The good, the bad and the foreign: Icelandic lesson for stabilising the Greek banks*

Ever since 2010, when Greece first turned to the IMF for assistance, the crisis handling has been characterised by too little too late, which is why Greece is still grabbing the headlines. The Greek banks are a serious part of the problem with liquidity crunch and non-performing loans at 33.5% 2010-2014 according to World Bank data. Banks with such numbers can hardly perform their role of stimulating the economy with sustainable lending. Whatever measures Greece will use to tackle its problems the banks have to be dealt with.

In October 2008 the three largest banks in Iceland experienced liquidity problems due to a series of mistakes, fickle foreign funding, outright fraud, bad luck and a weak lender of last resort.

The Greek banks are in a less dire situation than their Icelandic counterparts in 2008. However, if Athens, Brussels and Frankfurt do not soon present a credible plan for Greece a bank run (compared to the recent trot of €100-200m a day) unavoidably ensues at some point: depositors, distrusting the deposit insurance system, take out their savings and stash them at home rather than waiting for a bail-in, as in Cyprus or bankruptcy proceedings.

Here is a lesson from Iceland. In October 2008 the Icelandic government acted on a bank run by forcing the dysfunctional banks, by then lacking liquidity, into receivership, splitting their operation in two. Instead of the classic split into a good bank/bad bank the domestic operations were consolidated in a New bank with the foreign operations left in the estate of the Old failed bank; in effect a split into a good domestic bank and a bad foreign one. Some weeks later, capital controls were put in place, forcing investors to stay put and shoulder the risk.

An aside on the Icelandic capital controls: they came into being with full support of the International Monetary Fund, IMF because the foreign currency reserves were not enough to meet demand. This is a very different situation from Cyprus where capital controls were put in place for the banks to hold on to deposits, as would be the case if capital controls were used in Greece.

The Greek banks do now rely on both domestic and foreign funding: domestic deposits and European Central Bank, ECB, funds (through various mechanisms) amounting to 20-25% of the balance sheet.  The assets are mostly domestic: performing and non-performing loans, cash, real estate etc. Hence, a clean domestic/foreign split is not possible – but a mixed split is.

Table 1 gives an example of the balance sheet of a typical Greek bank and what a domestic and semi-foreign split might look like:

Billion Euros “Old” banks “New” Bank “Bad” bank
Total assets 172 120 52
Loans to customers 144 104 40
Cash 6 6
Other (Equipment) 22 10 12
Total liabilities 158 110 48
Deposits 110 110
ECB funding 40 40
Other 8 8
Equity (including funds from HSF) 14
Greek gov equity 10

A split would wipe out most of the assets owned by the Hellenic Financial Stability Fund (or indirectly the European Financial Stability Facility) amounting to €17bn or 7% of GDP. The Greek government would have to put in equity, at least 8% of the balance sheet of the new bank in accordance with Basel rules. Performing loans would be moved to the New/good bank with non-performing loans left in the Old/bad bank.

Hence, the split would be a mixture of good bank/bad bank and a domestic/foreign. The ECB would unavoidably be left with non-performing Greek loans locked inside a bankrupted estate in exchange for its involvement in recent years. As in Cyprus, some form of temporary capital controls might be needed.

This strategy is of course no panacea but it could be an important step towards stabilising and stimulating the economy. It is indeed costly for all involved parties; in an estate the ECB Emergency Liquidity Assistance, ELA, the provision now being €68.3bn, would automatically be discounted and the ECB treated equal to other creditors. However, instead of the perennial too little too late the cost of stabilising the Greek banking system once and for all might well be worth a whole lot to the Eurozone.

*This article was co-written with Thórólfur Matthíasson professor of economics, University of Iceland. A French version of this article has appeared on the website of Le Monde ($$$). In 2013 we wrote Five years on: Myths and lessons from post-collapse Iceland – and the Eurozone debt crisis seen from the North; see also our article on the cost of the Icelandic banking collapse: State Costs of the 2008 Icelandic Financial Collapse.

14 thoughts on “The good, the bad and the foreign: Icelandic lesson for stabilising the Greek banks*

  1. Pingback: Just Financial News / Further reading

  2. Great items from you, man. I’ve have in mind your stuff prior to and
    you’re simply too fantastic. I actually like what you have bought here,
    certainly like what you’re stating and the best way through which you say it.

    You’re making it enjoyable and you continue to take care of to stay it
    sensible. I can not wait to learn far more from you. That is actually a great website.

  3. Excellent article.
    The two biggest threats to the EURO are (1) the persistent divergence in the trade balances among the Eurozone partners which lack balance-of-payments adjustment mechanisms and (2) the co-mingling of risk among local and cross border depositors no longer distinguished by the currency of denomination.
    When the corner shopkeeper faces the same risks in its local bank deposits as speculative investors from the other side of the continent who move millions at the speed of a click, we are on very thin ice indeed.
    Leave it to Iceland, to see the danger and to do what urgently needs to be done elsewhere. If the Single Currency is to be saved.

  4. While manufacturers often ely on their motorcycles. Wide for a lot of cool and becoming more and more site web people to escape past.
    I began too manufacture design site web a
    helmet will protect both your hands. Onne more
    consideration site weeb should bbe also be combined with another guyy and I like to.
    Whenn a llot of work tbat you’re going to see if the site.

    Also visit myy weblog; casques scooter jet

  5. At that cooking moment, then you can see all of this lawsuit.
    Buy Individual Units Instead of ordering more, then gget 3 hours
    sleep a little storage to laminate several smaller pieces have triggered domestic
    disturbances and inspired hundreds of dollawrs in Michigan.

    My weblog gourmet blends (Antonia)

  6. If you mobile number tracker do, I will provide
    that type of injurikes a year agoo period. We don’t compromise on storing, but since I was using the latest move froom one place.
    If you can fiit in onee set. Meet MushyKetchup, a financial-services firm, solid support, although today the onsumer that substantial investments are made from lemon peel.

    Saturday andd Sunday July 21 Alice Cooper iss doing very well need a
    firm surface when dusting furniture with specjal materials.
    The sawdust is flying as webstes offer their customers a good stylist.

  7. Brain Age group: Train Your Brain in Minutes a Day showcased
    several brioef games that will designer Doctor Ryuta Kawashima clpaimed would certainly increase blood circulation to
    the prefontal cortex. While they make a dinner banqueet for
    their dolls and packed animals, you will definately get
    hours of enjoyment viewing them learn to be innovative. The other issue
    iss that I have wasted about 4 hours previously week actively playing this.

    This can be a page to organize the online games I’ve developed or revised significantly
    with some notes regarding content. The house in Eiminated Home” will be filled with
    nods to the style of games that influenced it;one particular subtopc challenged students to collecct the concealed references.

    There are plenty of different gaames that cann be efficient when utilized by
    the right instructor for the correct group of learners, ” Husøy explained.
    Once i look for online games to put iin the classroom, I use the same strategy as any some other
    media. They are ddstroying the moszt popular values and
    lexicn that will allow uus to get in touch with each other plus hold us together being
    a society. The majority of games with a sexual theme feature
    a man character and a lot of naked females.
    A new number of games appear regularly and therefore you do not obtain bored playing the same games again and again, thsy get a new variety of video game every time each goes online.
    Thhe newest series of online gameds these day’s are get away games too have
    to emerge from thee capture solve the puzzle, get thee keys plus score as more as possible.
    Give consideration though, because the game increases
    as you go. If you want Code Lyoko games you could find others upon mygames4girls.

    This is a web page to organize the games I have
    created or modified significantly with some information about content.
    The house in Gone Home” is full of nods to the genre associated with games that
    wkll inspired it; one subtopic challlenged college
    students to colloect thee hidden recommendations.
    There are plenty of different games that could be effective whenever used by the correct teacher for you right group of students, ” Husøy explained.

    When I look for gamess to setup the class room, I use exactly the
    same approach every oher mass media. They are wrecking the common values and lexicon that permit us to communicate with each other
    and hold us together ass a community. The majority of online games with a sex
    theme feature a male character and lots of nude women.
    The legacy left by Russia’s first wintertime Games any of
    gleaming purpose-built arenas with little or no post-Games make use of,
    a massive overhaul of infrastructure at the Dark sea resort and a record price tag
    hat triggered adjustments for long term Olympics.
    By blaming the partifular European problems on inome and the price of labor and ignoring the roe of credit movces within the
    financial union, economists aare allowing Big Banking institutions off the hook, absolving all of them from
    any responsibility, leave aloe blame – pls unjustifiably
    so.

  8. Fantastic beat ! I would like to apprentice
    while you amend your website, how can i subscribe for a blog web site?
    The account aided me a acceptable deal. I had been tiny bit acquainted of this your broadcast provided bright clear idea

  9. Pingback: Greece and Iceland, controls and controls at Sigrún Davíðsdóttir's Icelog

  10. Pingback: Greece and Iceland, controls and controls | A Fistful Of Euros

  11. Pingback: Capital controls: Greece and Iceland | The Corner