 238, 268, 273, 277 see also ‘dollarization’ Europe continental, 191, 237n.44, 267 Eastern, 283, 291 see also under individually listed countries European Commission, 223, 268, 274, 285, 274 European Economic Area (EEA), 26–7, 34, 65, 70, 73, 116, 167–70, 175, 223, 235n.8 see also European Union European Economic Community (EEC), 27, 168, 334 European Free Trade Association (EFTA), 27, 168–9 European Monetary Union (EMU), 1, 162, 222–3, 234, 237n.44, 241, 243, 255, 278, 288 European System of Central Banks (ESCB), 237n.41 see also central banks European Union (EU), 27, 63, 70–1, 143, 162, 165, 168–9, 235n.8, 223–4, 255, 278, 333 eurozone, 1, 21, 24, 108, 144, 125, 261, 278, 284, 288 Financial Services Action Plan, 161, 175 financial stability committees, 70 Iceland, proposed accession to, 21–2, 24, 221–2, 234, 238n.44, 241–4, 255, 261–72, 278, 281–91, 295, 339 legislation, 173, 231 see also ‘euroization’; European Economic Area (EEA); European Monetary Union (EMU) 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 348 Exchange Rate Mechanism (ERM), 131 exchange rates see under Icelandic krona (ISK); United States dollar (USD) exports Icelandic, 47, 55, 64, 78–9, 91– 2, 262–3 prices of Icelandic exports, 132 Faroe Islands, 36, 168 Farrugia, Charles, 338, 340 Ferguson, Jr., R.W., 211, 236n.35, 239 Financial Services Authority – UK (FSA), 38 Financial Supervisory Authority – Iceland (FME), 16, 34, 45, 70, 108, 116, 138, 148–9, 175 bank regulation, 116 bank takeover, 39 stress tests, 17, 38, 46, 57, 64, 67, 72, 81, 116, 142, 163, 175, 180, 186, 189, 232 Financial Times, 38, 269 Finland, 10, 12, 37, 120, 124, 147, 165, 168, 191, 237n.41, 253, 255, 289n.1, 303, 337 FIM Group, 37, 191 Sampo, 176 fiscal policy deficit, 137 fiscal policy, Icelandic, 48, 52, 77, 117, 166 countercyclical, 48 criticism, 88 deficit, 47, 83, 105 external debt, 65 foreign currency reserves, 70 formal fiscal policy rule, 152–3 government spending, 44, 45, 51: multi-year budgeting, 45, 53 imbalances, 142–3 loosening, 47 lowering of tax rates, 27–8, 36, 47, 51, 83 passivity, 16, 24 surplus, 43–4, 65, 70, 73, 83, 95, 105, 117 taxation levels, 70, 200 349 tightening, 14, 45, 48, 52, 83 see also debt, government Fischer, Stanley, 133, 155n.25, 158 see also IMF fishing industry, 71, 91, 142, 164–5, 169, 192, 204, 215, 290, 293, 295, 298–300, 308, 317, 333–5, 338 quota, 30, 164, 204, 214 Fitch Ratings, 39, 171, 198, 216, 235nn.4, 6, 239–40, 248, 257, 273nn.4, report dated 22 February 2006, 18–19, 30, 36, 59, 77–88, 101, 109, 145–6, 156n.40, 164, 179 food production, 171, 203, 293 foreign exchange market, 46, 64, 72, 131–3, 174 currency speculation, 135 foreign currency risk, 68, 131–3, 142 pegging, 7, 132–3 see also Icelandic krona (ISK); United States dollar (USD) forward contracts, 56, 61, 189–90 France, 6, 124, 331–2, 337–8 and the First World War, 304–5 Frankel, Jeffrey, 155n.22, 158 Fraser Economic Freedom Index, 122 Freixas, X., 236n.20, 239 Frettabladid, 36 funds, sovereign wealth, 270–1 game theory: prisoner’s dilemma, 299 gas, 270, 333 General Agreement on Tariffs and Trade (GATT), 168 Germany, xii, 6, 120, 124, 278–80, 285–7, 289, 305, 320–1, 331–2, 337 German banks, 235n.8, 302, 331–2: Commerzbank, 199; Hauck & Aufhauser, 29, 35; and the First World War, 304–5 Gertler, Mark, 154n.16, 155n.19, 157–8 ‘Geyser Tigers’, 11 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index Index Gilchrist, Simon, 154n.16, 157 Gisladottir, Ingibjưrg Sólrún, 38 Gjersem, Carl E., 154n.8, 158 Glick, Reuven, 155n.27, 158 Glitnir Bank, viii, 181, 193 Gokhale, Jagadeesh, 154n.9, 158 Goldstein, M., 237n.37, 239 Goodfriend, Marvin, 156n.36, 158 Goodhart, C., 236n.20, 239 governance of Iceland, 48, 70, 90, 107–8, 113, 115, 138 see also Parliament of Iceland Great Britain see under United Kingdom Great Depression, the, 136–7 Greenland, 168, 333–4 Gros, Daniel, v, xiii, 22–3, 276–89, 309 gross domestic product (GDP) Icelandic, 3, 112, 115, 165–6, 198: growth, 50, 65, 93, 110, 113–14, 202; negative, 105 growth see under gross domestic product (GDP) guarantees, government, 67 Gudmundsson, Björgolfur, 29, 31–2, 269 see also Independence Party Gudmundsson, Bjorn R., 326 Gudmundsson, Mar, 269, 274 Gunnarsson, I., 29, 39 Gwartney, James, 154n.12, 158 Gylfason, Thorvaldur, vi, xiii, 22, 290–5, 339n.9, 340 Haarde, Geir, 38 ‘hard landings’, 9–10, 18, 77–9, 82–4, 100, 104, 206–7, 325 see also soft landings Harmonized Index of Consumer Prices (HICP), 152, 238n.51 Hartmann, P., 239 Hau, H., 237n.39, 239 Hausmann, Ricardo, 155n.21, 158 Havamal, 300 Head, Allen C., 336–7, 340 health-care system, 16, 52–3, 167 see also government spending hedge funds, 22, 38, 211, 249, 254, 272, 276, 299, 319 Herbertsson, Tryggvi Thor, v, xiii, 18–21, 25n.2, 36, 107–59, 164, 206, 212, 236n.35, 238n.54, 240, 243, 274 Heritage Foundation, the, 115, 166, 300, 301n.6 Hong Kong, 2, 85, 123–4, 156n.30 see also China Honohan, Patrick, 156n.32 Housing Finance Fund (HFF), 35, 44, 46, 48, 53, 56–7, 139–40, 163, 173, 183, 229–30, 235, 238nn.50, 52, 257, 260, 263 easing of lending rules, 2004 reform, 46, 48, 51, 53 Hubbard, R Glenn, 155n.19, 157–8 Hutchison, Michael, 155n.27, 158 human capital, 1, 50, 90 Hungary, 106, 124 hyperinflation, 230 Iceland Directorate of Labour, 166, 342 Iceland Stock Exchange, 34, 115, 142, 153, 170, 172, 179, 310, 341–2 see also OMX Nordic Exchange Iceland Iceland Telecom, 35, 83 Icelandic Chamber of Commerce, 18–20, 28, 39–40, 153, 160, 164, 240, 274–5, 326 Icelandic Banks Data Centre, 153 Icelandic Group, 177 Icelandic krona (ISK), 178 collapse, 30, 46, 109 confidence, 68 depreciation, 9, 44–5, 50, 55, 63, 67–8, 71, 103–4, 131, 146, 152, 160, 179 effective exchange rate, 80, 83, 94 exchange rate risk, 162: flotation, 79, 110, 170 fluctuation, 45, 88, 99: impact on inflation, 94 foreign debts denominated in, 11 overvaluation of, 100, 293–4 volatility, 54, 82, 113, 162, 178 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 350 Icelandic National Audit Office, 26, 29, 40, 291 Icelandic Pension Funds Association, 40, 153 Icelandic Securities Depository, 153, 235n.2 Illing, G., 236n.20, 239 imbalances, macroeconomic, 14, 22, 44, 46, 50–2, 54–5, 57–8, 64, 79, 88, 98–101, 103–4, 109, 146, 160–1, 164, 176–7 IMD World Competiveness Report, 115, 166 import prices, 94 independence, Icelandic, 122 Independence Party, Icelandic, 27–9, 338 see also Oddsson, David; Central Bank of Iceland indexation, 20, 28, 51, 104, 118, 123, 163, 169–72, 200, 230–1, 235, 291 see also debt, price-indexed; Harmonized Index of Consumer Prices (HICP); inflation, Consumer Price Index (CPI); mortgage market; index-linked mortgages Indonesia, 132–3, 136 infant mortality rates, 166–7 inflation, 48, 89, 98, 114, 139–41, 143–4, 151, 166 asset price, 24 consumer price index (CPI), 20, 82, 94, 104, 143–4, 151–2, 156n.35, 173–4, 219–20, 227–8, 230, 238n.50, 263, 265, 298, 341 increases, 27, 43, 47, 103 inflationary pressures, 44–5, 48, 54, 94, 113 target rate of Icelandic Central Bank (CBI), 34, 43, 45, 48, 50, 53, 68, 93–4, 108, 110, 113, 143, 151, 162, 174 see also Central Bank of Iceland (CBI); interest rates; monetary policy informational crisis, 21, 30, 160, 164 351 Ingolfsson, Finnur, 29 see also Progressive Party; Central Bank of Iceland instability, financial, 127–9, 133 insurance, 165, 171 AIG, 323 Sjóvá, 171 TM, 171 VIS, 171 International Center for Monetary and Banking Studies, 239 International Financial Reporting Standards (IFRS), 221 International Monetary Fund (IMF), v, xii, 4, 6, 12, 14–16, 21–2, 43–49, 57, 83, 90, 106n.2, 116, 133, 155n.27, 156nn.32, 38, 157–8, 161, 163, 168, 216, 219, 235, 236n.24, 237nn.40, 44, 239, 242, 253, 258–60, 262, 264, 272, 274, 281–3, 301, 326, 329 Article IV consultation reports, 6, 14–15, 43–9: International Financial Statistics, 4, 309–12, 318, 321, 326 contingent credit line (CCL), 259–60 failure to recognize warning signs, 12, 14 General Resources Account (GRA), 259 Stand-By Arrangements (SBA), 259 Supplemental Reserve Facility (SRF), 259 interest rates Icelandic, 72: Central Bank interest rates, 34, 38, 44, 47, 54, 82, 89, 94, 112–14; Interest Rate Act, 34, 170; liberalization, 27–8, 34, 123, 172; mortgage rates, 44, 56, 139; nominal, 131; real, 27, 95, 169 worldwide: increasing, 63; low rates, 30, 64, 66; risks of increasing, 61, 64, 66; short-term, 60 see also Central Bank of Iceland (CBI); inflation; monetary policy 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index Index Internet bank accounts, 17 bubble in 2000, 18 usage, 115, 166 Invest in Iceland Agency, 153 Investment, 44, 47, 110–11, 161, 166, 178, 207 see also aluminium sector Ireland, 1, 11, 71, 191, 247, 290, 302–3, 323 Israel, 133 Italy, 11, 84–5, 120, 124, 267, 321, 331–2, 337 iTraxx Financial Europe index, 247–8 Ize, Alain, 156n.32, 157 Izquierdo, Alejandro, 155n.22, 157 Jännäri, K., 31, 39 Japan, 1, 2–4, 59, 107, 120, 124, 143, 168, 180, 289n.1, 337 Japanese Asset Price Bubble, 1986–91, 1, 5, 10–11, 134: Japanese yen, 1, 10, 217–18, 268; real estate and stock prices in, 303, 315, 331–2 see also Tokyo J.C Flowers & Co., 190 John, Elton, 291 Jonsson, A., 237n.43, 239 Jonsson, Halldor, 30 Kallestrup, René, 274 Kaminsky, Graciela L., 106, 155nn.20, 27, 156nn.38, 39, 158 Kazakhstan, 329 Kent, C., 238 Keynes, John Maynard, 6, 18, 25n.1, 304–5, 326 ‘transfer problem process’, 6–7, 10, 304–7, 326 Kindleberger, Charles, 3, 326 King, Robert G., 156n.36, 158 Korea, Republic of, 2, 84, 101, 133, 168, 303–4 Kosovo, 224, 334 Kouri, Pentti, 18 Kraay, Aart, 335, 339 Kristinsson, Y.O., 236n.18, 239 Krugman, Paul, 155n.29, 158, 206, 239 labour market, 70, 93, 95, 166–7 labour force participation, 120 Landsvirkjun, 122 Lane, P., 216, 239 Latin America, 156n.32, 158 see also Argentina; Brazil; Buenos Aires; Chile; Mexico Latvia, 269 ‘Lawson doctrine’, 208, 236n.22 Lawson, Robert, 154n.12, 158 ‘lender of last resort’ (LOLR), 18, 24, 150, 204–5, 208, 223, 232, 234, 236n.20, 239–76, 282–3, 296, 299, 330–2, 339 inability of Icelandic government to act as, 21–3, 32, 101, 251–5 Levine, Ross, 335, 339 Levy-Yeyati, 155n.24, 157–8, 237n.42, 239 liberalization, financial system, 15, 133, 138 Liechtenstein, 223, 283 life expectancy, 115, 120, 166–7, 339n.2 ‘limit theorem’, 5, 9–11, 316 liquidity, 46, 47, 84, 96 asset liquidity, 100 liquidity crisis, 67, 245: contagion, wider economy, 102 liquidity ratio, 19, 87 liquidity squeeze, 66, 101–2, 145, 147 Lithuania, 329 Lizondo, Saul, 156n.38, 158 London, 2, 20–1, 38, 191, 241, 303, 320–1, 329 see also United Kingdom; universities and colleges Lula da Silva, Luiz Inácio, 156n.31 see also Brazil Luxembourg, 35, 71, 191, 202, 209, 247, 256, 261, 276–85, 288, 320–1, 336–7, 339 Macedonia, 334 macro-prudential indicators, 19, 77, 80, 88 Mahar, M., 155n.27, 159 Malaysia, 124 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 352 manufacturing, 171, 203, 254, 276, 278–80, 286, 308 Marginal Lending Facility, 256, 261 marine products, 91, 165, 262–3, 333, 342 see also fishing Markets in Financial Instruments Directive (MiFID), 175 Marshall Islands, 334 Martin, S., 26, 39 Matthiasson, Thorolfur, 25n.4 media freedom of the press, 107, 115, 135, 154n.4 print, 2, 9, 25nn.4, 7, 35 metal sector, vii, 5, 92–3 see also aluminium sector Mexico, 2–3, 5, 10, 133, 136, 303–4, 360 economic crisis in 1994, 2, 5, 10 Mexican peso, 2, 303–4, 307 Middle East, 191 Milesi-Ferretti, G., 216, 239 Miller, Gregory, 37 ministries, Icelandic Ministry for Foreign Affairs, 38, 153, 291, 337 Ministry of Commerce, 153 Ministry of Finance, 28, 39, 115, 153, 166, 245–6, 289, 342 Ministry of Trade, 34, 36 Mishkin, Frederic S., v, xiii, 18–21, 36–7, 107–59, 164, 206, 212, 236n.35, 238n.54, 240, 326 monetary financial institutions (MFIs), 255–6 monetary policy, 137, 206 in an economic crisis, 135 Icelandic, 48, 52: credibility 45–6, 50, 52; criticism, 19–20, 46, 77, 82, 88, 152, 163, 262–6; effectiveness, 15, 48, 68, 77, 83, 103, 108, 144, 298; expansion, 7, 298–301; prudent, 20, 143; tightening, 14, 44, 50, 95 worldwide, 43 see also Central Bank of Iceland (CBI); inflation; interest rates, Icelandic; money supply 353 money markets, wholesale, 23, 54, 145 dependence upon, 30, 46, 64, 97, 108, 148, 160, 178–80 money supply, M3, 96, 98–9 tightening, 44, 71 see also Central Bank of Iceland (CBI); interest rates, Icelandic; monetary policy Montenegro, 224, 277, 334 Moody’s, 37, 146, 171, 205, 248, 257 Investors Service, 236n.21, 240 moral hazard, 71, 128–30, 132, 134–6, 208 Moreno, F., 155n.27, 158 Morgunbladid, 36–7 mortgage market, Icelandic 100% loan-to-value mortgages, 35–6 abnormal activity, 57 fixed interest rates, 140–1 foreign currency mortgages, 184 Icelandic banks, increased competition from, 140 index-linked mortgages, 60, 103, 139, 163 liberalization, 79–80 loan-to-value ratios, 69, 140–1 low rates, 82 reform, 24, 46, 55–6 see also debt, Icelandic Moscow, see also Russia multiple equilibria, 108–9, 149–53, 236n.35, 330 Mundell, Robert, 18, 267, 275 Myanmar, 123 Namibia, 334 National Debt Management Agency, Iceland, 153 net international investment position (NIIP), 162, 208–10, 216, 233, 236n.29, 281 Netherlands, the, 17, 24, 33, 38, 71, 123–4, 154n.16, 157, 176, 331–2, 337 New York, 18, 20, 155n.24, 157, 191, 303 see also United States of America 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index Index New Zealand, 1, 78, 82, 84–5, 106, 121, 162n.13, 209, 215–18, 233, 253, 267, 335–7 Nordic Council of Ministers (ECOFIN), 154n.10, 158, 168 Nordic Partners, 177 Norway, 10, 12, 35, 37, 120, 124, 147, 165, 168, 191, 207, 215, 223, 242, 253, 256, 270, 273n.1, 303, 322, 336–8 DnB Nor, viii, 192–8, 236n.16 Union Group, 36, 202 Nuuk, 334 see also Greenland Obstfeld, Maurice, 157n.44, 159 Oddsson, David, 27, 36, 337 see also Independence Party; Central Bank of Iceland oil, 64, 123, 207, 270, 333 Ólafsson, Frosti, v, xiii, 160–240, 275 Olafsson, Olafur, 29 see also Egla; Samskip OMX Nordic Exchange Iceland (OMX ICE), 31–2, 39, 160, 166, 172–3, 176, 184, 212, 220–2, 235n.2, 236n.36, 237n.41, 310, 341–2 see also Iceland Stock Exchange Opera Investments (Opera fjárfestingar ehf ), 31 Organization for Economic Cooperation and Development (OECD), 6, 14–16, 90, 154n.6, 158, 292, 295 Economic Survey of Iceland 2006 and 2008, 15, 50–3 OECD area, 19, 89–91, 95, 104, 115–16, 165–8, 283, 285 Organization for Security and Cooperation in Europe, 168 Orszag, Michael, 154n.10, 158 Orszag, Peter, 154n.10, 158 ‘overbanked’, 24, 329–33 Palau, 334 Panetta, F., 239 Papaioannou, E., 240 Parigi, B., 236n.20, 239 Parker, D., 26, 39 Parliament of Iceland (Althing), xiii, 29, 39, 174, 290, 295, 333 pension system, 30, 108, 117–20, 139, 164, 172 pension gap, 65 reform, 28 see also Icelandic Pension Funds Association; Stafir Pension Fund pharmaceuticals, 53, 171, 203 Phelps, Ned, 23 Pitcairn Island, 339n.5 Plantin, G., 212, 240 Ponzi scheme, 23 Portes, Richard, v, xiii, 20–3, 28, 30, 37, 40, 160–240, 243, 275 Portugal, 84–5 Pou, Pedro, 137 Prime Ministers of Iceland, 27, 36, 38, 174, 291, 337–8 Progressive Party, the Icelandic (Framsóknarflokkur), 29 Promens, 177 property see under real estate market prophecies, self-fulfilling, 108, 149 purchasing power, 47–8 Raffelhüsen, Bernt, 154n.9, 158 Rawkins, P., 236n.33, 240 Read, Robert, 339 real effective exchange rate (REER), 80, 219–20, 266, 268 real estate market, Icelandic, 1, 5, 15, 22, 60, 112, 165, 182 effect on CPI, 151–2 prices, 1, 4, 20, 47, 54–5, 72, 80, 122: above equilibrium levels, 61, 69 see also United States of America Rebelo, Sergio, 339n.8, 340 recession, 48, 79, 89–90, 93, 136, 154n.5, 236n.22 in 2002, 43, 79, 104, 106n.1 predicted in Iceland, 48, 89–93, 97, 104 Reinhart, Carmen M., 155nn.20, 27, 156nn.38, 39, 158 repressed financial system, 122 Reuters, 218 Rey, H., 237n.39, 239 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 354 Reykjavik, 320, 331, 337 see also universities and colleges, Reykjavik University risk premiums, 46, 61, 63–4, 66, 161, 163, 165, 199–200, 231–2 Rochet, J.-C., 236n.20, 239–40 Russia, 12, 133, 136, 283, 291, 303 see also Moscow safety net, government, 134 Sampo, 176 Samskip, 29 Saudi Arabia, 124 saving, 7, 27, 166, 207 domestic, 7–8, 110–11, 172, 207–8, 290, 306 financial, 115, 123, 154n.1, 158, 164, 166, 170, 172, 214, 230, 236n.28, 296–7, 311–12, 318, 320, 323 foreign, 8, 110, 283, 299 Scandinavia, 105, 107, 134, 145, 191, 247, 273n.1, 289n.1, 322 see also Denmark; Faroe Islands; Finland; Greenland; Norway; Sweden Scotland, 258, 270 see also United Kingdom social services, 167 securities demand, 6–11 Icelandic, 20, 28, 31, 35–6, 66, 81, 109, 116, 118, 123, 143, 148, 170, 172, 175, 180, 190–1, 201–2, 237n.41, 244, 248, 250, 257, 304, 306–7, 312, 316–17, 323, 325–6 krona, 304, 317, 322, 324 mortgage-backed, 257, 303, 323 prices, 8–9 see also asset-backed securities (ABSs); Icelandic Securities Depository Shanghai, 191 see also China Shin, H.S., 212, 240 Sibert, Anne C., v–vi, xiii, 6, 21, 23–4, 241–75, 329–40 Sigurdardottir, Johanna, 338 see also Prime Ministers of Iceland 355 Sigurdsson, Olafur, 28, 215 see also Stafir Pension Fund Sigurdsson, P.O., 236n.32, 240 Sigurmundsson, A., 30, 40 Sigurjonsson, Throstur Olaf, v, xiii, 6, 13, 22, 26–40 Singapore, 156n.30, 320 Sjóvá, 171, 202 Skidelsky, Robert, 25n.1 Slovenia, 84, 334 ‘soft landings’, 9–10, 100 see also hard landings South Africa, 1, 11, 124, 133 Spain, 1, 11, 120, 124, 276, 285–7, 303 Spiegel, M., 155n.27, 158 stability, macroeconomic, 14, 44, 79 Stafir Pension Fund, 28 see also Sigurdsson, Olafur Standard & Poor, 37, 240, 248, 257 start-ups, 15, 51 see also entrepreneurship Statistics Iceland, 28, 40, 114–15, 153, 166, 309–10, 342 Stiglitz, Joseph E., 155n.18, 159 Svavarsson, D., 215, 236n.32, 240, 257, 275 Stock Exchange Act, 172–3 stress tests see under Central Bank of Iceland (CBI); Financial Supervisory Authority – Iceland (FME) student loan fund, 139 sudden-stop theory, 147 supply side, 78 Sverrisdóttir, Valgerður, 36 see also Iceland, Ministries of Iceland, Ministry of Trade Sweden, 10, 12, 37, 121, 124, 147, 162, 165, 168, 233, 242, 253, 255, 273n.1, 287, 289n.1, 303, 322, 331–2, 337 Fisher Partners, 36 SEK, 196, 218 Swedish banks, 269, 273n.1: Swedbank, viii, 192–3, 195–8, 236n.16; Swedish banking crisis, 1992–93, 105, 289; Swenska Handelsbanken (SHB), 192–8, 236n.16 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index Index Switzerland, 24, 123–4, 261, 273n.7, 276–7, 279–81, 283–5, 288, 320, 331–2, 337 Swiss franc, 217–18, 268, 283 Taiwan, 156n.30 Talvi, Ernesto, 155n.22, 157 taxation see under fiscal policy Taylor, John, 154n.16, 157 terrorism, anti-, 33, 39 Thailand, vii, 2, 5, 12, 19, 89–90, 98–105, 115, 124, 127, 133, 144, 294, 303 Thai baht, 99, 304 see also Asia, Asian financial crisis, 1997 Thompson, D., 26, 39 Thorsteinsson, Magnus, 29 Tier ratios, 163, 171, 186–7, 190, 197, 232 TM, 171 Tokyo, 10, 303 see also Japan Toronto, 303 see also Canada tourism, 280, 338 Trade Council of Iceland, 153 trade deficit, trade surplus see under balance of trade Transparency International, 115, 166 Treaty of Versailles, Trinidad and Tobago, 336–7 Turkey, 89–90, 98–104, 115, 133, 136, 144 Turkish lira, 99 Tuvalu, 337 United Nations (UN), 340 Human Development Index, 329, 339n.2, 340 Icelandic membership of, 168, 329, 339n.2 Security Council, 116 trade database, 278, 280 unemployment, 9, 80, 89, 93, 110, 115, 154n.5, 166–7, 176, 184, 206, 227, 263–4, 342 United Arab Emirates, 216 United Kingdom, 1, 11, 17, 24, 33–5, 37, 39, 61, 67, 71, 107, 120, 124, 131, 144–5, 177, 180, 191, 208, 228, 238n.54, 242, 244, 247, 249, 255–6, 261, 302, 304, 322–3, 331–2, 335–7 ERM currency crisis, 131 HM Treasury, 33, 39 seizure of assets of Icelandic banks, 33, 39 see also Financial Services Authority – UK (FSA) United States of America, 1, 11, 59, 66–7, 107–8, 113, 120, 134, 136, 143, 150, 152, 154n.9, 158, 163n.19, 168, 175, 177, 180, 190, 206, 220, 232–3, 237n.39, 242, 244, 251, 256, 261, 267, 276, 284–7, 289n.1, 293, 302–4, 307, 310, 317, 319–20, 323, 331–2, 335–7 Federal Reserve, 38 GDP ratio, x, 112, 124, 284, 293, 310 Inter-American Development Bank, 156n.32, 158 real estate market, 66, 152 US dollar, ix, 4, 86–7, 115, 131, 142, 152, 218, 237n.42, 309, 319–21 see also Bismarck, North Dakota; New York; universities and colleges universities and colleges in Iceland: Reykjavik University Financial Research Institute, xiii, 20, 26, 160; University of Iceland, xiii, 3–4, 18, 22–3, 25nn.2, 4, 154n.7, 157, 274; Institute of Economic Studies, 25n.2, 153, 154n.7 in the United Kingdom: Birkbeck College, University of London, xiii, 21, 241, 329; London Business School, xiii, 2, 20, 160; London School of Economics, 241 in the United States: Columbia University, xiii, 18, 23; University 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 356 of Chicago Business School, xiii, 23 see also Ronald Coase Institute Vaiman, V., 32, 40 Valgreen, Carsten, xiii, 19 Vestmanna Islands, 116 Vickers, J., 26, 40 Vidskiptabladid, 36 Villalonga, B., 26, 40 Vines, D., 207, 240 VIS, 29, 171 Vishny, R., 26, 39 Vives, X., 236n.20, 240 volatility, VoxEU, 22, 240, 339–40 wage agreements, 45 see also inflation Wall Street Journal, The, 115, 166, 290 357 warning signs, failure to recognize, 13, 17 wealth, Icelandic, household, 5, 7–8, 105, 317–18 Weiss, Andrew, 155n.18, 159 Williamson, John, 155n.27, 159 Woodford, Michael, 154n.16, 156n.36, 157, 159 World Bank, 40, 112, 116, 154nn.2, 15, 155n.24, 158–9, 168, 339 World Economic Forum, 115 World Trade Organization (WTO), 168 World War I, 6, 304–5 Yarrow, G., 26, 40 yield curve, 82 Zoega, Gylfi, v–vi, xiii, 13–25, 154n.1, 158, 274, 296–301 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega Copyright material from www.palgraveconnect.com - licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Index ... YOUR LIFE Preludes to the Icelandic Financial Crisis Robert Z Aliber and Gylfi Zoega 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and Gylfi Zoega. .. licensed to ETH Zuerich - PalgraveConnect - 2011-04-30 Preludes to the Icelandic Financial Crisis 10.1057/9780230307148 - Preludes to the Icelandic Financial Crisis, Edited by Robert Z Aliber and... Robert Z Aliber Preludes to the Icelandic Financial Crisis In the late 1990s Iceland participated in the global moves toward the privatization of government-owned firms The privatization of the three