Writing in the
Wall Street Journal, James Glassman is outraged by Iceland's treatment of foreign investors --
Argentina, after the largest sovereign default in history, spent 14 years stiffing creditors until finally settling in March after the defeat of President Cristina Kirchner’s preferred successor. Argentina’s refusal to abide by court orders, negotiate, or even recognize its obligations caused serious harm to the economy as private investors, fearful of receiving the same treatment, stopped lending money. But Argentina has a history of poor governance and serial defaults. You would expect Iceland to be different.
Instead, this prosperous member of the European Economic Area and NATO, with an unemployment rate of 2.5% and income per capita of nearly $50,000, is adopting the old Argentine playbook, even hiring the same law firm. The consequences to Iceland’s recovering economy could be similar ...The legislation passed last month gives foreign holders of about $2.3 billion in bonds denominated in Icelandic kronur two unappetizing options. They can either sell their bonds by June 16 at an exchange rate severely below the current market, or hold the bonds until maturity and have the proceeds locked up inside Iceland in a savings account paying 0.5% interest.
The exchange rate today is about 122 krona to the dollar, so one million krona should be the equivalent of about $8,100. The legislation orders conversion at between 190 and 210 krona to the dollar, so one million krona becomes as little as $4,800.
There's one thing you'd realize if you read Glassman's column carefully, and a couple of things that you wouldn't, since he doesn't say so.
The one thing you're realize from a careful reading is that these investors bought bonds
denominated in the local currency, the kronur. Thus it's Iceland's sovereign decision to set the exchange rate at which these bonds can be converted into dollars -- and the government points out that the exchange rate it has set has to take into account what would happen if all these investors tried to convert into dollars at once when they get paid.
Which brings us to the points not so clear from Glassman but are well explained in this
Bloomberg News article. These investors don't want to get out of Iceland. They want to stay invested, because the yields are so large relative to anything else that they get from a well-run country. But Iceland has decided that going up and down with the swell of hedge fund moods is not the way they want to go. So in the second option that Glassman discusses above, they can keep their money in an Icelandic bank account -- until Iceland removes capital controls, which the government wants to do quite soon. And the interest rate in that account is not much different from what they could elsewhere, and in the meantime that Icelandic currency that they're "locked in to" is most likely to gain value -- precisely because of Iceland's unorthodox but successful approach to handling its debt crisis.
The message to foreign investors is not that Iceland is the northern Argentina. The message is not to invest in a country that does such a good job of dealing with the cycles caused by foreign investors that it can pick and choose how to pay them.
