Eyjafjallajökull – Europe’s slow motion crisis (updated x5)

Seeing lots of explosions this morning. Thick dark ash headed... on Twitpic

As the Eyjafjallajökull eruption continues, my sense is that the crisis is beginning to become quite serious (check out radar of Europe’s empty skies). Lots of people have been stranded for a significant period of time now – many in difficult conditions. Some are being told not to expect a flight home for a week or more.

And that’s if the ash cloud clears quickly. At the moment, there are no signs of this happening (for recent info, see Erik Klemetti’s blog). The volcano is still erupting, albeit at a lesser intensity –  but high pressure means that the cloud is not going anywhere. A renewed eruption  is possible, while the bigger neighbouring volcano, Katla, is reported to be showing increased seismic activity.

That could be a very big deal:

The danger is that the small volcano is just the beginning and that it will trigger the far more powerful volcano of Katla, which nestles beneath Myrdalsjoekull.

“That has to be on the table at the moment,” Dave McGarvie, senior lecturer at the Volcano Dynamics Group of the Open University, said. “And it is a much nastier piece of work.”

Icelanders agree. “This could trigger Katla, which is a vicious volcano that could cause both local and global damage,” Pall Einarsson, from the University of Iceland, said.

There is an immediate need to get those stranded abroad home. The FCO finally has an emergency consular hotline up and running (+44 207 008 0000) for British citizens stranded abroad (not on the website as yet, though, as far as I can see), and hopefully other countries are implementing crisis plans as well.

There are also encouraging signs of people helping themselves, with bottom-up resilience being facilitated by social media (also this Dunkirk evacuationloading now in Calais). On Twitter, the #getmehome tag is worth watching as, of course, are the main tags: #ashtag #ashcloud (also – a good list of Twitter resources here).

But I’d like to see some coordination by and between European governments. It is absolutely absurd that people are having to buy bicycles to be allowed to board a cross-Channel ferry. Soon, we are going to need a much more coordinated evacuation.

Beyond that, I am wondering how healthy European airlines are. Are any facing immediate cash flow problems as they face demands for refunds and are forced to shell out to put stranded travellers in hotels? How long can each one keep going if flights remain grounded? A bailout probably needs to be considered. A stress test of the industry’s stability would be a useful first step.

Finally, it’s worth exploring the longer-run consequences if this develops into a major  Black Swan event. Is there anything that can be done to keep planes flying should there be a chain of eruptions over months or a year or more (maybe not, but it’s worth exploring)? And is there a risk of serious damage to Europe’s fragile economy, or can we be sure regular interruptions to aviation pose no systemic threat?

I can’t help thinking of the European heat wave of 2003. That was one of the continent’s “worst ever peacetime disasters, but we barely noticed it at the time and have forgotten it remarkably quickly.” The volcano is unlikely to cause 35,000 deaths, of course, though the risk to health could worsen depending on the changing composition of the ash.

But the heat wave should remind us how bad we are at responding to a slow motion crisis – and that resilience may be at its lowest ebb when we don’t take a threat seriously enough until it is too late.

In the UK, it doesn’t help that there’s an election on. But Lord Adonis, the Secretary of State for Transport, is not running for office. It would be good to see greater signs that he – or someone else – is being much more decisive about taking charge.

Update: Both KLM and Lufthansa are itching to get flying again (have a look though at these pics of damage to a Finnish airforce jet – also the experience of this Ural Airlines flight is not encouraging):

KLM, the Dutch subsidiary of Air France, said Sunday it wants to resume passenger flights in Europe as soon as possible after it flew a plane through the cloud of volcanic ash covering much of the continent without suffering any damage.

KLM carried out the test flight above Dutch airspace Saturday. It said initial inspections afterward showed no damage or irregularities from the ash in the air that has led to a ban on air travel over much of Europe since Friday.

The airline says it now plans to return seven airplanes without passengers to Amsterdam from Duesseldorf Sunday.

“We hope to receive permission as soon as possible after that to start up our operation and to transport our passengers to their destinations,” said Chief Executive Peter Hartman, who was aboard Saturday’s flight.

Germany’s Lufthansa flew 10 empty planes to Frankfurt from Munich at low altitude on Saturday under so-called visual flight rules, in which pilots don’t have to rely on their instruments.

Update II: Robert Patterson – and in the comments, @aem76us, wonder what longer-term disruption of air traffic might look like…

Update III: I think the media is getting desperate to find a new angle on this story –  and that means having someone to blame. FCO, Department for Transport – if you’re not 100% on top of the situation, they’re coming for you…

Update IV: Sure enough, the Conservative Party has issued an eight-point action plan for beefing up the response to the crisis. John Redwood calls for a cross-Whitehall review of what can be done. And, finally, Brown will chair a Ministerial meeting. I’d say the government allowed itself to get at least 48 hours behind the curve.

Update V: Watching the latest Eurocontrol press conference and many journalists seem to be coming to the conclusion that governments should be blamed for exaggerating the threat from the ash cloud. Airlines are also pushing this line. Here’s a statement from Olivier Jankovec of Airports Council Europe:

With 313 airports paralysed at the moment, the impact is already worst than 9/11. More than 6.8 million passengers have been affected so far and European airports have lost close to €136 million. Many thousands of passengers are still stuck at airports because of this situation. While safety remains a non-negotiable priority, it is not incompatible with our legitimate request to reconsider the present restrictions.”

Absolutely clear, that governments are losing – or have lost – control of the narrative now…

Wall Street on Ice

In the latest Vanity Fair, a brilliant article by Michael Lewis (author of Liar’s Poker) on Iceland.

It’s a sad, funny and surreal story:

An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “We can do that.” For a brief moment it appeared that they could. In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, “the most rapid expansion of a banking system in the history of mankind.”

At the same time, in part because the banks were also lending Icelanders money to buy stocks and real estate, the value of Icelandic stocks and real estate went through the roof. From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. Reykjavík real-estate prices tripled. By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry. “Everyone was learning Black-Scholes” (the option-pricing model), says Ragnar Arnason, a professor of fishing economics at the University of Iceland, who watched students flee the economics of fishing for the economics of money. “The schools of engineering and math were offering courses on financial engineering. We had hundreds and hundreds of people studying finance.” This in a country the size of Kentucky, but with fewer citizens than greater Peoria, Illinois. Peoria, Illinois, doesn’t have global financial institutions, or a university devoting itself to training many hundreds of financiers, or its own currency. And yet the world was taking Iceland seriously.

Global financial ambition turned out to have a downside. When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market.

A hedge fund manager in London summed up the situation like this:

A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets—the banks, soccer teams, etc. Since the entire world’s assets were rising—thanks in part to people like these Icelandic lunatics paying crazy prices for them—they appeared to be making money. Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets.

“We were always told that the Icelandic businessmen were so clever,” says university finance professor and former banker Vilhjalmur Bjarnason. “They were very quick. And when they bought something they did it very quickly. Why was that? That is usually because the seller is very satisfied with the price.”

It wasn’t just Icelanders caught up in the frenzy of the last few years. Nor was it just bankers in US sub-prime. It was a global frenzy, raging from Moscow to Dubai to Lagos, fuelled by cheap western credit, mainly from US and UK banks.

One of the new casualties to emerge – the shipping industry. I was talking to a banker this weekend, who covers the sector. She told me that 10 European banks (including RBS, Nor, Nordea, HBOS and others) leant around $250bn to European shipping firms in the last few years, at very low rates, and at vastly inflated estimates of the value of the ships.

The value of the ships has now plummeted, many are lying idle, shipping companies are facing bankruptcy and most of the loans are now, on the whole, in default – enough defaulted debt to finish off the banks on their own, never mind with everything else on their plates.

Throwing yoghurt, and other responses to the credit crunch

A year or so ago, I did a post wondering what had happened to the anti-globalisation movement. Well, something looking very like it now certainly seems to be reappearing in Iceland at least. Here’s Roger Boyes in the Times on Wednesday last week:

Icelanders all but stormed their Parliament last night. It was the first session of the chamber after what might appear to be an unusually long Christmas break. Ordinary islanders were determined to vent their fury at the way that the political class had allowed the country to slip towards bankruptcy. The building was splattered with paint and yoghurt, the crowd yelled and banged pans, fired rockets at the windows and lit a bonfire in front of the main door. Riot police moved in.

Eirikur Bergmann thinks this amounts to “at the very least, a revolution in political activism”.  And both writers are having a grand old time identifying the baddie.  (more…)