Iceland - Teetering on the brink?

A recent economic paper (“The Global Financial Accelerator and the Role of International Credit Agencies” by Carsten Valgreen, Chief Economist, Danske Bank) asks whether central banks of small countries are losing influence over macro economic policy. By losing influence, he means lack of impact in mitigating climbing interest rates and out-of-whack budgets.

The question he asks is Why hasn't the international market stepped in to rein in these imbalances?

The examples he uses are Iceland and Latvia. Let's talk about the conditions in Iceland since that country is this provincial government's nation-model-hero of the hour.

(Sounds like fun, I know but bear with me for a second - it's relevant.)

The fact is that Iceland is barely escaping the kind of currency crisis that a more vigilant bond market would traditionally have imposed just a few years ago.

Iceland has racked up enormous current-account deficits, running at a remarkable 25-30% of GDP.

NL, by comparison, is running substantial current account surpluses thanks to healthy oil and nickel revenues.

Iceland's companies have been in an acquisitive mood in recent years, borrowing heavily to buy abroad. The country has also used foreign finance to build some large aluminum smelters. As a result, its gross foreign debt is more than five times the value of its GDP.

The GDP is approximately US$16billion which makes the foreign debt about US$80billion. That's US$260,000 per capita.

Our debt? Well, these days it's running about $10billion compared to a GDP of about $19billion* for a ratio of roughly 50% of GDP. And it's already the highest per capita in Canada at roughly C$18,400 per person.

The Central Bank of Iceland has been trying to bring this issue of national debt under control by raising short-term interest rates to nearly 15%. This compares to a local interest rate of 6.5% or so.

Interestingly, the bank's efforts have, if anything, backfired. High rates have made Iceland the beneficiary of the “carry trade”, where investors borrow in a low-yielding currency and invest the proceeds in a higher-yielding one. The conventional wisdom is that high interest rates will be offset by an eventual plunge in the value of its currency.

But that hasn't happened. Iceland now has the worse of all worlds - simultaneous high interest rates and high currency.

So Iceland is now boxed into a situation where they have a debt that is crippling and unsustainable, interest rates that are more than twice of ours and an overvalued currency that's waiting for a collapse back down to more sensible levels.

Sure, let's emulate them because that's the economic model we want to follow.

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* Our debt would actually be higher than that is we included our share of the federal debt but we'll leave that out for purposes of this discussion.

30% cut to cod quota

The national government has released a report recommending a sharp reduction of 30% in the cod fishing quota. The TAC is now at the lowest level in generations. The minister is implementing the recommendations of the report but regrets the effects of his actions as remote rural communities will be harmed. Still, he defends his actions saying it will strengthen the stocks in the long run.

Harvesters protest noting that the government has been consistently wrong in their stock predictions. Fishing vessel owners demand participation in marine research and a say in decisions. Meanwhile a professor of fish science says more money should be put into research.

This is a familiar story that has been part of the public environment around the fisheries sector in the province of Newfoundland and Labrador for years.

It's just too bad, as the local wags claim here and here, we can't be more like Iceland who have been far more aggressive in exercising complete control over their fish stocks with wisdom and foresight.

The only problem is that the first couple of paragraphs of this post have nothing to do with this province. These events all come from the last 10 days of Icelandic news stories about their fishery: the Icelandic Minister of Fisheries Einar K. Gudfinnsson has just instituted a 30% cut in their cod quota.

Chances are that's only the beginning for that rocky isle.

It would be worthwhile to closely examine the cold facts why Iceland has been forced into these actions rather than simply pining with starry-eyed sentimentality to be just like them.

More to follow.

Common property resource mythology

In today's Globe and Mail there is a fascinating column by Jeffery Simpson called Why this country believes its own fish story (subscription required).

In part he says:

In a country with the world's longest coastline, we have made a hash of too many fisheries. Instead of being the leader in intelligent fisheries policies, we cling to mythologies that, in turn, have led to bad practices that more sensible countries discard.

The most tenacious mythology, especially in Atlantic Canadian fishing communities, is that fisheries must be a "common property resource," owned by all through the government and therefore available to all.

The results of this mythology are everywhere apparent: The fishery is not an industry based on economic principles, but a mixture of some economics and various forms of welfare.

It doesn't have to be this way, and it isn't this way in Iceland*, New Zealand, Australia and parts of the United States. And it wouldn't be this way if Canadians followed these examples and were also inspired by the latest report from the U.S.-based organization Environmental Defence.

. . .

The conclusion: Ditch common property resource regimes and adopt what Environmental Defence calls a "catch share fishery," also called a "transferable quota system." (full report here)

. . .

Why is this system, which has revolutionized the fisheries of Iceland and New Zealand, so dreaded in Canada? The mythology of the common property resource is one reason, the system having been in place for so long. Another is that catch share tries to put the fishery on a sound economic basis. It provides stable, full-time employment, and, through its market principles, encourages the best fishing interests.

It does, therefore, lead to less part-time employment and some shrinkage of processing capacity in small communities. Since the fishery-cum-unemployment system in Canada is designed to maximize part-time employment, ostensibly to help fishing communities, the very economic soundness of catch share causes fright.

It caused fright in Iceland and New Zealand in the early years. There were problems in setting overall catch limits and allocating initial shares. But, eventually, the fisheries of both countries found strong economic foundations, and no one proposes going back -- back to where Canada is and for the most part has always been, gripped by one of its mythologies.

Both the federal and provincial, Liberal and Conservative party fisheries spokespeople on government and opposition sides subscribe to the fisheries as a common property resource. As long as they do, any and all fisheries "reforms" will be mere tinkering around the edges never avoiding the tragedy of the commons.

I'm sure if it wasn't for the equalization jihad gripping the province that this column would be the "they are bashing us again" story of the day.

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It's interesting that abandoning the common property resource for the fisheries never seems to enter into the calculations of those who want us to emulate Iceland (more on that another time).