Major Washington Agency Runs Iceland Look-Alike Casting

“Many central and eastern European countries simply don’t have either the financial strength or the technical expertise to bail out banks,” said Lars Christensen, a senior emerging-markets analyst at Danske Bank A/S in Copenhagen. “It’s like an Iceland look-a-like contest and there are a number of candidates looking very fragile at the moment.”

As rumours abound about the imminent formal “bankruptcy” of the Hungarian economy – the BUX stock index fell as much as 11.9 percent yestoday, while the forint slumped 5.3 percent against the euro and liquidity in the foreign exchange market more or less evaporated – many commentators are asking the impertinent sounding question: “will Hungary be the next Iceland”. To that question I will answer with a categorical no. But not for the reason that most standard commentators offer, that, for example Hungarian private sector credit is at 62 percent of GDP, compared with 407 percent in Iceland, or that short-term external debt obligations are at 112 percent of reserves, compared with 1,705 percent in Iceland.

I do not doubt that Hungary’s short term position is much less leveraged than Iceland’s is, although I also don’t doubt that the Hungarian financial system will need IMF support to ease the financial distress caused by the unwinding of the foreign exchange denominated mortgage market and the fall in the forint against the Swiss Franc.

But this is not why I don’t think Hungary is like Iceland, or better put that Iceland is like Hungary, or like most of the EU10. My reasoning howvere is longer term. The longer term financial and economic future of Iceland is rosy, once they weather the present storm, and learn some belated lessons. I wish I could say the same about Hungary. Indeed I wish I could say the same about any of the 5 other candidates for IMF aid whose names have been mentioned on this blog this week – Latvia, Lithuania, Estonia, Ukraine and Serbia. I will offer three, simple but clear data points.

Median Age

Iceland 34.8 Hungary 39.1 Latvia 39.9 Lithuania 39 Estonia 39.6 Ukraine 39.4 Serbia 37.5


Iceland 1.91 Hungary 1.34 Latvia 1.29 Lithuania 1.22 Estonia 1.42 Ukraine 1.25 Serbia 1.69

Population Growth Rate

Iceland (plus) 0.783% Hungary (minus) 0.254% Latvia 0.629% (minus) Lithuania% 0.284% (minus) Estonia 0.632% (minus) Ukraine 0.651% (minus) Serbia 0.4 %(minus)

That is to say, Iceland is a young country, almost reproducing itself in terms of children, and with a rapidly expanding population of working age. Hungary, Latvia, Lithuania, Estonia, Ukraine and Serbia on the other hand are comparatively old country, with a rapidly ageing populations, where each generation is about two thirds of the size of the previous one, and where the potential workforce and total population are now in long term decline.

This is why Iceland – even though it has gone to a huge excess – can sustain a much higher level of “leveraging” into the future than Hungary, Latvia, Lithuania, Estonia, Ukraine and Serbia can, and why in the longer term Iceland is certainly not comparable to these East European countries. I do not say any of this to criticise these countries, or their citizens, but really I am making this point out of a deep seated concern about the future of the countries that I do care about. The point here isn’t to “have ago”, but to illustrate why it was always obvious to me that what is currently happening on the economic front was always going to happen, and why it was that Eastern Europe was always going to be one of the most serious causualties of the global credit crunch once it finally got a grip on things. I am also writing this to give voice to my feeling of impotence and frustration in the face of the turn events are taking by saying, for god’s sake, why doesn’t someone do something, why doesn’t someone react?


The background to some of the arguments presented above can be found in the following posts:

Have Hungarian Retail Sales Now Passed Their Historic “Peak”?

Catch Up Growth and Demographics – Evidence from Eastern Europe by Claus Vistesen

This entry was posted in A Fistful Of Euros, Economics and demography by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

16 thoughts on “Major Washington Agency Runs Iceland Look-Alike Casting

  1. What do you want them to do, squirt out more kids? That would be nice, but they don’t apparently want to do that, or perhaps the conditions aren’t encouraging them to.

  2. Fertility and population growth is surely related to how well off and secure people feel they are. Isn’t there a chance that Iceland statistics may take a downturn is the present crisis creates prolonged feeling of insecurity to its people? Also, what if the present crisis results in outflux of young people due to immigration?

  3. Hi Brett,

    “What do you want them to do, squirt out more kids?”

    No. That would take twenty or more years to have any effect, it is too late for this as an immediate remedy. Of course, if people had reacted when the problem first became obvious we wouldn’t be here now. People should have seen all this coming but they didn’t. Just like the meltdown of Lehman Bros.

    So these countries need an injection of capital from the IMF just like Spain and Italy do from the EU. But they also need an injection of young people – ie immigration. That may not prove popular, but people have a stark choice here. Either you want financial ruin and a harsh recession in the short term, followed by years of angst and despair as the demographic jaws simply locktight, or you want to respond, react, do something instead of just sitting there with your arms folded and waiting. Or is it only the so called “Anglo Saxons” who feel like this. (Mind you I am a Celt, and I do).

    My opinion is that we need a major multilateral high level conference NOW, taking the issue just as seriously as we have just done the financial crisis, and even more seriously than we do the climate one.

    I don’t have all the answers already written down and nicely prepared, but I do think that simply making people aware that you cannot have lowest-low fertility for 20 or 30 years and simply sit on the situation without running the risk of severe consequences would help. I mean, people now know that smoking can damage your health, and people do change their behaviour over the longer term as a result. If people only knew that not having children can damage your long term financial health (like melting down your pension fund) then may be they would respond.

    I don’t think it would occur to the average person in the US, or Sweden, or France to argue that long term fertility doesn’t matter, so why is it that in the low fertility countries, almost univerally people do?

    OK, so people feel threatened. People who are diagnosed with cancer also feel threatened, but it is a lot better to go in and have that op, than it is to lie on the bed, cover yourself with a blanket and hope the issue goes away.

    The war wounded are now steadily wending their way over to the hastily erected IMF field hopspital in Washington, and they will be given a financial mastectomy, my fear is that this will not get to the root of the problem. Ask yourself, why is it Eastern Europe? What is so special about Eastern Europe this time round? Why not Thailand, or Chile, or India, or Turkey, or Brazil?

  4. Nick,

    “Fertility and population growth is surely related to how well off and secure people feel they are. Isn’t there a chance that Iceland statistics may take a downturn is the present crisis creates prolonged feeling of insecurity to its people? Also, what if the present crisis results in outflux of young people due to immigration?”

    You raise some pertinent questions. Of course, short term fertility is now at risk in Iceland as all those young people who must be in various kinds of mortgage and other debt put off having children: my hope is that when things settle down the long term outcome will be nearer to the Scandinavian pattern than the East European one.

    On this, it is interesting to note that Estonia’s fertility is a composite of the reproductive behaviour of two populations, a Russian and an Estonian one. Ethnic Estonian fertility taken separately would seem to be much closer to that of their Finnish cousins, while the ethnic Russians are much nearer to the one child early and then stop pattern seen in Poland, Ukraine and Russia.

    And of course we can see out migration all over the place here, but my sense is that the East is at even greater risk than Iceland, since the nets are already in place. Of course, it is hard to see Latvians running back to Ireland in the short term, or Poles to the UK, or Romanians to Spain, but presumeably, as the global economy turns the corner (hopefully sometime in 2009) there will be destinations coming available.

    Nissan just laid off 1,600 workers at their factory here in Barcelona, but they have offered those being made redundant alternative employment, in their newly built factory (in a joint venture with Renault) in Tangiers, Morocco.

    New, and interesting, destinations will become available.

  5. Hi P O’Neil,

    “There has been an interesting twist on the liquidity side for Hungary — the emergence of the ECB as a liquidity provider to a non-Eurozone country.”

    Well quite. My feeling is that we have a large institutional mess here at the moment with so many different layers and levels. I think it was just becoming so unpresentable for the EU simply to wring its hands in the face of the East European “unwinding”. What we will now need to see is whether this goes beyond tokenism. I mean, it isn’t clear how we are going to pay for all the commitments undertaken in Paris last weekend. Now we are going to be faced with a lot more. People are pointing out how the Fed’s balance sheet is becoming overstretched, but we shouldn’t close our eyes to the possibility that the situation over in Frankfurt could become even worse.

  6. This leads me to a question.
    Didn’t availability of cheap labor through immigration make the housing bubble in Spain worse?

  7. Pingback: Libya Buys Italy As Colonialism Moves Into Reverse Gear | afoe | A Fistful of Euros | European Opinion

  8. What is so special about Eastern Europe this time round? Why not Thailand, or Chile, or India, or Turkey, or Brazil?

    Eastern Europe is a current account deficit region that deindustrialised in the 90s; all the others are substantial surplusers that industrialised in the 90s and are members in good standing of ODIC.

  9. Hello Oliver,

    “This leads me to a question. Didn’t availability of cheap labor through immigration make the housing bubble in Spain worse?”

    Look, this is quite a complicated situation, but you need to think about which way the arrows of causality point? It is quite true that the construction booms in Ireland, Spain and Greece were sustained by the arrival of large numbers of migrants workers in the way that they were not in Latvia, Estonia, Bulgaria and Romania (since in the latter countries the workers left to find employment in the former). For this reason the Eastern European booms have been much more dramatic and short lived, as the shortage of workers sent wages and costs through the roof, and the resulting inflation brought the whole pack of cards tumbling down.

    But what made the boom possible in the first place was the cheap funding on offer via the eurosystem and EU and ECB guarantees. It was this that made the whole massive folly possible in both cases, and it was the availability of funds that sucked in the workers, and not the immigration which attracted the funds.

    Of course, applying your logic, you could say that the German banks are having such a hard time with the US sub-prime and Irish (Delfa for Hypo) write downs simply becuase the lack of young immigrants meant there was no housing boom due to weak demand for housing. But I’m not sure it works satisfactorily in either case. As Brad Setser says, it is probably better to “follow the money”.

  10. Well, I was asking whether it was made worse, not caused. It just seems to me that if cheap labor is available more units of housing will be built.

    I do realise that this is a sensitive question, by the way, but I think it should be looked at.

  11. Another things that are unique with Iceland, is the small population in large unpolluted country with great potential. Iceland’s national resources of pure water, green energy and fish will be valuable as in the near future for the Icelanders.

  12. “Well, I was asking whether it was made worse, not caused. It just seems to me that if cheap labor is available more units of housing will be built.”

    Well, put like that, my opinion is no. It was an indifferent element. If that “cheap” labour had been put to work in say factories, to manufacture for exports, then the problem wouldn’t have been so bad. And indeed this would be one of the ways forward even now for Spain.

    The trouble is that the labour isn’t that cheap, and for example the 1,600 workers just laid off at the Nissan factory here in Barcelona are being offered work in the new Renault-Nissan fatory being built in Tangiers (Morocco).

    “I do realise that this is a sensitive question, by the way, but I think it should be looked at.”

    It’s not so much a sensitive question Oliver as a complex one. We need to get back to why it was so much more attractive to borrow the money to build houses than it was to borrow it to build factories. The labour is a neutral element here.

  13. Hi again,

    “Didn’t you write a year ago that Spain should devalue but for obvious reasons cannot?”

    Uffff! One year ago, five years ago, whatever. I have been constantly arguing that the single interest rate monetary policy (rather than the availability of cheap immigrants) would lead to the mess we have now. The only real answer for Spain if the Euro continues at its current relatively high levels (which is not by any means guaranteed, it depends) is long term wage and price deflation (unfortunately) so that they can restore the competitivity in the export sector (since exports is about the only part of the Spanish economy left which could seriously grow) lost in years of above average inflation (fuelled by the monetary policy from the ECB which was inappropriate to the Spanish case, although appropriate to the German one).

    But isn’t this post supposed to be abot the developing financial and economic crisis in Eastern Europe. I’ve also been writing about and predicting this on this blog for the last couple of years. Its the demography, stupid!

    (sorry Oliver, no offence meant to you, just paraphrasing Bill Clinton).

  14. How can you deflate if interest rates go lower? It seems to me that eastern Europe can raise interest rates, but what do you propose Spain do?

    Secondly, if it is demographics, why did housing bubbles happen in demographically diverse places and not start in demographically similar places?

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