Friday, October 10, 2008

Iceland the absurd

I mentioned Iceland a few times only on this blog – because it was sort of well known in the hedge fund community – a crowded trade even.  Paul Krugman did an (incorrect) anti-hedge fund piece where he happily swallowed the dogma about hedge funds of conspiring against Iceland.  You didn’t need to conspire against Iceland – it was obvious once you read the balance sheet of any of the banks or any of the major corporates.

The first time I mentioned Iceland on this blog was in my list of current account deficit countries with potential banking problems.

Later I mentioned – but only in the comments – the raid on the UK savings market done by IceSavings and Kaupthing.  These were high interest rate deposits that seemed to be insured by a combination of the Icelandic and UK government if you read the documentation.

I wrote a post about high rate deposits (Wachovia will walk over you) and I confess that I had an ulterior motive – I was looking for someone to tell me how much the Icelandic banks were raiding the deposit market of Norway.  I got a few nice helpers amongst my readers (thank you). 

But this post is an ex-post analysis of just how absurd Iceland became – and some speculations from there.

Firstly the Russian loan (5.4 billion) is really big.  The population of Iceland is about 320 thousand people.   This translates to almost 17 thousand per person.  That is a real bailout – none of this small stuff that America is doing. 

It is pretty hard to see how an economy that has functionally destroyed itself is going to pay that back.  Whatever it looks like a darn big loan to a very dodgy credit – and I presume that there is a non-financial motive for granting it.

In my quick post on Iceland (done at JFK airport with a beer whilst waiting for a plane and not adequately fact checked) I linked to Andrew Neil who thought that the ulterior motive was Russian access to Iceland as a military base – or at least as a military refuelling depot – an unsinkable aircraft carrier if you will.

That is plausible because there is no obvious financial motive for this loan.  But there is an alternative theory doing the rounds – which is that one of the Icelandic banks was closely tied to the Russian Mafia – and the loan by the Russian Government is just make-good.  [The implication being that the Russian Government is just another arm of the Russian Mafia.]  Again I have no proof for that hypothesis – however as you need a non-commercial explanation of the loan its as good as most.  [Access to military bases however looks more likely…]

But you got to realise just how big the Icelandic problem is relative to the Icelandic economy.  Kaupthing Edge and IceSavings raided the UK deposit market as noted above and raised 3 billion pounds in deposits.  That is another 20 thousand dollars per person in Iceland.  Iceland as I need not remind readers cannot print pounds or dollars.  It is small wonder the Icelandic government is not going to meet its deposit insurance liabilities.  We have the Sovereign Default of a democracy at hand.  That is rare… I always thought it was populist dictators that defaulted.   Now I guess it is just populist democracies.

So Iceland is going to default at the national level and the level of every bank.  Lets have a look at its corporates.  I did this – there are about 20 companies listed on the Icelandic stock exchange.  I went and read the annual reports of about 5 and they were mostly similar – over-levered global acquisition conglomerates with Kaupthing as the major investment bank. 

Bakkavör Group sticks in mind – just because it was so levered in such an ordinary business – processed fresh food.  The five year summary is as follows:

(Click for detail...)

Yes – it does have quick ratios of less than one, current ratios of less than one and ebit of only about a ninth of outstanding debt. 

It might be possible to survive that – but it will be tough.

And whilst the investment bank is Kaupthing with whom it shares multiple board members – the list of “principal bankers” contains more usual suspects – they are Barclays, RBOS, Rabobank, Mizuho,  Fortis, ABN Amro, Bank of America Securities and HSBC.

Oh Iceland the international.  What happens in Iceland does not entirely stay in Iceland.


It is also worth considering what happens to Iceland in the absence of new funding...  It has no banking system left.  There is nobody much willing to take Icelandic Kroner.  The country has no reserves of hard cash that matter.  Its winter coming.

They can sell fish and energy intensive manufactures (their main exports) for hard currency.  But this is not like Australia - when the going got really tough in Australia in the depression you gave up and went and hunted (feral) rabbits for food.  

Iceland is a little colder.

My guess - and it said only half in cynicism - the women are beautiful in Iceland - the place just pushes out Miss World winners.  Its almost as close to NYC as Vegas.  Sex Tourism for hard cash will be their next export industry.

If they adopt the Vegas slogan will it work for financial crisis as well?  What happens in Iceland/Vegas ...



Anonymous said...

Can you at least have some respect to the hardworking citizens of Iceland that do not deserve this happening to their life?

What perverted pleasure do you derive from sitting afar and posting all these "I told you so" blogposts?

And asking the women to sell their bodies and soul for money? How could any decent man even suggest the notion of that?!

John Hempton said...

I do have some respect for the people of Iceland.

My personal view is that it is a geopolitically cheap thing to bail out Iceland and it should be done by the West.

I am also facing reality here - the administration in Washington does not think that way. The evidence firmly is that you are going to be left to your own devices.

I got a series of emails from someone who knew (and hence will remain nameless) about how the quality of prostitutes went up sharply in Argentina after the crisis.

That will be the reality on the ground. You don't deserve it. But this blog is not so much about who deserves what but how to invest money.

I suspect good houses in Reykjavic are going to get VERY cheap in USD terms. There is a suggestion for anyone who wants to get their hands dirty for an investment.


Anonymous said...

The funny thing is that the girls in Iceland were easy enough already.

They used to say:
"See in the US, the trick is to get the girl drunk to go home with you, whereas in Iceland, the trick is to get the girl home before she gets so drunk that she passes out on you!"

Anonymous said...

Come on John. You are going a bit far here with your prostitution comments. You are forgetting that Iceland also has the worlds cheapest aluminium smelter about to come online.

John Hempton said...

I know I am going too far here. The country has pretty good assets, notably fish and very cheap energy.

It will be alright in the end. But for the moment it has no banking system at all. That is very bad indeed. There is no payment system worth having and as much is imported to eat that is really bad news.

Great depression events happen. Witness the US in the 30s or Indonesia in the Asia crisis.

This should be over relatively fast, but for the moment it is seriously ugly.

Its going to be a hard currency trading event at the moment, and the USD or EUR will replace the Kroner in much the same way as USD circulates in Cambodia.

As for how this ends... well the bailout is large...


The Way Rider said...

You are unfortunately only too right about what happens to countries with beautiful woman in a severe financial crisis.

I remember reading during the waning Yeltsin years a quote from a journalist in Moscow who said that the average Russia girl's main ambition was to be a "dollar" whore.

That said, I agree that Iceland is effectively bankrupt, and also agree that the "country that tried to be a hedge fund" is going to find it very hard this winter, with or without Russia loans.

The irony is nearly poetic.

Anonymous said...

Iceland still has the basics of a decent economy with seriously cheap and plentiful energy, minderal wealth and of course all that fish. They'll get out of the mess but need bailing out in the meantime to prevent panic making things worse.

As to the Russians, everybody seems to overlook the possibility that they might just be trying to be good citizens here. $4B is a lot of money for Iceland but not for Russia with it's massive oil-fueled foreign reserves. The Russians have experienced quite a crash of their won lately and a sovereign default would be just the thing to awaken memories of 1997 and make the last investors in BRIC bolt. That is not what the Russians want. In fact, given that political stability is tied to economic improvement they will do anything to prevent it. $4B for Iceland is just cheap insurance.

So, with the West too busy patching up it's own banking system the Russians are stepping in to prevent another meltdown with potentially nasty repercussions for their own economy.

And if they can get basing rights as a reward for their good behavior, that just sweetens the pot...

Anonymous said...

You know you are just talking out of your ***. We have pretty much free energy. 60% of the food we eat is domestic (90% of the vegetable, 90% of the meat, 100% of dairy products, 100% of the fish), guess it's not really a problem to pump that up to 100% for 300k people.

And another thing, show some respect. How simpleminded and sad person are you to bring up prostitution? How old are you, like 15?

Guðrún Birna said...

I understand your conserne about how women come out of a severe financial crisis or a war in this twisted world of dominance of "manly" values over the "womenly". I think that is partly the reason for war and greed in this world.

The far biggest health problem women are facing in this world is vionlenc from men. And your country Britain is if not worse, no better than others in that case.

New reasourses show for example that about 70% of all women killed in Britten are killed by there husbands.

Your comment about the icelandic women shows only your ignorance of icelandic women, you dare to compair them to women in Argentina.

Women in Iceland stand very strong and we have the highest percent of femail workforce IN THE WHOLE WORLD. That makes our women very independent and strong both socially and financially.

Women are now in big majority in all icelandic highschools and universities so i guess that the women of this country will be busy the next few years using their education to build up a new society with their feminin riskawareness vs. the old icelandic way of viking dareness.

You need to gain some respect for women in this world that have for ages saved us in depressions, by finding new solutions and ways to feed their families and have jumped in all jobes whenever they are needed to!

Anonymous said...

I'll hazard a guess the people who got offended don't work on a trading floor.

Anonymous said...

"It is small wonder the Icelandic government is not going to meet its deposit insurance liabilities."

This is false, the Icelandic government has never said it would not honor these insurances, as far as they go.

Thing is that this insurance only covers individuals (not charities, councils, companies) up to a certain amount (was 20000 pounds, now 16000 due to the krona currency falling).

Gordon Brown is demanding that the Icelandic Governement go beyond the legal document and insure ALL.

There is no job shortage for international banking lawyers in near future.

As for the mafia connection it is true that one of the bank owner became a bank owner by running a successful business (booze factory) in Russia, that he could not have done without being on good terms with the Russian Mafia.

Nice guy though.

Anonymous said...

here's the funny stuff about being "self-sufficient" on food ... as long as you don't export it, you are

but the food producers also need imported stuff, like clothes or cars or oil ...

and in most cases, in order to get them they'll have to export more food ...

fortunately, Iceland will get some new loans, and food will never be a problem ... but the level of living for most people (especially those working in non-export sectors) will go down significantly, if the experience of other countries teaches us anything

also, Iceland is a fabulous country, and tourism could become an important industry - which could increase the demand for prostitution ... this is all I read in John Hempton's entry, and I'll have to say that his argument is rock solid :)

Anonymous said...

There is a very little prostitution in Iceland. 80-90% of them are foreign. Icelandic women are highly educated and I would expect them to use their brains rather than their bodies to create opportunities in business, but thanks for worrying for us. Icelandic women sleep with whom ever they choose just like the men, and do not get paid or pay for it. As to answer the comment about drinking and sex in Iceland. But tell me one thing. Why prostitution is so common in UK?

John Hempton said...

I am aware that there is little prostitution in Iceland. There is a liberal sexual culture so there is less incentive.

But more to the point, it is a high wage flat income structure as opposed to say London. That reduces the incentive to.

My point - that is all about to change beyond recognition.

Economics does that. And it will not matter what your education levels are - financial crises do nasty things.

For Iceland this is the most significant event in modern history and most the certainties you had till last week are wrong.


Anonymous said...

You will never see increasing prostitution in Iceland. They would rather shoot you and eat you than sell their bodies.

Anonymous said...

my god,

maybe the prostitution comment was not so nice but I am abhorred to see such racist comments from iceland-ish (?) people.

The comment about "daring" to compare between Iceland and Argentine women is disgusting as if there is a uber-race living in Iceland, untouchable by vices of the unwashed masses living in Argentine.

Maybe being a Russian colony would be a nice future.

John Hempton said...

I would prefer to think my Icelandic student poster is ignorant rather than racist.

The problem is that it is pretty hard to tell.

I have had a few emails accusing her of racism... this is unfortunate...

I suspect that the Icelandic exceptionalism indicated is just shock... reality will come later.


Anonymous said...

I don´t think many Icelandic women agree on the comment on the on the Argentinian women. I do not think they are any lesser than any other women. But I think that what she meant was there is a cultural difference between Iceland and Argentina about sexual matters, and the women in Iceland like I said before have more sexual freedom than any woman in a catholic country. So the "soil" for prostitution is not as rich here as in the Latin countries. So again I do not worry that prostitution will be our fate!
At the time being is Russian colony no worse than an English one!

Anonymous said...

Talk about injustice. You post from Oz (as far as I can tell) and your commenters are dumping on us Brits. Our main prostitution problem is loonies killing them serially, completely independently of economic crises.

What sort of arbitrage is this?


Dave Doolin said...


I'm just an ordinary guy, but I have read many of the Sagas and I want to visit Egil Skallagrimson's homestead one day.

Iceland has always had a reputation for being very, very expensive though. Way too expensive for ordinary people like me to visit.

I like girls too, but there are girls everywhere, and if it was affordable to go salmon fishing I think I might rather try that instead. I read once that fishing in the the rivers of Iceland was very, very expensive and exclusive.

I hate that Iceland messed itself up, and it's stupid that my country (USA) or Europe won't help more. It wouldn't cost very much compared to the money we're going to piss away financing the massive consolidation of the banking industry. We messed ourselves up here in USA pretty badly too. Actually, I'll be fine since I went to cash a year ago and don't really need to work. But still, sucks in general.

In any case, if travel to Iceland becomes affordable, I might very much like to visit one day.

Anonymous said...


Anonymous said...

Most of this is true, and a little bit funny, but also sad.
Next year will be interesting and maybe John will write more about Iceland.

Anonymous said...

Icelandic woman here

Hate to say to it but.....
I told you so ;)

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