the UK, the next Iceland

Discussion in 'Economics' started by Brendan R, Nov 9, 2008.

  1. I couldn't resist, the UK could turn out to be the next Iceland.

    The below article was published in the Gulf News... not good news when you know Gordon and Alistair are bending over to attract Arab money.

    UK's spending plan unlikely to bolster economic revival

    The British could be forgiven for feeling gloomy right now with a tumbling currency, a shrinking economy, rising unemployment and a financial system that needed a government bailout.

    Still, help is at hand. The government is now planning to spend its way out of recession.

    In the past week, Prime Minister Gordon Brown has made clear his response to the most serious economic decline the UK has faced in more than a generation.

    In homage to economist John Maynard Keynes, Brown plans to spend and spend, casting aside his own rules on debt and launching big infrastructure projects. By stoking demand, the aim is to avert a long recession.

    He will be disappointed. At best, the final splurge of government spending will prove to be irrelevant. At worst, it risks turning a bad situation into a catastrophe.

    The UK depends on the global capital markets to stay afloat. Scare away international investors and the country could turn very quickly into anther Iceland. There is no doubt the UK is slipping into deep trouble.

    "The prospects for the UK economy are grim, with a fairly severe recession starting to unfold,'' Michael Saunders, an economist at Citigroup Inc. in London, said in a note to investors last month.

    He predicts the economy will contract by one per cent next year. On Friday, the European Commission made the same forecast.

    Arbitrary Rules

    The government is getting out its chequebook. Last week, Chancellor of the Exchequer Alistair Darling said the rule that limits public debt to less than 40 per cent of gross domestic product would be waived. "To apply these rules rigidly in today's changed conditions would be perverse," he said.

    Maybe so. But once you start picking and choosing when the rules apply, they aren't rules anymore. "The responsible course of action is more borrowing for the investment that is necessary both now and for the longer term," Brown said last week.

    But is more spending really "responsible"?

    People know that borrowing today has to be repaid tomorrow. That means taxes will soar. As debt levels rise, consumers and companies will save more to help pay for higher taxes down the track. Whatever boost you get from higher government spending will be lost.

    Worse, all that extra spending will hurt the currency. The pound fell as low as $1.53 on October 24 compared with more than $2 earlier in the year.

    The UK is dependent on foreign finance since it runs huge trade and public-sector deficits. If public finances spiral out of control, global investors may take flight, and bail out of sterling. If that happens, Britain could end up like Iceland. It is hardly a risk worth taking.

    Finally, this is a global recession. The UK relies more than most countries on world trade, so it will be one of the most affected. An extra few billion pounds spent on roads or other public works won't make any difference.

    The polls suggest many British have already seen through the arguments for more public spending. The Taxpayers' Alliance said a week ago in a poll that 59 per cent of voters would rather have lower taxes than higher public spending. Only 18 per cent wanted the government to increase its outlays.

    The UK spent its way into trouble. It can't spend its way out again. Taxes have risen too high, and debt has soared out of control.

    The nation needs to pay down its obligations and lessen its dependence on financial services. There is no reason it can't make that transition with hard work and some belt-tightening.

    A final splurge of public spending will only postpone that adjustment and create a real risk of economic disaster.

  2. from the NY Times on things to come for the UK....

    REYKJAVIK, Iceland — The collapse came so fast it seemed unreal, impossible. One woman here compared it to being hit by a train. Another said she felt as if she were watching it through a window. Another said, “It feels like you’ve been put in a prison, and you don’t know what you did wrong.”

    This country, as modern and sophisticated as it is geographically isolated, still seems to be in shock. But if the events of last month — the failure of Iceland’s banks; the plummeting of its currency; the first wave of layoffs; the loss of reputation abroad — felt like a bad dream, Iceland has now awakened to find that it is all coming true.

    It is not as if Reykjavik, where about two-thirds of the country’s 300,000 people live, is filled with bread lines or homeless shanties or looters smashing store windows. But this city, until recently the center of one of the world’s fastest economic booms, is now the unhappy site of one of its great crashes. It is impossible to meet anyone here who has not been profoundly affected by the financial crisis.

    Overnight, people lost their savings. Prices are soaring. Once-crowded restaurants are almost empty. Banks are rationing foreign currency, and companies are finding it dauntingly difficult to do business abroad. Inflation is at 16 percent and rising. People have stopped traveling overseas. The local currency, the krona, was 65 to the dollar a year ago; now it is 130. Companies are slashing salaries, reducing workers’ hours and, in some instances, embarking on mass layoffs.

    “No country has ever crashed as quickly and as badly in peacetime,” said Jon Danielsson, an economist with the London School of Economics.

    The loss goes beyond the personal, shattering a proud country’s sense of itself.

    “Years ago, I would say that I was Icelandic and people might say, ‘Oh, where’s that?’ ” said Katrin Runolfsdottir, 49, who was fired from her secretarial job on Oct. 31. “That was fine. But now there’s this image of us being overspenders, thieves.”

    Aldis Nordfjord, a 53-year-old architect, also lost her job last month. So did all 44 of her co-workers — everyone in the company except its owners. As many as 75 percent of Iceland’s private-sector architects have probably been fired in the past few weeks, she said.

    In a strange way, she said, it is comforting to be one in a crowd. “Everyone is in the same situation,” she said. “If you can imagine, if only 10 out of 40 people had been fired, it would have been different; you would have felt, ‘Why me? Why not him?’ ”

    Until last spring, Iceland’s economy seemed white-hot. It had the fourth-highest gross domestic product per capita in the world. Unemployment hovered between 0 and 1 percent (while forecasts for next spring are as high as 10 percent). A 2007 United Nations report measuring life expectancy, real per-capita income and educational levels identified Iceland as the world’s best country in which to live.

    Emboldened by the strong krona, once-frugal Icelanders took regular shopping weekends in Europe, bought fancy cars and built bigger houses paid for with low-interest loans in foreign currencies.

    Like the Vikings of old, Icelandic bankers were roaming the world and aggressively seizing business, pumping debt into a soufflé of a system. The banks are the ones that cannot repay tens of billions of dollars in foreign debt, and “they’re the ones who ruined our reputation,” said Adalheidur Hedinsdottir, who runs a small chain of coffee shops called Kaffitar and sells coffee wholesale to stores.

    There was so much work, employers had to import workers from abroad. Ms. Nordfjord, the architect, worked so much overtime last year that she doubled her salary. She was featured on a Swedish radio program as an expert on Iceland’s extraordinary building boom.

    Two months ago, her company canceled all overtime. Two weeks ago, it acknowledged that work was slowing. But it promised that there would be enough to last through next summer.

    The next day, everyone was herded into a conference room and fired.

    Employers are hurting just as much as employees. Ms. Hedinsdottir has laid off seven part-time employees, cut full-time workers’ hours and raised prices. The Kaffitar branch on Reykjavik’s central shopping street was perhaps half full; in normal times, it would have been bursting at its seams.

    While business is dwindling, costs are soaring. When the government took over the country’s failing banks in October, Ms. Hedinsdottir’s latest shipment of coffee — more than 109,000 pounds — was already on the water, en route from Nicaragua. She had the money to pay for it, but because the crisis made foreign banks leery of doing business with Iceland, she said, she was unable to convert enough cash into foreign currency.

    “They were calling me every day and asking me what the situation was, and they got really nervous,” Ms. Hedinsdottir said of her creditors. They got so nervous that they sent the coffee to a warehouse in Hamburg, Germany, where it now sits while she tries to find the foreign currency to pay for it.

    Her fixed costs are no longer fixed. Five years ago, the company built a new factory, borrowing the 120 million kronur — about $1.5 million — in foreign currencies. But the currency’s fall has increased her debt to 200 million kronur. This summer, her monthly payments were 2.5 million kronur; now they may be double that — the equivalent of $38,500 in Iceland’s debased currency.

    “My financial manager is talking to the banks every day, and we don’t know how much we’re supposed to pay,” Ms. Hedinsdottir said.

    In a recent survey, one-third of Icelanders said they would consider emigrating. Foreigners are already abandoning Iceland.

    Anthony Restivo, an American who worked this fall for a potato farm in eastern Iceland and was heading home, said all of the farm’s foreign workers abruptly left last month because their salaries had fallen so much. One man arrived from Poland, he said, then realized how little the krona was worth and went home the next day.

    At the Kringlan shopping center on the edge of Reykjavik, Hronn Helgadottir, who works at the Aveda beauty store, said she could no longer afford to travel abroad. But the previous weekend, she said, she and her husband had gone for a last trip to Amsterdam, a holiday they had paid for months ago, when the krona was still strong.

    They ate as cheaply as they could and bought nothing. “It was strange to stand in a store and look at a bag or a pair of shoes and see that they cost 100,000 kronur, when last year they cost only 40,000,” she said.

    In Kopavogur, a suburb of Reykjavik, Ms. Runolfsdottir, the recently fired secretary, said she had worried for some time that Iceland would collapse under the weight of inflated expectations.

    “If you drive through Reykjavik, you see all these new houses, and I’ve been thinking for the longest time, ‘Where are we going to get people to live in all these homes?’” she said.

    The real estate firm that used to employ Ms. Runolfsdottir built about 800 houses two years ago, she said; only 40 percent have been sold.

    By Icelandic law, Ms. Runolfsdottir and other fired employees have three months before they have to leave their jobs. At the end of that period, she will start drawing unemployment benefits.

    Meanwhile, her husband’s modest investment in several now-failed Icelandic banks is worthless. “They were encouraging us to buy shares in their firms until the last minute,” she said.

    She feels angry at the government, which in her view has mishandled everything, and angry at the banks that have tarnished Iceland’s reputation. And while she has every sympathy with the hundreds of thousands of foreign depositors who may have lost their money, she wonders why the Icelandic government — and, in essence, the Icelandic people — should have to suffer more than they already have.

    “We didn’t ask anyone to put their money in the banks,” she said. “These are private companies and private banks, and they went abroad and did business there.”

    Despite all this, Icelanders are naturally optimistic, a trait born, perhaps, of living in one of the world’s most punishing landscapes and depending for so much of their history on the fickle fishing industry. The weak krona will make exports more attractive, they point out. Also, Iceland has a highly educated, young and flexible population, and has triumphed after hardship before.

    Ragna Sara Jonsdottir, who runs a small business consultancy, said she had met for the first time with other businesses in her office building. “We sat down and said, ‘We all have ideas, and we can help each other through difficult times,’ ” she said.

    But she said she was just as shocked as everyone else by the suddenness, and the severity, of the downturn. When the prime minister, Geir H. Haarde, addressed the nation at the beginning of October, she said, her 6-year-old daughter asked her to explain what he had said.

    She answered that there was a crisis, but that the prime minister had not told the country how the government planned to address it. Her daughter said, “Maybe he didn’t know what to say.”

    Bye bye overinflated, exhuberant and irrational economy. Time to get back to reality: a small island will always revert to being a small island
  3. just21


    Sterling still doing better than the Aussie dollar and Norwegian krone. Australia has no government debt and Norway has a sovereign wealth fund. Agree that the economic situation is looking bleak for a country that only operates a casino, a refugee camp and an arms industry. North sea oil has peaked so the trade defecit will grow as more imports are needed every month. Sterling strength can only be because it is a bigger economy than the others mentioned here. FT reporting that 75% of gilts bought since 2004 have been liquidated since September.
  4. Really? Then why isn't their currency Top Dog... ???
  5. just21


    Commodity prices have collapsed and it is a small country, 20 million people, and the smaller a country the worse the market likes it.
  6. Iceland, Australia, UK, just a bunch of islands :p
  7. from the times


    Sterling hit as funding fears mount over soaring government borrowing

    Growing concerns in global markets over how Britain will fund the surge in government borrowing triggered by the recession are piling more pressure on the weak pound.

    Sterling tumbled again yesterday, to a fresh 12-year low on its trade-weighted index, and a record low against the euro, as new evidence emerged that investors may be shunning UK government bonds amid anxieties over the country's worsening economic prospects and financial position.

    Worries are surfacing over the threat of a vicious downward spiral in which waning appetite among overseas investors for UK assets, including government bonds, or gilts, saps the pound's strength. That, in turn, makes it still less attractive to take further holdings in assets denominated in a depreciating currency.
  8. Telegraph: Ken Clarke warns Britain is on the brink of 'meltdown'

    Mr Clarke, 68, said the British economy is headed for a "catastrophic crisis" that will be "far worse than anything that has occurred in my lifetime". "There will be a very serious recession next year," he said in an interview with Telegraph TV. "I think the big problem in 2009 will be the catastrophic fall in consumer spending demand, spending in shops will get worse." Mr Clarke, who as Chancellor of the Exchequer between 1993 and 1997 led Britain's recovery from Black Wednesday, called for a temporary cut in VAT to boost spending. Speaking as the Office of National Statistics revealed unemployment has reached an 11-year high of 1.82m, Mr Clarke said the number of jobless could soon reach three million.

  9. UK is hurting,

    But I seriously doubt they are on the "Iceland" path for many reasons.

    They are the "1" fx exchange on the planet, and more importantly, Yanks love them, and in no way will allow them to fail.

    So you counter with "what happens when the Yanks implode?"

    Well, if that happens, we are all fucked.

    BTW, my last name is Halford. Can't get more Brit than that (yeah I'm a Yank).

    #10     Nov 12, 2008