Thursday, June 16, 2011

When having a choice was bad

Icelanders argue about the validity of the Ireland-Iceland comparison.  The Finance Minister Steingrimur J. Sigfusson:

“People should be careful when it comes to drawing comparisons between Iceland on the one hand, and Greece, Portugal, Spain and Ireland on the other,” Finance Minister Steingrimur J. Sigfusson said in an interview in Reykjavik. “Iceland didn’t have the ability to save the banks. Trying to rewrite the events that led to that eventuality as some sort of an export product is irresponsible.” ... “Iceland should be humble and avoid advising other countries, especially when it comes to banking,” Sigfusson said. “What happened was an emergency situation which couldn’t be avoided.” 

Univ of Iceland professor Ásgeir Jónsson  --

Dublin faced the same predicament as Reykjavik in 2008, but it responded with a blanket guarantee that turned Irish taxpayers' money into collateral for Irish bank debts. Rating agencies and so-called experts hailed the move at the time, in part because Dublin had the euro and the mighty German state vouching for its credibility. But Iceland's experience of botched government takeovers and private-capital flight has also played out in Ireland—only much more slowly and, arguably, more painfully. 

The crucial difference between Iceland and Ireland is that Icelandic taxpayers relinquished responsibility for their banks' bondholders, while their Irish counterparts are on the hook for their banks' crushing debts. Even worse, we may not have seen the full scale of the Irish banking system's losses, given that it remains on government life support.

The way to reconcile the arguments is to note that Ireland had better circumstances in 2008, but made worse decisions. It's not yet clear that official Ireland knows that.

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