The Specter of Debt Revolt Is Haunting Europe
Why Iceland and Latvia Won't (and Can't) Pay for the Kleptocrats' Ripoffs - Michael Hudson

Neither Britain nor Holland, neither the EU nor IMF have provided a scenario for just how Iceland is supposed to pay the debts that are being claimed. How much will personal income and living standards have to fall? What government programs must be cut back? How many defaults on domestic mortgages and personal debts will result, and how much unemployment? How much emigration will occur? The models being employed treat these dimensions of the economic problem as "externalities," but they are central to how the economic system works in practice.

The question is whether neoliberal ideology will give way to economic reality, or whether economic policy will retain the blinders that typically characterize short-term creditor-oriented policies? What is blocking a more reasonable pro-growth policy, Ms. Joly observed, is that "the Swedish presidency of the EU does not seem to be in a hurry to improve regulation of the financial sectors, and the committees with an economic focus in the Parliament are, more than ever, dominated by liberals, particularly British liberals." So Europe continues to impose a shortsighted economic ideology. Therefore, she concluded: "Mr. Brown is wrong when he says that he and his government have no responsibility in the matter. Firstly, Mr. Brown has a moral responsibility, having been one of the main proponents of this model which we can now see has gone up the spout.

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.

[Torygraph Alert] Iceland: what ugly secrets are waiting to be exposed in the meltdown? (15 August 2009)

It has now become clear that this was no ordinary crash. Iceland's special investigation into "suspicions of criminal activity" at the three banks is likely to stretch from Reykjavik to London, Luxembourg and the British Virgin Islands.   Related Articles

Eva Joly, the French-Norwegian MEP and fraud expert hired by Iceland and now working with the [UK's] Serious Fraud Office, now believes it will be "the largest investigation in history of an economic and banking bank collapse".

Many of the banks' secrets are likely to be inextricably bound up with corporate Britain and the success of these investigations in tracing and recovering assets is likely to affect every UK household.

There is a long-standing precedent for countries refusing to pay "odious" debts - debts that were run up by repressive, colonial or otherwise illegitimate regimes. Similarly, a case can be made that countries who have been saddled with unpayable levels of IMF credit should be able to jettison these liabilities.

If I understand correctly this was a principle that mostly was used by Latin American countries in the 19th century - and also by the US when "liberating" such countries. It has since fallen out of use though attempts has been made to resurrect the principle.

Does anyone know when it was last used succesfully?

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Sir, I was fascinated to read Michael Hudson's article "Iceland's debt repayment limits will spread" (August 17).

Nicholas Taleb, in these pages, and Willem Buiter, in his FT blog, have both recently made the point that if debt is unsustainable then equity is the only solution. Since sovereign debt is unrepayable, and this is as much the case (in fact more so) for US debt as any other nation, then why should not nation states recognise this reality and issue undated units of "national equity" by way of a debt/equity swap?

These undated units would be issued with a reasonable (say) 1.5 per cent to 2.5 per cent index-linked dividend in dollars - at least for as long as the dollar is the global reserve currency.

Units would be both freely tradable and redeemable by the issuer at any time, simply by buying them back, and the unit price would reflect the judgement of investors that the issuer is able to pay the dividend.

The methodology of national equity turns existing thinking about risk on its head. Everyone has an interest in a country agreeing an affordable dividend, since it will then be more likely that it will be paid, and the unit will therefore be less risky and more valuable.

Chris Cook,
Linlithgow, West Lothian, UK