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Michael Hudson:
Why Iceland's move is so important for international financial restructuring

Iceland has decided that it was wrong to turn over its banking to a few domestic oligarchs without any real oversight or regulation, on the by-now discredited assumption that their self-dealing somehow will benefit the economy.

The amount of debt that can be paid is limited by the size of the economic surplus - corporate profits and personal income for the private sector, and the net fiscal revenue paid to the tax collector for the public sector. But for the past generation neither financial theory nor global practice has recognized any capacity-to-pay constraint. So debt service has been permitted to eat into capital formation and reduce living standards.
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Instead of imposing the kind of austerity programs that devastated Third World countries from the 1970s to the 1990s and led them to avoid the IMF like a plague, the Althing is changing the rules of the financial system. It is subordinating Iceland's reimbursement of Britain and Holland to the ability of Iceland's economy to pay.

This weekend's pushback is a quantum leap that promises (or to creditors, threatens) to change the world's financial environment. For the first time since the 1920s the capacity-to-pay principle is being made the explicit legal basis for international debt service. The amount to be paid is to be limited to a specific proportion of the growth in Iceland's GDP (on the assumption that this can indeed be converted into export earnings).[...] This means that if creditors take punitive actions whose effect is to strangle Iceland's economy, they won't get paid.

Iceland promises to be merely the first sovereign nation to lead the pendulum swing away from an ostensibly "real economy" ideology of free markets to an awareness that in practice, this rhetoric turns out to be a junk economics favorable to banks and global creditors.
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No doubt the post-Soviet countries are watching, along with Latin American, African and other sovereign debtors whose growth has been stunted by the predatory austerity programs that IMF, World Bank and EU neoliberals imposed in recent decades. The post-Bretton Woods era is over. We should all celebrate.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Aug 19th, 2009 at 08:50:43 AM EST
A good compromise between disastrous austerity and disastrous default methinks. And very, very interesting. Also gives creditors an incentive not to fuck around or plot revenge, which they are completely free to do in the event of default.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Aug 20th, 2009 at 03:02:41 PM EST
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