Greece vs Iceland. Why these two defaults stand a world apart

Lately many articles in the press highlight the success of Iceland following its default and compare it to the situation in Greece. Of course, Iceland has faired pretty well. Lessons should be learned on the way they had handled the crisis.

But let us not forget that the default of Iceland, its economy, demographics and economic structure have very little to do with Greece. The two defaults (or selective defaults) stand a world apart.

The reasons of Iceland’s default were different. Iceland defaulted because the debt of the three largest banks amounted to around 5 or 6 times the country’s GDP. In other words, the banking system was the reason behind the sovereign default.

Iceland was a free market, with relatively low taxes and the Icelanders ranked at the top 10 of the worlds most productive workforce. The default was not a result of an inefficient economic structure. It was the result of an over-leveraged financial sector which when the Lehman crisis knocked the door, it collapsed like a house of cards.

The Icelandic policy makers had to deal with a huge problem. But this problem was relatively contained.

The didn’t have to change the whole economic structure. The just needed to re-start the financial sector and at the same time give breathing space to the citizens. That achieved, the country would eventually stand back to its feet as the structure for growth had been always in place.

Icelandic banks were nationalized, loans were written off, and BECAUSE the economy’s competitiveness was already ranking amongst the top 10 globally, Iceland recovered.  Please note that Iceland is a nation of 318,000 inhabitants (which is about comparable to any medium sized suburb of Athens) and a significant chunk of its energy needs are addressed domestically due to the abundant geothermic energy

In Greece, the reason of default is the OPPOSITE. The sovereign default is BEHIND the bank financial crisis.  The reason of the default is not the over-leveraged financial sector (Greek banks are below average when it comes to that) and the Lehman collapse had a very small affect as the nation’s banks did not have US toxic assets.

The reason for Greece’s default is the Sovereign. The structure of the economy. The fact that the country ranks 56^th out of the 59 countries in the IMD competitiveness scoreboard.  A restart of the financial system is required BUT the most important action that has to be taken is the RESTRUSCTURING of the economy . Structural changes to improve the profile and viability of the Greek state.

Economists argue that if Greece follows Iceland’s path of reforms, Greece will get out of the mess. This is a gross miscalculation in my view. Of course there are lessons that have to be learned fromIceland, and I had argued previously in favor of a bank recapitalization with partial write off of household loans. But if Greece’s economic structure does not change, then the probability of success is very low.

What Greece needs is much more complex. Iceland’s policy makers had one major problem. The clean up of the financial system. This was pretty straight forward.

Greek policy makers have their hands full. They need to change the economic structure, to enhance the entrepreneurial spirit, to reduce bureaucracy, to design a proper tax regime, to balance the social security bills and sort out the financial sector. And at the same time, make sure that the energy needs of the country can be fully met. They need to rise to the occasion. The more they debate on the issue, the more time is lost. And time is of essence.

The country seems to have secured the bail-out despite the rhetoric of EU politicians. Now Greecehas to deliver on a massive economic change program and think of ways to stimulate investment, entrepreneurship and finally growth. Not to appease the EU. But to secure the prospects of its own people.

This Herculean task doesn’t need a semi-god to perform it. It needs focused, knowledgeable individuals who will not give a damn and will not care for the infamous “political cost” a.k.a “state cronyism cost”.

Instead of discussing if the country should keep the Euro or return to the Drachma, the discussion should be HOW to stimulate the economy. Economy is 50% expectations. When Greeks complain  on their own  prospects visualizing an Armageddon in 3 years time, it becomes a self-fulfilling prophecy. Let’s try to stop crying over spilt milk and take a step forward. 

 Dimitris