Macro update - Iceland - The Great Debt Escape

The Great Debt Escape, and why Iceland is faring better now than Ireland.

There is life after default and Iceland is a good example.

While Ireland, as I posted previously (The Irish Black Hole), sealed its demise by accepting to bail out its banking sector, sinking its public finances and its economy in the process, Iceland did not bailout its banking sector and the results could not be more evident as indicated in this post.

First of all, Iceland CDS 5 year: Deleveraging and Derisking

From infinity and beyond....1400 bps to 261 bps on the 5 year CDS, when Portugal is at 1050 bps and Ireland at 850 bps.
As I wrote in "European issues and the Greek jinx - Macro update, a focus on Iceland and more" in June this year, Iceland is trading tighter now than most peripheral countries.

From punishing interest rates to acceptable interest rates:

The benchmark interest rate in Iceland was last reported at 4.50 percent, since the 17th of August.
"From 1998 until 2010, Iceland's average interest rate was 10.66 percent reaching an historical high of 18.00 percent in October of 2008 and a record low of 5.16 percent in February of 2003." - Source Trading Economics.

While inflation has recently picked up, hence the tightening move by the Central Bank of Iceland, the inflation rate is at 5%, as reported in August 2011:

"From 1989 until 2010, the average inflation rate in Iceland was 5.88 percent reaching an historical high of 25.20 percent in December of 1989 and a record low of -0.06 percent in November of 1994." - Source Trading Economics.

And guess what unemployment is starting to fall:

Iceland GDP growth rate:

GDP growth was 2% for the 1sqt quarter of 2011.

Compare that to the GDP growth of Ireland:

1.3% GDP growth in the 1st quarter of 2011.

But what about Government Debt to GDP between Iceland and Ireland you are going to ask.

Here is the story:
Iceland Government Debt to GDP:

"The Government Debt in Iceland was last reported at 87.8 percent of the country´s GDP. From 1980 until 2009, Iceland's average Government Debt to GDP was 41.19 percent reaching an historical high of 87.80 percent in December of 2009 and a record low of 23.00 percent in December of 1981." - Source Trading Economics.

Ireland Government Debt to GDP:

"The Government Debt in Ireland was last reported at 96.2 percent of the country´s GDP. From 1980 until 2010, Ireland's average Government Debt to GDP was 68.95 percent reaching an historical high of 109.20 percent in December of 1987 and a record low of 24.80 percent in December of 2006." - Source Trading Economics.

You can clearly see the cost of what the Irish banking bailout so far has been on Ireland's public finances compared to Iceland on the two graphs below, Government budget balances:

Iceland Government Balance:

"Iceland reported a government budget deficit equivalent to 9.10 percent of the Gross Domestic Product (GDP) in 2009." - Source Trading Economics

Ireland Government Budget:

"Ireland reported a government budget deficit equivalent to -32.4 percent of the Gross Domestic Product (GDP) in 2010." - Source Trading Economics.

As I wrote in the European Vortex in November last year:
"The problem for Ireland, has I discussed in my last post is that its financial sector is damaged beyond repair and need additional support. Currently Irish banks are heavily depending on the ECB for their funding, they are indeed truly zombie banks. The issue is that it is such a black hole for Ireland's public finances, that some external support is necessary. As for Iceland, the Irish banks where too big to fail for the country, hence an estimated budget deficit of 32% for 2010."

"Ireland faces the same issue than Iceland did in relation to its banking sector. It did not kept its banking sector under scrutiny and now the whole banking sector is taking the country with it in its downfall."

But, as we know the story by now, Iceland decided for the other option of not bailing out its banking sector and, it seems the results speaks for themselves so far. Now unemployment is at 14.3% as of July 2011 in Ireland, although, latest exports figures in June, are indeed very encouraging, Ireland could have avoided such difficult situation by not signing a blank check to its banking sector and bailing out all ill-advised senior bondholders in Irish banks in the process.

Iceland is also in a position to repay 90% of the near 1 billion GBP deposited with failed Icelandic banks by UK Local authorities.

While Iceland is back from the brink by deciding not to save its banks, Ireland is still trying to recover from that ill-fated decision of bailing out its entire banking sector.

Stay tuned!