Is dwelling on "past mistakes forever” the same as, “you’ll lose your creativity?”

Dear Readers,

Today, I bring you a very hopeful article, verbatim by Omar R. Valdimarsson, a reporter for Bloomberg entitled, Iceland’s Lost Billionaires Unmourned as Riches Draw Ire. Considering the ridiculous notion just presented to the Cypriots, isn't it about time someone injected some sanity into the discussion? More on my response is below with room for your comment below that, unless you prefer to send an email but please keep your comments smart and civil. Don't attack others personally, and keep your language decent.

                                                 Cypriots saying NO to the their President!

Iceland, a country with a $13 billion economy, had six dollar billionaires before the financial crisis struck in 2008. Now it has none. Five of the men -- including former West Ham soccer team owner Bjorgolfur Gudmundsson and Baugur Group hf founder Jon Asgeir Johannesson -- have lost all, or most of, their fortunes after building empires on loans from banks that used the island’s investment bubble to stretch their assets to 10 times the size of gross domestic product.

 

Baugur Group hf founder Jon Asgeir Johannesson 

pauses during an interview in Reykjavik. 

Photographer: Arnaldur Halldorsson/Bloomberg 

Stefan Olafsson, sociology professor at the University of Iceland, discusses changes in Iceland's society following the collapse of the economy. He spoke March 14 with Bloomberg's Omar R. Valdimarsson in Reykjavik, Iceland. (Source: Bloomberg)

 

Actavis Group HF Chairman Bjorgolfur Thor Bjorgolfsson is 

pictured in this undated company handout portrait. 

Source: Actavis via Bloomberg

At least three of Iceland’s ex-billionaires are, or have been, the subject of financial misconduct probes. Johannesson, who once flew around in a pin-striped private jet and owned luxury apartments in New York and London, received a suspended one-year jail sentence in February for violations including accounting fraud. He and Gudmundsson, who filed for bankruptcy in 2009, personified the boom-to-bust cycle that dragged Iceland away from fishing and tourism and turned it into a center for high finance.
“Greed can’t again lead the way,” said Prime Minister Johanna Sigurdardottir, 70, whose Social Democrat-led government took over from the coalition that led Iceland into the crisis just over four years ago. “We’ve taken that route before with terrible consequences for this nation and its people.”

Debt Bubble

After gaining fame for its debt bubble and the havoc that ensued when it burst, Iceland now is purging itself of the values that brought it to the brink of ruin. The only country to take a former prime minister to court for failing to prevent the crisis has since forced banks to forgive foreign-currency mortgage debt. And in a move to prevent speculation, the Interior Ministry this year proposed limiting land ownership by offshore investors after repeatedly rejecting approaches by Chinese billionaire Huang Nubo.
Iceland’s collapse -- which sent average disposable incomes plunging 20 percent between 2008 and 2010 after the banks defaulted on $85 billion -- even prompted the pro-deregulation Independence Party to pledge its commitment to welfare over investor rights.
Sigurdardottir, whose coalition faces elections in April, says the result is greater economic stability. Her party’s goal is to continue “shielding those groups in society that need it most,” she said in an interview.

IMF Program

The island, which exited an International Monetary Fund-led bailout in August 2011, now is growing faster than most of Europe. Gross domestic product will expand 2.3 percent this year, while the 17-nation euro area will contract 0.2 percent, the Washington-based fund estimates. As for the former billionaires, their pre-crisis rise and post-crisis fall is an apt analogy for Iceland’s coming of age, according to Stefan Olafsson, a professor of sociology at the University of Iceland. He’s studied the effect that Iceland’s economic boom had on the nation’s attitudes toward wealth. One year before everything collapsed, Icelanders bought more Range Rovers than the citizens of Denmark and Sweden combined. Now, Olafsson says his countrymen are wary of extravagance. Before the crisis, billionaires “were the personification of what people believed in: materialism,” he said in an interview. “Since the collapse, their image has been tarnished, and what they were considered to be a symbol of -- successful business and financial genius -- is no longer valued.”

Accounting Fraud

That means the risks the former billionaires took to achieve their status probably won’t be repeated, Olafsson said. Seventy-two-year-old Gudmundsson, who was sentenced to 12 months in jail in 1991 for accounting fraud at failed shipping company Hafskip, bounced back from that setback to make millions producing soda pop in Russia. He and his son, Bjorgolfur Thor Bjorgolfsson, moved to St. Petersburg in 1993, securing a production deal with PepsiCo Inc. (PEP) a few years later. The soda company he started was bought by Pepsi, giving Gudmundsson the funds to start producing beer in Russia. That business was bought by Heineken N.V. (HEIA) in 2002 for $400 million. Gudmundsson then returned to Iceland and partnered with Magnus Thorsteinsson to buy a 45.8 percent stake in Landsbanki Islands hf, the island’s largest lender at the time. In 2003, Gudmundsson was ranked Iceland’s fifth most- trusted business person by newspaper Frettabladid. The most trusted was Johannes Jonsson, the father of Baugur co-founder Johannesson, who ranked second.

Golden Years

These were the golden years, culminating in 2005, when Gudmundsson received Iceland’s Knight’s Cross Order of the Falcon from President Olafur R. Grimsson for his contribution to society. The next year, Gudmundsson spent 85 million pounds ($128 million) on an 83 percent stake in West Ham, and in March 2008, newspaper Morgunbladid estimated his personal fortune at $1.1 billion. Seven months later, his investment in Landsbanki soured as the lender collapsed. The credit event triggered a claims dispute from depositors based in the U.K. and Netherlands with savings in the bank’s high-yielding Internet accounts.
When global financial markets froze at the end of that year and Iceland’s banks were shut out of funding markets, everything came tumbling down. Gudmundsson, then chairman at Landsbanki, told a Reykjavik court his assets had plunged the equivalent of $1.1 billion in value. His $759 million personal bankruptcy plea in 2009 was the biggest in the nation’s history, according to Iceland’s Legal Gazette.

Retail ‘Kingdom’

In an interview outside his house in Reykjavik, Gudmundsson ascribed his sudden accumulation of wealth before the crisis to “a certain situation in the economy” at the time. He declined to elaborate. Johannesson, who in a March 2012 interview revealed plans to build what he described as a new retail “kingdom” in the U.K., was sued by the caretakers of failed Glitnir Bank hf, the lender that financed most of his ventures. His personal fortune -- which peaked at $1.6 billion in 2007, according to Frettabladid, which he owned at the time -- had dwindled to about $2 million, he said last year. Johannesson, now 45, started his career more than two decades ago, opening a chain of Bonus supermarkets in Iceland in 1989 with his father. By borrowing against equity in his existing business, Johannesson financed purchases of U.K. brands, including toy store Hamleys Plc and department store House of Fraser Ltd. Both have since been sold off to cover debts.

‘Past Mistakes’

Johannesson, in the March 2012 interview, said his biggest mistake was to continue expanding after buying Big Food Group Ltd. in December 2004 for 326 million pounds. Last month, Iceland’s Supreme Court found Johannesson guilty of nine violations, including tax fraud. On top of a prison term, he was fined 62 million kronur ($497,000). The 12-month sentence was suspended for two years, meaning he can avoid going to jail if he doesn’t break the law during that period. Johannesson, who didn’t return repeated calls seeking comment, said in the March 2012 interview that dwelling on “past mistakes forever” means “you’ll lose your creativity.”

According to another former billionaire, foreign investors will return to Iceland only if the nation can show it has learned from its past mistakes. “There are a lot of diligent people in Iceland that are making good money,” said Karl Emil Wernersson in a phone interview. His fortune peaked at $1 billion in 2007, using the exchange rate at the time and based on figures provided by Frettabladid. “But if companies in the domestic-goods and services industries are to prosper, we need to increase investments in Iceland. That won’t happen until international investors stop being afraid to put their money in the country.”

Lost Fortune

Wernersson lost much of his fortune when his investment company, Milestone ehf, failed in 2009. Since its bankruptcy, lawyers working to claw back 9 billion kronur in assets needed to repay creditors have filed eight lawsuits. Six of those affect Wernersson, according to Grimur Sigurdsson, a lawyer representing Milestone’s estate. Two other former billionaires -- brothers Lydur and Agust Gudmundsson -- lost much of their wealth when their investment company Exista hf failed in 2008. Lydur Gudmundsson was indicted in September last year for fraudulently registering a capital injection into Exista in an effort to inflate his stake and retain control. Both brothers are now residents of the U.K.

Past Era

The only Icelandic billionaire to keep the title through the crisis has left the island. Bjorgolfur Gudmundsson’s son and partner in Russia, Bjorgolfsson, who also resides in the U.K., was worth $5.1 billion as of May 2007, according to broadcaster Stod 2. Two years later, his wealth had slipped to $1 billion. Bjorgolfsson, who is rarely seen in Iceland these days, declined to be interviewed. Wernersson predicts Iceland will never again become a breeding ground for billionaires -- and that’s not bad thing, he said. “Although this era won’t return, there will still be growth in the Icelandic economy,” he said. “This time around, it’s more likely that it will be reasonable and moderate, which should be a positive thing for everybody.”

.............my response,

                                      A no entry sign is seen outside a branch of Bank of Cyprus
                                                 UK, in central London March 18, 2013.
                                                          REUTERS/Andrew Winning

This very disturbing article brings me to question Ontario's future should the Cypriots decide that onerous debt brought to them by back-room money dealers and assorted hangers-on does not fit into their future plans. Once the economic engine of Canada when Bill Davis was Premier and after only 6 years of unbridled socialism under Liberal leadership, no less, Ontario became an official have-not province in 2009 collecting a government cheque for the first time in our history! Shameful!!

With little to show since and notwithstanding taxpayer encouragement, is it possible that Kathleen Wynn's meager attempt at finally dealing with uncontrolled spending habits by reigning in the obscene Teacher's pension program could be just a long overdue attempt to forestall a bond holder haircut resulting from Ontario's mind-boggling annual budget deficit of around $15, Billion dollars, as in '$15,000,000,000 along with an an 'accumulated debt of around $300 Billion dollars, as in '$300,000,000,000? I mean, little Greece was allowed to grow their  accumulated debt to $500 Billion before they came to the crossroads! When will the ponzi-schemers in Ontario realize we have come to ours?

Rating agencies, in a clear declaration of skepticism regarding this government's capacity to rein in its spending have already expressed their concern that these folks are capable of implementing a multi-year financial plan, with the intention of restoring a balanced budget by 2018. Meeting that target would require ongoing expenditure restraint in divergence from historical growth trends while achieving forecast revenue targets through projected tax increases. Wynn's Liberal government is fooling no one as they feign surprise when the credit rating agencies have the temerity to call a spade a spade while curtailing unnecessary spending fall far short of what the markets require as our Provincial budget spins out of control when over 25 cents of every dollar spent is borrowed. But that’s what’s happens when you mask the problem. This is not the time to run away but to get the economy rolling again! But until Liberal politicians realize that by walking away from our 'pillars of growth; like our manufacturing sector, we will not create jobs in the numbers required. By government largesse, we have become dependent upon others for our daily needs. With the province’s long-term debt rating already at a AA downgrade; resulting in a raising of Ontario’s cost of financing and reducing our credibility in global markets, has the 'proverbial horse already left the barn'?

Another downgrade, with others to follow as we roll down the other side of this mountain is frustrating for those who see the folly of onerous public debt as new bondholders will doubtless demand double-digit yields; but they'll be taking a greater risk, assuming they are willing to part with their capital at all and certainly would expect to earn a greater reward for buying any sovereign debt, should they ever get paid out! But with interest payments threatening to become our largest expenditure after health; as Cypriots, Greeks and Americans, too are finding out, many know this can't go on much longer!

But the way things have been; up to the Cypriot solution, at least, that risk was being masked by an insidious fairy tale that sovereign debt somehow comes with a repayment guarantee but the unfortunate victims of this fairy tale are young Cypriots, Greeks, Americans, and yes Ontarian's, too when they realize they are tied to a debt run up by an older generation. If the Cypriots have their savings taxed, when will we?

                                   Demonstrators raise their arms in protest as Cypriot President
                         Nicos Anastasiades's convoy drives to the parliament in Nicosia March 18, 2013.



Attracted by unprecedented yields, will high-risk betters bail before the inevitable bondholder haircut leaving the hapless to pick up the pieces anyway? Just like the credit squeeze in the run up to the Great Depression, ignoring the reality that bills have to be paid and instead choosing endless band-aids only feeds a deep moral abyss creating an even deeper hole for the younger generation. In Ontario specifically, some fault lies with the post-Davis administrations, specifically the Peterson/McGuinty Administrations, doubtless more with the Rae Administration when assistance from the IMF was starting to look good, but some fault lies with investors for making risky bets! Shouldn't they pay too?
 
As unpleasant as it may sound, to default and restructure remains the method of last resort for loans that should never have been made in the first place. The reality is that governments do default; it has happened before to Iceland and Argentina and will happen again! If the present Cypriot government of President Nicos Anastasiades falls, it would not be the first in Europe to be toppled by the austerity demanded by European debt relief. In Ireland and Portugal, governments fell after accepting bailouts from the European Union and the IMF, and the Slovakian government fell over a vote on whether to participate in the European Union’s rescue package. But these lessons are being ignored in an over-borrowed Queen's Park as if it doesn't fit with someone's economic fantasy. But all of this may be a moot point if, and when investor's say, enough is enough, as France and Germany have just done to the Cypriots and Greeks and China has just done to the Americans! The only question is...should Cypriots, Greeks, and then Italians, Spaniards, Americans, and yes Ontarian's, too continue to pay never ending interest on top of interest payments, seemingly without end or say NO and pull the plug?

Despite plenty of complicating factors, not the least of which is the viability of myopic banks who are now treading water with debt tied to stagnant CDO's and who no doubt regret pouring as much as they already have into these deep holes, don't our young deserve a new beginning?

Regardless, Michele Kambas and Karolina Tagaris, of Reuters tell us this 'house of cards' may already be falling with Europe’s demand that Cyprus break with previous EU practice and impose a levy on bank accounts as part of a 10 billion euro ($13 billion) bailout sparking outrage among Cypriots and unsettled financial markets. Anastasiades refused to accept a levy of more than 10% on deposits above 100,000 euros, which meant taxing smaller accounts too. That hurts ordinary savers with deposits that they thought came with a state guarantee. Stunned by the backlash and fearing rejection by Cypriot lawmakers, euro zone finance ministers urged Anastasiades to avoid hitting accounts below 100,000 euros, and instead implement the Iceland Solution and increase the levy on big accounts, which are unprotected by the state deposit-insurance system.

                                                  The German response to Cypriot concerns?

The European Union and International Monetary Fund are demanding Cyprus raise 5.8 billion euros to secure its bailout, needed to rescue its financial sector. A revised draft bill seen by Reuters would exempt savings under 20,000 euros from the planned 6.75% levy on deposits of less than 100,000 euros. The government has not explained how it would fill the funding gap this would create.

Should the Cypriot solution result in a “no” vote; as a recent poll says a huge majority of Cypriots do not support the Anastasiades government's austerity measures, this would have enormous consequences not just for Cyprus, but possibly for the rest of the world. It would no doubt lead to a disorderly Cypriot default, force Greece out of the 17-nation euro zone, certainly topple many European banks as well as other fragile banks around the world. Rejection by the Cypriots of the continuing European bail-out saga; where the bondholders have already agreed to increase their haircut from 21% to 50%, will certainly cascade destruction through Europe and maybe into North America, too, so we may not even have a choice but to watch the unraveling of our joint financial architecture, such that it is that condones the mortgaging of our children's future.

So, how do we stop the spread of this malady in Ontario? As stated earlier; but warrants confirmation, once the economic engine of Canada, Ontario now is saddled with a mind-boggling $15-billion budget deficit and became an official have-not province in 2009 collecting a government cheque for the first time in our history! But with the province’s long-term debt rating at a AA downgrade; just like America resulting in a raising of Ontario’s cost of financing and reducing its credibility in global market, yes the 'proverbial horse has already left the barn'!

Should we keep your money out of the banking system in Canada and USA? The general fear is that we are next. Is Cyprus is just a Bilderberg test to see if the taxpayers of Cyprus would accept this scam! If this ever  goes through, get ready for the same thing to happen here. 

So, as an alternative, is it possible that wiping the slate clean with a general bondholder haircut could be our best solution, one that has always been the inevitable result when socialists are allowed to run amok? 

We may know the answer to these questions before the end of this year!

                                        -30-

@write_stuff_2
 
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 Cyprus...an insidious fairy tail?  

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