Some people in Iceland want to abandon the Krona and adopt the Loonie. This came as rather a surprise to me. Here are some thoughts off the top of my head:
1. Is Canada+Iceland an Optimal Currency Area? Is Canada one of Iceland's main trading partners for imports and exports? Is there high labour mobility between Canada and iceland, so that unemployed Icelanders could easily get jobs in Canada, and unemployed Canadians could easily get jobs in Iceland? Are macroeconomic shocks to Canada and Iceland highly correlated? None of these claims sound very plausible.
2. Who does Iceland imagine would act as lender of last resort to Icelandic banks? In 2008 Iceland's banks defaulted on their foreign currency liabilities. I am very glad that the Bank of Canada was not obliged to act as lender of last resort to Icelandic banks in 2008. Does Iceland think it can manage without a lender of last resort to its banking system? It didn't work so well in 2008.
3. The government of Iceland would presumably be issuing Loonie bonds. Given the recent experience of the Eurozone, governments borrowing in a foreign currency — which they cannot themselves print — does not look like a very stable arrangement. If the Eurozone has very weak fiscal relations, those between Iceland and Canada are non-existent. Would Canada be expected to play Germany to Iceland's Greece?
4. If there were a financial crisis in Iceland, is there any possibility that could spillover and affect Canada's financial markets and the exchange rate? Would the Bank of Canada be forced to act as lender of last resort to Iceland's government or banks in order to protect Canadian financial markets and the exchange rate from the fallout?
5. If Canada decided that it was not in Canada's national interest for Iceland to adopt the Loonie, is there anything Canada could actually do to prevent Iceland unilaterally adopting the Loonie?
6. (Update) One clear benefit to Canada would be the extra seigniorage revenue. Assume Iceland's GDP is 1% of Canadian GDP, the currency/GDP ratio is 5%, and the long-term nominal interest rate is 4%. The extra seigniorage from iceland adopting the Loonie would be 1% x 5% x 4% = 0.002% of Canadian GDP (somebody check my math please).
Your thoughts?
Worthwhile Canadian Initiative 
This seems more like the central American/Caribbean countries that use USD. They are too small to have a stable and credible currency. Iceland has lost a lot of credibility, so maybe they are hoping to use Canada’s. I agree that it doesn’t make much sense. To answer 5, I think there is no way to prevent another country from using your currency, short of capital controls such as China’s.
Why would Iceland want to adopt a petrocurrency?
Wasn’t Iceland’s monetary system doing quite well until their bankers started to get big ideas?
Frances: Yep. I think Iceland has geothermal. But the correlation between geothermal and oil is presumably not that great. And I’m not sure that the Krona is a “geothermocurrency” to any great extent. More a “piscelcurrency”?
Iceland has a history of high inflation, I did some preliminary checking and they are the smallest country with their own currency. Imagine Hamilton having its own currency and central bank.
This come across more as an vote of non-confidence in the present order and elites rather than a serious plan.
A few more thoughts.
Would Canada be expected to play Germany to Iceland’s Greece?
No, except to the extent made necessary by the next question.
If there were a financial crisis in Iceland, is there any possibility that could spillover and affect Canada’s financial markets and the exchange rate? Would the Bank of Canada be forced to act as lender of last resort to Iceland’s government or banks in order to protect Canadian financial markets and the exchange rate from the fallout?
This could happen and the we’d be forced into it to keep our own debt markets working to the satisfaction of the Bank of Canada and the Department of Finance. I believe Canada’s routine transactions would swamp Iceland’s transactions, particularly though Canada/US trade and the only currency rate that matters, the Canada/US dollar rate.
My thoughts exactly — except much better.
(I have no macro or international trade background, so these are just really random guesses …):
1. If I was Iceland, a (very) small country, heavily dependent on imports for… well, everything, I’d put currency stability at a very high premium; I think I’d be willing to trade off a lot in the way of optimality to basically remove any chance of my currency crashing one day because investors got skittish. I saw Determinant compared it to Hamilton… I’d say it’s closer to saying “what if Whitehorse had its own currency?”. A couple bad months due to a run on the currency could make essential supplies far too expensive.
2. If 1. is true, and it’s just a matter of choosing which currency to adopt, well, it’s not like any other central bank would step up as lender of last resort, why not join Canada’s? The US is no more ready to act as lender of last resort, and I’m not sure if there’s much evidence that the European Central Bank wants to play that role even for its own member states.
2. From what I hear, Iceland has a really large aluminum smelting industry (it’s cheap to do with that much electricity). Maybe they figure that since they’re both commodity-dependent economies, they should experience similar shocks? Not sure how much of the case that is, but if oil and aluminum correlate well in price during peak years and recessions, that might be all Iceland needs… buffer the shocks in the worst years, and suffer through imperfect monetary policy in the average years.
Does any of this make sense at all?
I understand the concerns that Nick has raised.
My question is: how do all the other little countries that have some form of {total dollarization,currency board, hard peg} handle these issues? It isn’t exactly rare–and I’m quite sure they’re not optimal currency areas with their much larger ‘partners’ either.
Solution to the problem #4:
1. Sell all the commercial banks to Canadian banks.
2. Run budget surpluses during
This solution has worked well for Estonia.
Well. We invaded them once. Our newly Royal Air Force is garrisonned there to provide air cover ( since the US left), why not do the whole Central America scenario?
As for the seignoriage: Old russsian joke: Ivan the Terrible and Peter the Great greet Stalin in hell. ” “Still executing opponents and sending the rest to Siberia?” Yes. ” Still managing the economy into the ground?” “Yes” “Vodka still at 38%?” “No. 40 now” “All that trouble for 2 %?”
Erik: Iceland switched to inflation targeting (2.5%) in 2001. Since then the exchange rate against the Euro (Iceland does more trade with the Eurozone I think) was reasonably stable, up until the 2008 banking crisis. chart here. The central bank could always hold a couple of months imports worth of foreign exchange bonds in reserve and do a dirty float (intervene in forex market) if it was scared of a run on the Krona.
“Not sure how much of the case that is, but if oil and aluminum correlate well in price during peak years and recessions, that might be all Iceland needs… buffer the shocks in the worst years, and suffer through imperfect monetary policy in the average years.”
That makes sense.
Kevin: “My question is: how do all the other little countries that have some form of {total dollarization,currency board, hard peg} handle these issues? It isn’t exactly rare–and I’m quite sure they’re not optimal currency areas with their much larger ‘partners’ either.”
Very good question. My hunch is some mixture of: keep large reserves; try to issue mostly long-term bonds that don’t need to be rolled over; insert a clause in short term bonds (and demand deposits) that lets the borrower postpone payment in an emergency; keep your fingers crossed.
IIRC, Scottish banks under the gold standard had a clause that let them suspend convertibility into gold but they had to pay a penalty rate of interest to prevent moral hazard. (Something like that.)
Here is a comment from Tim on the other post that I think is worth repeating here:
“One issue is to what extent the Canadian chartered banks would essentially take over the Iceland retail banking system as happenend in Newfoundland. Currently all the main retail banks in Iceland are currently under government ownership so I suppose if Canadian bank want a retail presence in Iceland I wouldn’t be that difficult to pick one up. As to the Carribean I would argue that the Bank of Canada is already implicitely supporting much of the region’s banking system by the fact almost all of it is Canadian owned. While CIBC First Carribean is technically a legally distinct subsidiary of CIBC Canada at the end of day everyone know when push comes to shove CIBC Canada, the Bank of Canada, and the Government of Canada would all support the operations of CIBC First Carribean. That’s why in the latest revision of the Bank Act Flaherty is asking for direct authority to approve foreign acquisitions of Canadian Banks.
What is interesting in these Carribean countries is they all of use the US Dollar or local currencies pegged to the dollar through currency boards. Thus the Canadian banking system has a certain degree of indirect currency risk. Now all the major chartered banks can access plenty of US Dollar liquidity compared to the size of their US Dollar liabilities in the Carribean however, I think there is a case to made that if Canada is going to be as involved as it is in supporting the banking system of the likes of the Bahamas, Jamaica et all then preferably these countries should shift from using the US Dollar to the Canadian Dollar.”
The above was written by Tim.
This is part of a comment by Determinant that I think is worth repeating here:
“Though this happened once before, Newfoundland adopted the Canadian Dollar in 1895. Canadian banks became the dominant banks on the island, banks followed the dollar. If Iceland actually does this I expect that Canadian banks will start opening Icelandic branches.
Actually in much of the Caribbean Canadian banks are the retail banks. In the Bahamas the CIBC, Royal Bank and Bank of Nova Scotia are substantial retail banks for the Bahamian public and business sector, not the secretive offshore banks that have a single office in downtown Nassau and Cable Beach with only five staff.”
The above was written by Determinant.
When see the fall in interest rates for non Euro European countries matched that of Euro countries, I cannot see any reason why a peg/currency board alternative would not be better. It preserves the option value of leaving even if one never does.
Why guess how Iceland’s aluminum industry will fare under the Canadian dollar? Jacques, how has Quebec’s aluminum industry fared recently under the last decade’s chance in currency rates?
Solution to the problem #4:
1. Sell all the commercial banks to Canadian banks.
2. Run budget surpluses during
This solution has worked well for Estonia.
And God help you if you ever run deficits, this is what sank Newfoundland in 1933.
As I understand it, one of the problems that Iceland has is liquidity. The currency of a small economy can be a lot like a penny stock. It doesn’t take much demand (or a very big panic) to cause a large, but temporary, swing in the exchange rate. Foreign investment is more attractive if you don’t have a large exchange rate risk on top of the risk of the venture.
Most small economies either peg or use a major foreign currency. Aside from the question of why they’d prefer CAD, I think it probably makes a fair bit of sense for Iceland to go down this road, and enjoy the added stability that comes from being a tiny part of a much larger currency. And as for “why CAD,” it might well be that our resource centric economy makes for a closer-to-optimal currency area than the more popular American currency, and implementing the Euro doesn’t exactly look like a flight to safety these days.
Now I am curious,
you made whatever arrangement with the Iceland government, you took over all their banks.
Then the EFTA Court finds Iceland liable for €3.8 bn + plus 5.5 % for each year from 2009 on. Iceland refuses to pay and all European countries demand 30 % tax on everything going in or out between EU and Iceland (80% of their trade). Iceland refuses this, there is a run on their local banks, icelanders taking all their money out in good canadian dollars.
And appeal for help for their banks, their government, the suffering, innocent people of Iceland, babies crying shown every day on your TV.
What now ?
Genauer:
You bring up a very interesting thing in fact the 30% tax idea is quite familiar as I have been involved in fighting something called FATCA a 30% tax the US is trying to impose on Canada along with a lot of countries to induce sharing of banking information. To the extent the EU or the US tries to impose some type of financial transaction tax or witholding tax on Canada my response is for Canada to tell the EU or the US to pound sand.(Actually my language would be a little stronger but I don’t want to say it here as this is a family friendly blog).
It would seem that the only way to impose such a tax if the banking system of Iceland was taken over by Canada would be to impose a tax or witholding in leu of on all EU Canada financial transactions something the EU doesn’t have the guts or glory to do.(That is strong language). To the extent the EU tried to impose sometype of tax on financial transaction between just Iceland and the EU the newly Canadian controlled Icelandic banks could modify/forge the SWIFT routing codes to make such transaction look as if they are between Canada and the EU(Note this would be really illegal as matter of international law but I suppose Ottawa could approve of it whick makes it legal from a strictly Canadian perspective).
Determinant: fast and short as I am on the road: it seems the QC Al industry is going some internal devaluation game. Newly public documents shows ( to horrified shout from companies) that the Qc gov’nment renegociated in some ways the hydro rate ( to well below marginal costs) and one plant has locked-out his workforce over subcontracting. That plant has been granted ownership on parts of the Saguenay river plus concessions in adjoinig areas. A no-longer-secret contract enable that plant to sell back to Hydro-Québec the power generated by these dams ( yes you buy back what you gave) in case of strike or lock-out. The QC gov’ment is paying a palnt to lock-out its workers…Follow the story in the daily Montréal paper ” Le Devoir” of the last few weeks.
Like most QC economists, I have a dim view of this sector and have somtimes spoken publicly about it…A few years ago, I discovered I was barred from entering an AL plant for ” comments derogatory to the AL industry”… Weird but true.
@Neil
The problem Iceland has, is that they owe about 50 % GDP to the NL and UK government, due do reneging on private deposit insurances in 2008,
plus another 50 % each to the IMF and the EU in emergency loans.
And they are just one court decision away from active enforcement of this debt.
80 % of their trade is with the EU, where most folks see Icelander as pretty shameless criminals,
who voted already 2 times that they dont want to pay.
One remark on the side: why did the NL and UK Gov get involved in the first place in disputes between private iceland banks and
private depositors ? Because Iecland nationalized the banks, and only Nations can sue Nations, outside the respective nation.
@ Tim
Again, I do NOT have any personal beef in this. Germany is not involved at all, especially not with Canada.
To avoid any further misunderstandings: as an idea how they could be made to pay, I just pulled the 30 % tax on REAL material transactions
out of thin air, not just financial transactions. More like taking all fish and all boats which get into EU hands, and put them on the chain.
This is not just phantasy. The prince of Thailand didn’t pay a German construction company, was sentenced in an international court,
laughed at that. He stopped laughing, when his air plane was put on the chain in Munich 2011, until he paid.
The point I want to make, in the moment you “overtake the commercial banks of Iceland”,
I think you will be on the hook for their debt, one way or the other.
Maybe you think a little bit about the Balkans in the 90ties. Half the transactions there were done in Deutschmarks,
without Germany involved officially in any way, shape or form.
And that you already had to restrain your language, talk about illegal SWIFT numbers (I ll hope you dont do THIS in front of your children :- ),
shows how fast this could draw Canada into something, which I guess, most of you have non intention at all in the moment, to get into.
Gosh, and illegal SWIFT numbers, the perfect pretext to “proof” complicity of the commerical banks, and seize all their assets. This would be just perfect for NL and UK.
Whether Iceland adopts the loonie or the euro, I certainly think it should adopt someone else’s currency, along with various other state functions.
The Icesave dispute has been one of my specialist subjects, and without going into the details, I would say that the underlying cause of the problem was that Iceland tried to copy the big boys (by having an ex-post bank-funded deposit protection scheme) without sufficient resources to properly understand the implications (the scheme was managed part-time by a single central bank official, who was unable to attend many of the EEA discussions on deposit protection schemes). Of course, presented with the huge bill for their negligence, the Icelandic people try after the fact to find excuses for not paying the British and Dutch governments, but I think the truth is simply that no-one in Iceland had given the issue of deposit protection sufficient thought until it hit them.
If Iceland wants to remain an independent nation, it needs to set aside its national pride, and consider which of the functions of a state it is reasonable for 320,000 people to try to operate themselves, and whether, and if so how, they provide for those functions which they cannot reliably operate. Currency seems a relatively easy service to import.
Genauer:
My sense is any foreign purchaser of the Icelandic banks is going want to buy them “clean” essentially removed any legacy or toxic assets. This however, takes a very North American view of bankruptcy where debts can be seperated and discharged and in particular is what the US FDIC does on an almost weekly basis. There is some history though of this being done in both Europe and Japan. One incident I can think of is the French bank Credit Lyonnais bank in the 1990s where the bank was effectively put into an FDIC/Resolution Trust style restructuring where a new bank called LCL was created to takeover Credit Lyonnais good assets while a bad bank called the Consortium de Realisation was created to hold all of CL’s bad/toxic assets and handle outstanding litigation. Personally I think the powers that be in the EU should be studying the Credit Lyonnais story intensely right now as a model for how to cleanup the current problems in the banking system.
Credit Lyonnais was in its day quite a rogue institution at the link below you can read up on all Giancarlo Parretti and MGM Studios.
http://en.wikipedia.org/wiki/Cr%C3%A9dit_Lyonnais
I will keep it stupid and simple. The reason is there are almost if not more icelanders in Canada than in Iceland. Try Winnipeg for a start. If i remember well the ambassy or consulate of Iceland has been a long long time in Winnipeg instead of Ottawa. I do not know if it is still the case.
It’s when Montana decides to switch to the Loonie that things will get interesting.
Tim:
The example of the French bank is very simple, it was bailed out by the National French government, it was all an internal french story. Just as this Dexia was separated again into its French and Belgian part, when the s*** hit the fan. This just confirms what I want to explain.
In just the same way the EU people make sure, that the Irish mess is tightly contained to Ireland, to not let this grow to some story of irish debtors vs (mainly anglo) creditors. Irish bankruptcy courts have no chance to let their irish mortage deliquents to get off scotch free,
without hurting the irish public. No official politician
(e.g. Klaus Masuch http://www.youtube.com/watch?v=oBjxmsoIFKs )
would ever say it in this way. But a lot of irish economists know, how this game would be played. http://www.irisheconomy.ie/index.php/2012/02/22/eviction-in-ireland-in-2012-i-stopped-the-sheriff/
instructive read:
http://www.irisheconomy.ie/index.php/2012/03/04/understanding-the-german-approach-to-economic-policy/
To future Iceland now:
Forget about the SWIFT thing, forget about buying any existing icelandic bank. Just open a completely new canadian bank in Iceland. You take in their deposits and give out loans (mortgage and commercial) in Can Dollar.
With no ties to the CAn Government or an existing Candian Bank, but with Canadian owners. Lets call it the ICE-Can Bank (ICB).
“perfectly clean”, right ?
And now comes the crucial point:
Who would make deals with this bank, as long as not the Can Gov(ernment) provides some guarantees?
Nobody.
And now let NL and UK put some real material economic sanctions in place, like the material taxes, seizing assets. Not unrealistic, just one last court decision away. Icleanders withdraw their short term deposits, and the ICB is on the hook with the longer term loans, which now objectively can not be served.
Who is now on the hook ?
Canada.
One last thing:
Why do you think Switzerland declared a peg to the Euro at 1.2 ? At a pretty significant risk of huge losses. Because they like this blatant “currency manipulation” ? No !
They have given a lot of mortgage and other loans to eastern european countries, denominated in CHF. If these people see themselves unterwater by too much, they would just default in droves.
genauer:
I’ve just read the EFTA “reasoned opinion”(http://www.eftasurv.int/media/internal-market/RDO-180_11_COL.pdf), and I retract my previous statement as to the Icelandic sovereign responsibility for deposit insurance and tend to agree that Iceland, as a sovereign, appears to be on hook to the extent of E20K per each depositor’s account. The crucial fact is that Iceland, as a country, voluntarily assumed responsibility according to Directive 94/19 to ensure adequate deposit insurance protection and thus has to come up with the means to reimburse the depositors of the failed banks. The discriminatory treatment of domestic vs. foreign depositors merely makes the Iceland position worse, but is not as critical to the EFTA decision as the voluntary assumption of responsibility which is a simple contract matter. Had they not agreed to 94/19, there would be no case against the country as a whole.
The statement below, however, is most likely nonsense under your hypothetical:
“Who is now on the hook ?
Canada.”
Assuming Canada opens bank branches in Iceland. There need not be any implied Icelandic sovereign, or ICB, or both liability assumption by the Canadian banking system unless the latter is dumb enough to assume it/them explicitly. Why would it do that ?
Assuming a specific Canadian bank fails due to its Icelandic operations. The Canadian government is not on hook primarily because its deposit insurance scheme will most likely be able to cover the statutory losses. The situation would be no different from that when the bank in question would have failed domestically.
No, Genauer. Canada does not insure Canadian banks outside of Canada. We do not take responsibility for Canadian bank’s Caribbean operations, nor for the Bank of Nova Scotia’s extensive overseas operations. Iceland would be no different
Canada/US trade is far more important than European trade, the EU can try to set up national sanctions, but Canada doesn’t have extensive European holdings. I would like to see the EU try to persuade the UK to levy sanctions on Canada. Or enforce a judgment. Sovereign Immunity. We are not part of the EFTA or any European economic institutions. European courts have no authority here.
Canada is clear that deposit insurance is a responsibility of the country the branch is located in, not the home jurisdiction of the bank. Europe’s policy was poorly thought out.
Canadian bank subsidiaries in the UK abide by FDIC regulations.
Determinant–
“We do not take responsibility for Canadian bank’s Caribbean operations”
Good point.
The FDIC has a similar policy whereby “foreign deposits: are not “deposits” but general creditor claims on a failed foreign branch.
“Sovereign Immunity”
Not with respect to sovereign debt, though. See the latest cases decided against Argentina both in the UK and the US.
The CDIC and the FDIC have similar policies I believe. Both insure deposits in the national currency up to the specified limit. In order to open a branch in Canada/US you need to take out CDIC/FDIC insurance on your CAD/USD deposits. So far, so good. Sensible, predictable from the customer’s POV and easy to enforce with the machinery of government.
The CDIC here in Canada is very clear that it does not insure foreign currency deposits, of which US Dollar Deposits are the only significant issue. Many Canadians keep USD accounts for US visits, particularly if they are retired and go to Florida for the winter for a few months. Canadian businesses keep USD accounts for cross-border trade. Yet they are not insured and as you say, vjk, just general creditor claims against the bank, unsecured debt in other words.
Why British and Dutch politicians allowed inadequately insured banks to operate in their jurisdiction is beyond me. EU directive or no, it isn’t discriminatory to demand that all banks who solicit funds from consumers in your jurisdiction take out deposit insurance in your jurisdiction. Domestic banks pay the same as foreign banks to take deposits in a given country.
It would have made the Iceland crisis much, much less severe.
Hi Nick.
“2. Who does Iceland imagine would act as lender of last resort to Icelandic banks? I am very glad that the Bank of Canada was not obliged to act as lender of last resort to Icelandic banks in 2008. Does Iceland think it can manage without a lender of last resort to its banking system? It didn’t work so well in 2008.”
Who acted as the LOLR before the Bank of Canada was established in 1935? Whatever it was, it worked pretty well, so Iceland should manage fine without a central bank liquidity provider.
Originally the Canadian banks kept most of their reserves in New York in sterling and dollars, and thus the New York money market became the liquidity provider of last resort. The largest Canadian banks served as bankers’ banks, or liquidity providers for peripheral Canadian banks. The point is that modern day central banks aren’t the only way for banks to secure liquidity insurance.
So Icelandic banks could easily buy liquidity support from large Canadian banks in the form of unconditional lines of credit. Royal Bank, CIBC et al would have to do the due diligence – with skin in the game, they’d probably do a good job.
To force Royal Bank and CIBC to do their due diligence, the BoC should refuse to accept Icelandic c-dollar assets in either BoC lending operations or open-market purchases.
Determinant:
“Why British and Dutch politicians allowed inadequately insured banks to operate in their jurisdiction is beyond me”
Right.
As far as I recall, FSCS (the UK FDIC analog) differentiates between a “branch”(inside the EEA) and a “subsidiary”(outside the EEA). The former (of which Icesave was apparently one example according to the EFTA ruling) is covered by the domestic country deposit insurance, the latter (e.g. Citibank UK) by the FSCS insurance with the premiums being paid in a manner similar to what the “indigenous” UK bank does.
I do not recall if a foreign “subsidiary” is obligated to participate in order to take deposits or it is optional. I would assume that is a must.
“Who acted as the LOLR before the Bank of Canada was established in 1935?”
El Salvador, Ecuador, as the latest examples, seem to be coping OK without the LOLR and by requiring adequate dollar reserve assets form its banks. In fact, there is some evidence that the abandonment of the local currency was beneficial to both countries’ economies despite the obvious drawbacks(no LOLR, no monetary policy, no “seigniorage” what else ?). To a significant degree, dollarization is equivalent to the gold standard with the gold mines being located in the US as some Post-Keynesian correctly observed.
Not sure why everyone thinks that Canada cooperation is required to implement loonieization in Iceland. As far as I know, no special cooperation takes place between the officially dollarized countries and the US.
@JP Koning:
The “Lender of Last Resort” was the Bank of Montreal, the oldest bank in Canada (1817) and the banker and fiscal agent to the Government of Canada since 1867 and prior to that it provided the same service to the old Province of Canada (meaning Ontario & Quebec) since 1854. As fiscal agent to the Government it had one of the hallmarks of a Central Bank. It even printed its own money, all banks printed their own bank notes drawn on their own bank. We didn’t get Bank of Canada notes until 1938.
The Bank of Montreal got its heft from being the government’s banker and bond dealer. The Canadian Banker’s Association had the responsibility of handling bank insolvencies and bank runs, their method of operation was to arrange a takeover by a stronger bank so as to protect depositors and contain the damage. This is how the Bank of Hamilton was folded into the Canadian Bank of Commerce. The Home Bank of Canada, OTOH, was beyond saving and went bust in 1923, our last insolvency until 1985.
As you say, Banks kept reserves in New York.
@vjk
Your “I retract my previous statement” is just what I love about this “worthwhile Cana ….” place. Considerate people, careful thinking.
Very good moderation by Nick, Frances, and the others.
Take this as a huge compliment from some old fashioned german, who abhore grade inflation : – )
Determinant and I were at some point a little bit at loggerheads.
And also telling me straight, when I am wrong, do not know certain facts, misunderstood something, or just false reasoning : – )
The general approach, how do we make things work, together.
@all
Two more things:
1. Statistical Process Control (SPC)
as a very important concept, not only as a mechanism for some stuff done down on the factory floor, but as a certain way of thinking
How do we organize things in an efficient way, being aware, that nothing is perfect, but just has to be good enough overall, and with active intervention kept to a minimum, keeping things simple.
2. Trust
I do not go to work or to the grocery with a law book under the arm. I rely on that the people I meet, behave to common cultural standards, often never codified anywhere. I gave certain people credit to the tune of their engineers yearly salary, without a sheet of paper with a signature on it,
and without any interest rate discussed. And I am not a rich person, all I own, comes from my own work.
dictum meum pactum, my word is my bond
pacta sunt servanda
These are integral parts of our common western civilization heritage,
and they are not for sale, Sergei
Iceland and Greece are not part of that civilization, as we learned.
Now we practice Meidung, in Gelassenheit, to those, who do not like Ordnung.
I don’t see why Canada should not provide deposit insurance and a LOLR for Icelandic banks if Iceland adopted the loonie. You just have to make sure that you charge fees that cover the risk-adjusted cost of such services (the cost of deposit insurance is supposed to be covered by the banking industry in the long run anyway). In fact, if I am right that it would be all-round cheaper for Iceland to import a currency, there may well be a surplus available that Canada could negotiate a share of – ie an exorbitant privilege. Don’t be coy, Canada!
Hi Determinant and vjk, interesting points.
Hi Rebel,
“I don’t see why Canada should not provide deposit insurance and a LOLR for Icelandic banks if Iceland adopted the loonie.”
I agree, but only on the condition that Icelandic banks agree to submit to Canadian regulation via the Office of the Supervision of Financial Institutions (OSFI), which sets capital and risk standards here in Canada. If they don’t agree, then the BoC shouldn’t accept Icelandic assets in its lending or purchase operations.
Absolutely, JPK! In the light of their experience, it seems that banking supervision is one of the functions that Iceland would be wise to buy in from another country anyway.
“Not sure why everyone thinks that Canada cooperation is required to implement loonieization in Iceland. As far as I know, no special cooperation takes place between the officially dollarized countries and the US.”
To say nothing of a number of countries that are de facto US dollarized.
Determinant: “Canada/US trade is far more important than European trade, the EU can try to set up national sanctions, but Canada doesn’t have extensive European holdings.”
Maybe not relative to our US investments, but Canada has sufficient EU investments that we aren’t likely to be inclined to pick a fight on behalf of Iceland. In 2009, Canadian FDI in the EU was something like 25% of our total FDI.
VKJ: “Sovereign Immunity” Not with respect to sovereign debt, though. See the latest cases decided against Argentina both in the UK and the US”
Generally, countries like the US or the UK don’t extentd overeign immunity to ordinary commercial transactions with sovereign states (such as borrowing money). Similarly, in those case, the terms of the debt obligations were likely such that Argentina explicitly or implicitly waived sovereign immunity (as, of course, they can do – and as I suspect any would-be lender to Argentina would insist on).
However, I suspect the sovereign immunity doctrine would apply to an attempt by the EU to compel Canada to extend deposit insurance to, say, account holders of Islandic banks. While borrowing money on the open market is an ordinary commercial activity that should be exempt from the doctrine of sovereign immunity, insuring the deposits of banks isn’t – it’s precisely the sort of act of policy that sovereign immunity is intended to protect. Of course, sovereign immunity doesn’t do much when would-be creditors are trying to enforce Icelandic law (i.e., EU obligations under the EEA Agreement which were enacted into Icelandic law) and it means even less when your creditors have something you want – i.e., EU membership.
“Generally, countries like the US or the UK don’t extentd overeign immunity to ordinary commercial transactions with sovereign states”
Right.
It is interesting to observe that a lot of commentators (myself included until I read the EFTA opinion) have emphasized that Iceland banking collapse is different from say Argentina’s default due to the fact that the latter defaulted on its sovereign obligations while the former did not.
If one accepts the EFTA reasoning, then I think it is clear that there is not much legal difference in substance between the two countries’ defaults because by agreeing to the Declaration terms Iceland converted deposit insurance contingent liabilities into contingent sovereign obligations (as did every EEA country).
“If one accepts the EFTA reasoning, then I think it is clear that there is not much legal difference in substance between the two countries’ defaults because by agreeing to the Declaration terms Iceland converted deposit insurance contingent liabilities into contingent sovereign obligations (as did every EEA country).”
There’s not much difference in economic substance, there’s a heck of difference in legal substance. Sovereign debt is a bilateral contract between the lender and the state, in legal form it’s no different than any borrower/creditor relationship. It is the embodiment of an ordinary commercial relationship
Deposit insurance is a whole different kettle of fish. There’s no contractual relationship between Iceland and Icesave’s creditors. If Iceland promises to insure some or all depositors in its banks, that is a gratuitous promise on the part of Iceland (as least as far as investors are concerned) – there’s not privity of contract between bank depositors and the state, and no entitlement for depostors to bring an action against Iceland (outside of Iceland’s domestic deposit insurance scheme, if it applies). Iceland may choose to insure foreign depositors as a matter of policy, but as a matter of policy, it can choose to change it’s mind. That’s the sort of policy freedom that the doctrine of sovereign immunity is intended to protect.
Mind you, because Iceland has entered into a quasi-contractual relationship with the EU (through the EEA Agreement), changing it’s mind has potentially adverse implications. But the implications are political, rather than legal, in nature. After all, Iceland can exit the EEA Agreement and, if it’s domestic law is anything like Canadian domestic law (and it may not be in this respect, I have no idea) it can override its treaty obligations through domestic legislation and generally ignore international “law”. Moreover, it isn’t clear that the European Court of Justice has authority to compel Iceland to comply with its EEA obligations (since the dispute resolution provision of the EEA Agreement appears to contemplate court authority only if both parties agree to bring the matter to the court).
The significance of the EFTA Opinion isn’t that Iceland isn’t entitled to claim sovereign immunity with respect to depositors – it clearly can, evidenced by the fact that the governments of the UK and Netherlands are waging a political action against Netherlands, rather than bringing an action in court – it’s that sovereign immunity doesn’t protect Iceland from retaliatory action on the part of EU members, which actions are permissible under the EEA if Iceland isn’t in compliance with its obligations thereunder. As a sovereign state, Iceland is free to do as it wishes, but sovereignty doesn’t protect itfrom retaliation of other countries (which are sovereign in their own right). Telling UK and Nertherlands depositors to get stuffed makes Iceland decidedly unpopular in the EU and, to the extent it violates the EEA Agreement (as the EFTA opinion concludes that it does) could expose it to “safeguards” under the EEA Agreement. At the end of the day, the EU has something Iceland want/needs and it has to play nice to get it – that Iceland’s a signatory to the EEA Agreement is almost beside the point, although it does tend to undermine the moral force of Iceland’s position.
Bob:
“Deposit insurance is a whole different kettle of fish.”
Both are commercial contracts, the first is a simple promissory note and the second is an insurance contract backstopped/guaranteed by the government of Iceland. If the deposit insureror fails, the government is on hook as would be a private cosigner under similar circumstances.
“there’s not privity of contract between bank depositors and the state”
In my opinion, there is privity because the state plays the cosigner role rather than that of the re-insurer.
“If Iceland promises to insure some or all depositors in its banks, that is a gratuitous promise on the part of Iceland”
Not according to the EFTA opinion.
“Iceland may choose to insure foreign depositors as a matter of policy, but as a matter of policy, it can choose to change it’s mind. That’s the sort of policy freedom that the doctrine of sovereign immunity is intended to protect”
Well, I disagree because applying the doctrine to what is, in essence, an ordinary commercial contract makes such a contract meaningless if the guarantor is free to renege on its promise.
Similar fallacious reasoning was applied, as far as I remember, in the recent Argentina sovereign debt case where one of the defenses was sovereign immunity.
Now, the European Court may arbitrarily (in my opinion) decide that the backstop does not amount to a contractual obligation in the sense similar to that arising from a sovereign promissory note default and is protected by the doctrine, but that would be a strange decision in the light of the economic equivalence of both defaults as you agreed. As Judge Posner states, the law should be driven by economics, not vice versa.
“and generally ignore international “law” ”
I share your scepticism wrt international law in general, but one has to be consistent in this regard and realize that such scepticism must be fully applicable to sovereign debt obligations enforcement as well. E.g. the New York and London recent decisions on the Argentina debt are as meaningful or meaningless as would be a hypothetical judgment of the European Court on Icesave deposits.
vjk: if Iceland (or Argentina for that matter), tell the other parties to pound sand, what are the options? Limited, I’d say. And entirely political. EFTA et al can issue opinions and rulings all they want, but they have no means to compel compliance. Sure, they can impose sanctions or whatever, but they have no way to compel compliance in ways analogous to a state enforcing laws within it’s own jurisdiction. I suppose they could go to war to attempt to compel compliance, but that’s not likely.
“Both are commercial contracts, the first is a simple promissory note and the second is an insurance contract backstopped/guaranteed by the government of Iceland. If the deposit insureror fails, the government is on hook as would be a private cosigner under similar circumstances.”
But they aren’t, that’s the point. Iceland’s deposit insurance scheme is established unilaterally under an Icelandic statute (although pursuant to the EEA Agreement), not a contract. Iceland gratuitously promises to pay certain depositors and compels financial institutions to help finance it (effectively, a tax). In contrast, an insurance contract (or sovereign debt contract) creates a bilateral relationship between the parties. One party has to offer insurance to the other, the other has to accept that offer, and there has to be a flow of consideration from the accepting party to the offeror. I don’t know of any commercial insurer in the world who can force you to buy their insurance (for the benefit of a third party – depositors) and then compel you to pay for it, so it’s hard to see how you can characterize that as a “commercial” relationship when its done under a government deposit insurance scheme.
More to the point, in this context, the Icelandic regime didn’t purport to cover foreign depositors – that’s the basis for the dispute, Icelandic deposit insurance law isn’t sufficiently broad to comply with Iceland’s obligation under the EEA Agreement. Not only is the Icelandic scheme a gratuitous promise, it’s not a promise to Icesave depositors. Think of an analogy, if the federal government pushes back the OAS entitlement age to 67, will Canadians have a contractual right to sue for OAS at 65? Exactly.
“In my opinion, there is privity because the state plays the cosigner role rather than that of the re-insurer.”
The lack of privity is the depositor side. In an insurance contract, I’ve paid consideration to the insurer in exchange for rights under the insurance contract. What did Icesave depositors pay the Icelandic government? Nada. Again, there wasn’t a contractual relationship. The only rights depositors had were those created under Icelandic statute (which, bien sure, can be amended at will, and which allegedly didn’t cover Icesave depositors). Indeed, the only parties who paid anything to Iceland were financial institutions, but they didn’t pay such fees in consideration for deposit insurance (obviously, they weren’t insured), they paid amounts to Iceland because they had to if they wanted to be licensed to carry on business in Iceland.
And note, the EFTA opinion didn’t conclude that depositors had any rights, contractual or otherwise, vis-a-vis Iceland (they don’t). It merely concluded that Iceland’s existing deposit insurance scheme was inconsistent with Iceland’s obligations under the EEA Agreement (which is probably the correct conclusion). But that doesn’t resolve the matter. At that point either Iceland can amend its law or it could be exposed to repercussions on the part of EU countries. But in either case, sovereign immunity is of no relevance because the remedies are not legal ones, but political ones.
“Well, I disagree because applying the doctrine to what is, in essence, an ordinary commercial contract makes such a contract meaningless if the guarantor is free to renege on its promise.”
But a statutory regime is not, almost by definition, an “ordinary commercial contract”. Ordinary commercial contracts aren’t imposed by statute. That distinction goes to the heart of the sovereign immunity doctrine. Governments shouldn’t be able to avoid liability for breaching ordinary commercial contracts (debt obligations, employment contracts, purchase agreements) especially since, typically, the sovereign state has typically (or potentially) benefitted from having entered into what would otherwise be a binding legal relationship (i.e., it has induced lenderes to lend, workers to work, supplier to supply), while their counterparty has been harmed.
But outside of a contractal relationship the basis for that exemption from the doctrine of sovereign immunity disappears. The whole purpose of the doctrine of sovereign immunity is that governments shouldn’t be exposed to liability in foreign courts for actions of a government nature (as opposed to actions of a commercial nature carried out by a government). A statutory deposit insurance scheme fits squarely within that rationale.
“Now, the European Court may arbitrarily (in my opinion) decide that the backstop does not amount to a contractual obligation in the sense similar to that arising from a sovereign promissory note default and is protected by the doctrine, but that would be a strange decision in the light of the economic equivalence of both defaults as you agreed. As Judge Posner states, the law should be driven by economics, not vice versa.”
That would hardly be an “arbitrary” distinction, the common-law (and I suspect the civil law as well) regularly makes the distinction between contracts, statutes and gratuitous promises (it’s a distinction that’s a source of a lot of material for first-year contract law exams). There are significant, and well recornized, legal distinctions between those sorts of relationships. That one can achieve a deposit insurance regime by way of insurance contract or statutory regime, and that the two may be economically equivalent is, legally, beside the point. Justice Posner may be right that the law “should” be driven by economics, but he doesn’t go so far as to say that it is (and more to the point, sovereign debt obligation and a liability under a statutory insurance regime are only economically equivalent, if you ignore the fact that the counterparty to the former is being compensated for something he gave to the state, while the counterpart to the latter is not – not a minor distinction).
Bob:
I respect your opinion, but it has a problem. It is a common law view. I know this is your training, but consideration is not necessary to form a contract in civil-law jurisdictions, including Quebec. The Civil Law tradition, which includes the Netherlands and Iceland, has different contract principles.
Your last paragraph was entirely to the point, though. I agree that Iceland as a sovereign has a much freer degree of action and therefore the solutions are entirely political. A lawsuit between a sovereign government and an individual in another country is hardly an equal contest. Power matters.
Third, importing Canadian regulation is a non-starter. Canadian regulators would not have the force of law behind them as they do in Canada, they would be there at the sufferance of the Icelandic government. That does make a difference. If you’re going to have Canadian bank regulation and Canadian notes as legal tender and therefore use Canadian banking law, it’s time to haul down the flag and apply to be the 11th Province.
Might I add that “Compact Theory”, which this line of thought is tending to, that Confederation was the delegation of certain powers to a new creation called the Federal Government is wrong. It didn’t happen that way. Canada was created in 1867 by an Act of the Westminster Parliament. Quebec and Ontario were also created at that time by splitting up the old Province of Canada and New Brunswick and Nova Scotia were added to that. None of the colonies had any power to contract or agree to anything. That’s also how Newfoundland was brought in, by the British North America Act, 1949.
Determinant:
Perhaps we need to open up a thread on the Turks and Caicos Island joining Confederation given there are real shades of Newfoundland going on down there right now. Heavy debt plus administration of the islands taken “back” over by the United Kingdom since 2008. However like in the 1940s the UK has no desire to get further involved in being a colonial power. Much of the banking system is already controlled by you guessed it Canada. Currency though is the US Dollar.
I agree with Determinant, they should either become a province of Canada or of Denmark.
But I ll guess they will need a few more years to realize this.
“I respect your opinion, but it has a problem. It is a common law view. I know this is your training, but consideration is not necessary to form a contract in civil-law jurisdictions, including Quebec. The Civil Law tradition, which includes the Netherlands and Iceland, has different contract principles”
Fair enough, although the distinction between common-law and civil-law jusrisdictions is often overstated. Even under the civil law, you don’t have a contract unless you have offer and acceptance, and both parties intend to enter into a legally binding relationship (which is really the core of the common-law, the consideration requirement is often satisfied with nominal consideration – “good and valuable consideration set out herein”, is the usual language, or a notional peppercorn. As much as anything else, consideration is evidence of intention to form a contract). The Icelandic scheme didn’t involve an offer (deposit insurance was mandatory for those covered by it, and not available for those not covered – i.e., Dutch and UK depositors), there was no acceptance (there was nothing to accept, and certainly depositors didn’t accept anything), and there was no intention to enter into a contract (the legal relationship, to the extent there was one, was formed under a statute). Hard to see a judge finding a contract in that.
Canada goes shopping at the small island nation going of business sales?
Hey, think of what grabbing up Iceland (to say nothing of a few other Atlantic Islands) would do for Canada’s fishing disputes. Canada could start asserting that the North Atlantic is “internal waters”, subject to Canadian sovereignty. A stretch, perhaps, but I can’t help but notice that there isn’t a shortage of near bankrupt countries on the other side of the Atlantic. Get a good price on Portugal (and the Azores) and Ireland, and we’re good to go. Besides,the world could use a healthy dose of Canadian imperialism.