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Markets  |  February 14, 2013 11:20:34

Better horror end than horror without end

Textbook example of crisis-fighting performance in the past years, Iceland. One of the first European country to face the existential problems of the crisis. Seemingly complex solution was yet very simple. Rational and resolute measures may serve as an inspiring example of Southern economies whose pain even after years seem to stop.

To recap the situation, Iceland and hence its banking sector since the beginning of the century experienced strong growth. The assets of the three largest Icelandic banks has increased fivefold since 2004. Grew at the same rate and debt that the peak of the crisis amounted to USD 61 billion, more than five times the annual GDP of Iceland. The outbreak of the crisis plunged the banking sector and thus the entire economy into insolvency.

auto;-webkit-text-stroke-width: 0px; "> recovery process

Iceland is a textbook example of crisis management. Just use common sense and willingness Answering painful measures, properties far removed from many politicians. The government was forced to resign, followed by popular vote to resolve the situation and new elections, the nationalization of the banking sector took place at the current guarantee deposits in domestic Icelandic crown, was subsequently adopted a new constitution and reformed the financial sector to prevent a recurrence of the situation.Foreign investors in a quest for high yields unreasonably funded activities Icelandic banks were popřáno goodbye and told that their deposits will not be paid.

Icelandic krona collapsed, inflation vzorstla sharply and the economy has declined precipitously. But the process has brought necessary and healthy cleansing. The steep fall replaced gradual stabilization and turnover trend. Trade balance, one of the indicators of international competitiveness of the economy, has resulted in a huge surplus. Since the late nineties while almost continuously showed negative values. Inflation also declined over time, interest rates were normalized, unemployment fell from 9 to 5%. In 2012, Iceland is predicted healthy growth of 2.9% of GDP. Monitoring for the presence of the International Monetary Fund and no trace remaining of the debt will be repaid in the next few years. The showcase for Europe?

Unceasing pain

auto;-webkit-text-stroke-width: 0px; "> causes of the crisis in Europe is a lot. since the common currency euro, despite the poor integration of the economies in the Eurozone, after pathological inability of politicians. first cause, a common currency, in the current situation plays a vital role . spite of many indisputable advantages brings considerable handicap - loss of autonomous monetary policy. Basically possibility of natural weakening of the domestic currency, rebalancing the economy and re-acquisition konkuenceschopnosti as was the case in Iceland. while Germany can fully enjoy the benefits of a relatively weak euro and its trade balance shows a record surplus for perifererní economy rate is too high and must go through a painful process and regained competitiveness.

Unemployment in some peripheral countries is 25%, for the young generation even 50%, industrial production has found a bottom, high government deficits persist, social unrest and strikes are rampant. Catalonia desire for independence and Greece have already made up with the endless struggle between budget cuts and the pain that is still to sustain. It would not be in this situation better to retreat from the path of the euro, weakening domestic currency depreciation current debt and a fresh start with a clean slate? The second equally important question: We have learned? There has to remove the causes of the crisis?I will no longer answer to the reader.

Iceland is not an isolated case. Ironically, that twenty years have now passed since the Sweden went through a very similar crisis as the Eurozone. Swedes immediately and without compensation of any nationalized troubled banks zdevalvovali its currency massively and made major structural reforms that started the twenty-year growth. Banks, the state introduced a hefty profit back to the exchange. Today you hardly looking mature and become more competitive in Europe than in Sweden.

One German proverb says, "Better a horror end than horror without end." As an optimist, I believe that Europe eventually overcome the crisis. Whether with or without the euro. Both scenarios are likely and need to count them. The lesson should be applied in everyday life and in investment decisions. I confident François Hollande long understood that financial markets need more than they need him. And if someone will punish politicians for bad decisions, it will be on financial markets.

Author:   Cimala Peter, Member of the Investment Committee of Charles Bridge Global Macro Fund

Risk education

0px; "> The information in this analysis (hereinafter referred to as" Analysis) are for informational and educational nature and is not intended as a proposal or offer to buy or sell any investčního tools. The decision to deal in financial instruments is the responsibility of each individual and only he himself responsible for his own decisions full responsibility. The value of financial instruments fluctuates over time and the return on investment is not guaranteed. The results of the previous period are not guarantees of future performance. Information and data analysis can be drawn from external sources. Author is not responsible or liable for timeliness, completeness, legality, timeliness or accuracy of any information, data, and statements.

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