I love this story. It’s one of those that calls to mind the old Margaret Mead dictum, “Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it’s the only thing that ever has.”
Icelanders who pelted parliament with rocks in 2009 demanding their leaders and bankers answer for the country’s economic and financial collapse are reaping the benefits of their anger.
Since the end of 2008, the island’s banks have forgiven loans equivalent to 13 percent of gross domestic product, easing the debt burdens of more than a quarter of the population, according to a report published this month by the Icelandic Financial Services Association.
So does the story end there? Did the people revolt and the banks give in, leading to a lower standard of living or some financial disaster or something? No. Debt deleveraging successfully brought back the Icelandic economy.
The island’s steps to resurrect itself since 2008, when its banks defaulted on $85 billion, are proving effective. Iceland’s economy will this year outgrow the euro area and the developed world on average, the Organization for Economic Cooperation and Development estimates. It costs about the same to insure against an Icelandic default as it does to guard against a credit event in Belgium. Most polls now show Icelanders don’t want to join the European Union, where the debt crisis is in its third year.
The island’s households were helped by an agreement between the government and the banks, which are still partly controlled by the state, to forgive debt exceeding 110 percent of home values. On top of that, a Supreme Court ruling in June 2010 found loans indexed to foreign currencies were illegal, meaning households no longer need to cover krona losses.
We’ve heard in this country for the past several years of housing crisis that principal forgiveness rewards bad actors and causes moral hazard, and that we can’t do that to the poor, put-upon banks. Well guess what? Debt write-downs work. They generate a wealth effect among the population, and they help to end balance-sheet recessions and bring about economic growth. What’s more, Icelandic home values came back, just 3% off their September 2008 pre-crisis level. You can take the example of Iceland or you can take the example of the rest of Europe. It’s your choice. But the facts reveal that austerity is counter-productive, while debt forgiveness is extremely productive.
More there so go read the rest. Dave's interview with Cenk below the fold.