Ireland versus Iceland as ways to escape from bust banks

Martin Wolf reports in today’s Financial Times on a recent IMF-hosted conference on Iceland’s economic recovery. The main comparison is with Ireland: both are small, open economies where government borrowing was low but where massively over-expanded banks created a gigantic national liability. Iceland rescued the domestic banking system and forced the other bank creditors to take losses. Ireland’s government guaranteed all bank liabilities, not just depositors, and ended up with over 100% government debt to GDP.

In short, Iceland has experienced less unemployment than Ireland, shows better signs of recovery and most remarkably has much lower CDS spreads than Ireland (352 basis points against 720 as of this morning). In other words, the markets has rewarded Iceland for not bailing out former debts by making it less risky for new lenders.

Life is tough in both countries, though both are showing signs of some recovery, with current account balance of payments surpluses and modest growth. Both are vastly better off than Greece. But Iceland is well ahead. The full conference proceedings (including slides from Paul Krugman’s talk) are here.

Poor Ireland.

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