Reykjavik Blues

Coffee with Costa - Pavement Philosopher

Reykjavik Blues

In pre-democratic South Africa for several decades under the Nationalist Party government, we had an unjust system of political, social and economic engineering that devastated the lives of countless black South Africans. It was called apartheid.

In Iceland today people face the devastating consequences of a system of financial engineering gone wrong. It is the fallout from the global credit holocaust. It is a financial and moral crisis that seriously affects the confidence and morale of this small island nation. Citizens bear part of the responsibility for living with unacceptably high debt levels and for taking out 100% loans from overeager and unregulated banks, to finance car and home purchases. Consumer debt averaged 213 % of disposable income. The main culprits however are the greedy global money elite, bankers and Iceland’s negligent political class. The financial wizards pushed the country to live on the margins and the politicians allowed it to happen.

Iceland is a small peaceful island in the North Atlantic Ocean with a population of 320 000 belly-buttons. It has a proud Viking heritage and was initially settled by Norwegian chieftains, settlers and Irish monks looking for peace, solitude and liquor. It is home to several volcanoes and to the singer Bjork. The economy once reliant on the fishing industry and agriculture diversified into much sexier and sophisticated global banking and financial services. Everybody felt rich and flush with easy credit rented the good life. The Americans call this living high on the hog. During these boom times people ate the best parts of haddock and cod. Now they may need to eat fish fingers made from ground fish heads and tails.

What’s the capital of Iceland? $3.50

Expansion in Iceland was financed with foreign loans and depositors money from outside Iceland. Thousands of Dutch and English depositors and at least 95 UK local authorities had cash invested in Iceland’s banks. Large inflows of foreign currency attracted currency speculators. Iceland’s banks accumulated foreign assets and corresponding debts at least ten times the country’s GDP. The central bank could not build up enough reserves but was in any event too small to guarantee loans or act as a lender of last resort. As creditors insisted on repayment, banks were not in a position to roll over their loans or receive fresh loans from other banks. The party came to an abrupt end.

Enter the Russian Bear

So now one of the most developed and egalitarian countries in the world with its citizens enjoying longer than average life expectancy, is bankrupt. When the central bank as the lender of last resort goes bust and all else fails what do you do? You go to Russia with cap in hand asking for a 4 billion Euro bailout loan. With no more porridge left and the cupboard bare, Goldilocks wakes up to a living nightmare, forced to share her plate of borscht with the Russians. Welcome to the real world. But why on earth go to the Russians and Don Vladimir in the first place? That’s like inviting the Cosa Nostra to protect your business. First you pay them protection money. Before long, they own your business and you work for them. And it’s a job for life with no fringe benefits.

Iceland probably turned to Russia because the Americans are also technically bankrupt and too busy bailing out their own banks as are the Europeans. That leaves the Chinese with their huge cash reserves, and their banks sitting pretty but they don’t need fish and snow. The Russians know about snow. The Chinese prefer trekking through the vast ethical wasteland of Africa where they can buy corrupt African politicians, coal, steel and oil in that order undisturbed. And in Africa the Chinese are unlikely to bump into American businessmen and they like it that way.

In Russia, the mob hijacked the entire oil industry. In Bulgaria, the mob hijacked an entire country. Now we have a situation where one country stands poised to hijack another country. Everyone knows that Russian money will come with strings and conditions attached. Vladimir Putin in his new role as Prime Minister is no democrat. He’s a bear-wrestling control freak. Even his dog Koni wears a specially designed GPS enabled satellite-tracking collar. The former KGB officer, judo exponent and dog lover, is the real power-broker and strong-man in a resurgent Russia with imperial ambitions. Iceland will make a very useful and convenient naval base and refuelling station in the North Atlantic for the ageing Russian fleet, if it manages to get there. Before long, the Russian marines will land and there will be missile silos and air bases for Russia’s long-range bombers on Uncles Sam’s doorstep.

The USA has sensed Russian weakness since the 1990’s but intervening events like 9/11, the ensuing war on terror and war in Iraq have preoccupied and tied up the USA and its human and financial resources. More recently the USA kicked sand in Russia’s face by announcing its intention to install radar and missiles bases in Poland and the Czech Republic as part of a missile shield system, literally on Russia’s doorstep. This provoked a strong reaction from Russia which in turn threatened to add these bases to its list of targets. Then the USA pushed for Georgia and the Ukraine to join NATO. An unnecessary move in my view and not very clever especially as America needs Russia to exert its influence to persuade Iran to drop its nuclear ambitions.

Russia has been occupied by several armies in its bloody history and it does not trust the USA’s intentions and maybe rightly so. Reassurances are not enough. Only the projection of real and raw military power and surrounding itself with allied or neutral states acting as buffer zones will do. Russia now sensing American weakness has created a window of opportunity in Iceland and who is going to stop them in the new global chess game?

The USA with its actions interfered in Russia’s backyard and now Russia has decided to visit the USA’s backyard. Something they could not get right with the Cuban missile crisis at the height of the Cold War. Iceland a country with no standing army is also a member of NATO, in name at least, but who knows for how long?

Honolulu Blues

And before we vent our moral indignation and rage at this potential act of international piracy, we need to remind ourselves that there is a historical precedent for this sort of bully-boy behaviour towards small island nations. And thankfully for once we can ignore the gun-boat diplomacy of our mentors the British, who at one time or another have picked fights with most nations on this earth.

The Russians are intelligent and well-read people with a penchant for extremes; extreme weather conditions and extreme alcohol poisoning but also an enviable capacity for great hedonism and even greater suffering. In my view they share Putin’s nationalistic ambitions to see Russia restored to its rightful place as a great power. At best they want the USA to be neutral towards them. Western notions of democracy and individual freedom are less important in Russia and even less important in China. Unlike many Americans they also know their geography and their American history.

In 1893 the US Marines landed on the Polynesian Islands of Hawaii and never left. Immediately prior to this event, the monarchy in the Kingdom of Hawaii had been overthrown by native born Hawaiians of American ancestry. The country became an independent republic for a few years before being annexed by the USA ostensibly to ensure neutrality between the feuding parties but in reality to secure the interests of the landed American elite. The presence of US troops made it impossible for the monarchy to rule effectively.

So a sovereign country, Hawaii, was annexed as a territory in 1898 by a US government act, a resolution in the US Congress. The legality of this expansionist manoeuvre remains highly questionable because there was no treaty of cession as required by international law. And unlike Iceland there wasn’t even any debt involved. A hundred years later a joint apology resolution for overthrowing the legitimate government of a sovereign nation was passed by Congress and signed by President Bill Clinton.

Now surfer’s paradise and the birthplace of Barack Obama is the 50th State in the USA and the HQ of the United States Pacific Command, a military presence substantially larger than the standing armies of most medium sized countries.

Bank on a Career in Banking

President Nicolas Sarkozy of France was having a whale of a time last week Thursday at the European Council Summit in Brussels. The diminutive Frenchman was waving his hands, smiling, grimacing and shrugging with exaggerated Gallic flair. Here was a politician in full flight sensing that history was being made. He was in the eye of the storm and relishing every moment of the global financial crisis. Here was a very animated “Sarko” on centre stage enjoying himself before the eyes of the world and making full use of his formidable oratorial skills. Carla Bruni has done him the world of good.

My French is not very good. At best it’s of the kindergarten variety. But watching Sarkozy’s flamboyant hand gestures, I think I understood what he was trying to say. I think he said that:

“The days of the small cheeses are over but so are the days of the big cheeses. The days of big government however are now forever upon us.”

He also said that the crisis was an opportunity to reconcile Europeans with Europe. The time to act is now. Europe will not go backwards. I’m not sure I know what this means but it sounds reassuring. I for one didn’t know that Europeans had split up with Europe but in politics anything is possible. Sarkozy emphasized that Europe was not there to bury the American Empire and told the assembled press corps that he had noticed that presidential elections were taking place in the USA.

On a more serious note, Sarkozy pushed for reform of the global monetary institutions and instruments introduced at Bretton Woods after WWII such as the IMF and the World Bank. European leaders want to re-write the rules of international capitalism so that the rich benefit without feeling guilty. The new US President will need to time to move into his new office, change the drapes, clean the carpets and put his files in order, according to Sarkozy, so European leaders need a once off urgent summit with George Bush and the new incumbent before years end to discuss the way forward. George Bush has been sitting in his leather swivel chair lately staring at the yellow drapes in the Oval Office and is only too glad that some folks still want to speak to him before he retires into oblivion to his Texas ranch. Sarko flew to Camp David this weekend to cheer him up. George showed him his impressive badge collection.

The way forward now clearly includes substantial government involvement and equity holdings in banks. A whole new class of banking bureaucrats will be spawned in Brussels and Washington with huge supervisory and oversight power over the banks. It appears that the world’s biggest banks will be supervised by a new breed of global super-regulators.

Herr Doktor Fritz Toblerone Stumpfmeister has been appointed to train the new bank regulators at a secret facility in the Swiss Alps known as the Bankers Lair. He is a Swiss trained German speaking forensic auditor who collects and restores pocket knives in his spare time. He comes from a long and distinguished line of model train inspectors. He was recently quoted as saying:

“The bucket stops here! If banks do not comply with ze new rules, their assets or what is left of them will be liquidized!”

This tactless statement left bank CEO’s crying in their Rhine Riesling unable to finish their salmon rosti. The banks however have brought it upon themselves with their idiotic and unnecessary risk taking not to mention their irresponsible gambling with derivatives containing toxic debt. The banks are and will always be morally repugnant and no amount of public relations, advertising or corporate social responsibility programmes will change that. Unfortunately they are a necessary evil. In comparison Blackbeard the Pirate was a misunderstood, sensitive soul who very wisely chose to bury his loot. The banks failed to understand a basic maxim when investing money, namely: you cannot make a purse out of a sow’s ear. Or, the bears make and the bulls make, but pigs never do. They become bacon. Clearly the banks cannot be trusted with anything other than organising the annual golf day.

Stephen Covey Jr, points out in his book “The Speed of Trust”, that when trust disappears, the speed of doing business slows down and the cost goes up. Ask Warren Buffet about speed, cost and trust. If he needs an army of lawyers and forensic accountants to conduct due diligence lasting several months, he prefers to walk away from the deal.

As always Joe Public is going to pay the price. We’ve had almost no regulation or negligent regulation for some time now but there is also a real danger of over-regulation. Not to mention the serious invasion and continued erosion of individual rights to privacy that will inevitably ensue as over-zealous government officials stick their noses into every transaction.

In terms of the new rules, every bank will need a government appointed supervisor or in some cases a mini UN panel of supervisors if they operate in more than one country, so if I were to offer career advice to young people today, I’d recommend the new sure to follow, MBA in cross-border bank supervision and financing. Subjects will include; Central Banking 101; Sound Banking, Theory & Practice and Applied Credit Ethics for Bankers. A secure job in bank supervision is guaranteed but for students with a more long term perspective, I’d suggest they do their MBA in Mandarin.

New books due to hit the shelves soon will include:

- The Idiot’s Guide to Reliable Central Banking;
- How To Restore Trust in Banking & Still Make Money;
- How to Identify an Asset Bubble;
- How to Be the Lender of Last Resort without Going Bust;
- Banking the Icelandic Way;
- The Investment Bankers Almanac & Guide to Derivatives (Only available in Mandarin);
- Predictable Risk Management for Beginners;
- Understanding Market Related Irrational Exuberance.

I have no desire to learn Mandarin because you can’t teach an old dog new tricks, so I’m thinking of dusting off my CV and applying for a job as bank supervisor in Greece. I have no accounting knowledge but that shouldn’t pose a problem. I was accused once of cooking the books in standard 7 at Sir Pierre van Ryneveld High School by my accountancy teacher. The late Mr Muller also said that I was as thick as a lavatory door. Later as a student I sold Sanyo cash registers for a living with my mate Spyros and in my spare time sold raffle tickets for the Greek community in Benoni. The priest blessed me for my efforts with some holy water and told me that the church was grateful.

As the American empire declines after a 25 year debt binge taking Europe with it, few mention the spreading tentacles of China. The position of Greece is that China will never own the Greek yoghurt industry and will never contaminate Greek dairy products with melamine. And in the unlikely event that this happens, Greek households will simply boycott Chinese products and cut up their plastic flip-flops. In solidarity and defiance they will make yoghurt at home using traditional methods passed down by generations of Greek grandmothers. My grandmother bless her soul, never trusted Communist China because Mao Tse Tung’s widow wore racy and expensive French lingerie under her Mao suit.

As global stock markets go bi-polar and America suffers extreme mood swings, China hoards her money, watches and waits to pounce. China now sits on foreign currency reserves of close to $2 trillion in cash that is forecast to reach $3 trillion by the end of 2009. This makes China the world’s new financial super-power. China also holds the most US government bonds. This means effectively that China owns the bulk of US government debt in the form of US Treasury bills. China will no doubt use its formidable foreign exchange cash reserves to go on a huge global asset buying spree. They already own the Angolan government. Many may gloat that the USA has met its come-uppance after decades of unbridled capitalism, unchecked corporate greed and reckless consumerism but I for one would rather take my chances with a deeply-flawed, wounded and faltering America than a cash-flush and rising China.


Yours fearfully

Costas Ayiotis

Reflections & Observations from the Pavement
Waterkloof, Pretoria
19 October 2008