Ann Pettifor – 12th May 2009
Have just returned from a flying visit to Iceland, where I was mightily impressed by the warmth and strength of the Icelandic character. Also struck by the pride Icelanders have in the way the financial crisis deepened and strengthened their democracy – leading to the ousting of a corrupt government, and the election of a progressive coalition.
Like many other visitors no doubt, I was bowled over by the austerity of the landscape. These people live on a volcanic island close to the Arctic Circle, and go about their business while mighty tectonic plates regularly shift beneath their feet. Sure those shifts generate massive doses of geo-thermal energy, making this country one of the world’s most sustainable, in energy terms. Nevertheless those plates regularly cause the earth to move, while Arctic gales whistle down glaciers and chill one to the bone, and volcanic rocks litter a treeless landscape. Icelanders – descended from Vikings and Celts - are an extraordinary and resilient people!
Which is why it was sad to see proud, independent and innocent sheep farmers, fishermen and workers lose their independence to creditors. One complained that Icelanders could handle the severity of financial losses. However, what is unbearable to the Icelandic ‘soul’ is the damage inflicted on their nation’s reputation by a small group of bankers – cheered on by internationally-renowned, neo-liberal economists.
I learned a lot. The one fact that angered me most is that Icelanders that took out loans with domestic banks have had those loans ‘indexed’ to inflation - by law it appears. Clearly, Iceland was another bank-owned-state, governed in the interests of creditors. If their new government is to represent the interests of the Icelandic people, and not just those of creditors, then legally-binding indexing must be repealed.
Here is more of what I learned:
- Ordinary protesting Icelanders, using and amplifying their voices with pots and pans, drove a government from office. This has given Iceland’s people renewed confidence that they can, and should, remove governments that prioritise the interests of the finance sector over the interests of the people.
- 43% of the new Parliament is made up of women MPs.
- The new Prime Minister, Johanna Sigurdardottir (daughter of Sigurdar) is a woman and openly gay. She is the Minister of Economic Policy, as well as Prime Minister.
- Prominent neo-liberal economists, including Fred Mishkin, a high-profile advocate of ‘inflation targeting’ and Bush nominee to the Federal Reserve, (until he unexpectedly resigned in May, 2008) and Tryggvi Þór Herbertsson, were paid, I have been reliably informed, considerable sums by the Icelandic Chamber of Commerce to produce a report on Financial Stability in Iceland in September, 2006. The purpose of this report was to keep the banking party going after the near-disastrous ‘mini crisis’ of March, 2006. The report was the centrepiece of a ‘road show’ promoting Iceland as a haven of financial stability that autumn. (See this speech made in New York by Mrs. Valgerður Sverrisdóttir, Minister for Foreign Affairs of Iceland at the time, and a proud farmer.)
- We know that Fred Mishkin (now of Columbia University) was not the only academic economist to act as cheerleader for Iceland’s reckless bankers. Prof. Richard Portes, President of Britain’s Royal Economic Society, played a similar role. (For more about Professor Portes’s role in the Icelandic saga, go here.)
- A year after the Mishkin Report, in November, 2007, Prof. Portes produced another report for the Icelandic Chamber of Commerce which concluded that Iceland’s banks were ‘successful and resilient’ and that ‘the banks have been highly entrepreneurial without taking unsupportable risks; good supervision and regulation have contributed to that, using EU legislation.”
- The privatisation of Iceland’s banks began as late as 1998, and was not complete until 2002. See the excellent chart below, courtesy of Stefán Ólafsoon of the University of Iceland. The banks lost no time in piling up debts.
- By 2008 – when Prof. Portes wrote his report – private bank liabilities made up 10 – 12 x Iceland’s GDP, according to a reliable source.
- Ratings firms, I was told, maintained the AAA status of Icelandic banks until two days after the collapse of these banks. Have not been able to check this.
- The debt burden falls disproportionately on low income groups. In other words, it was the poor and other low-income groups that were encouraged to borrow and finance the bankers’ party. (See another of Stefán Ólafsoon’s charts below.)
- As a result of the financial collapse, unemployment is expected to rise to 10% in 2009 – particularly difficult for a ‘work society’ Stefán Ólafsoon argues.
- In a new take on ‘inflation targeting’ Icelanders have the principal on their loans to domestic banks indexed to inflation. In other words, if inflation rises, the value of their debts rise too! Inflation is currently at 11.9%.
- Creditors are protected from inflation – by contract law, it seems.
- After the crisis broke on the 6th October, 2008, 95% of Iceland’s stock market was wiped out.
- The $2.1 billion loan to Iceland is one of the biggest ever made by the IMF.
- Iceland introduced currency and capital controls in December, 2008, and operates these effectively, according to an adviser to the Prime Minister. Effectiveness is maintained by revising the regulations every two weeks to fix loopholes.
- The IMF supported the introduction of capital controls ‘forcefully’.
- As a result of capital controls, interest rates had fallen from 18% at the height of the crisis in September, 2008, to 13% last Thursday. Rates for corporate borrowing remain in the region of 17%.
- The UK has loaned to Iceland the money needed to compensate UK depositors. Revenues from the sale of Iceland banks will be used to pay interest on this loan.
- GDP is expected to drop 10-12% this year.
- Consumption has declined by 25%.
- Real wages have fallen by 10%
- Real incomes are falling by 12-15%.
- 20% of families are in negative equity. The comparable figure for the US is 28%.
- Icelanders have made substantial losses on their savings
- In a bid to lower employer costs, people have had 2 working hours cut each week.
- Iceland’s fish exports, thanks to currency devaluation, now have an edge over those of Norway.
- For the last 30 years, Iceland has imported coffins. Because of the decline in the value of the Icelandic Krona, two companies have started making coffins – and are now exporting these to Canada.
I am waiting to hear of the new Prime Minister’s cabinet appointments this weekend. Sincerely hope that, in tackling this crisis, she calls on a wider range of economic advisers – and advice – than her predecessors. Or indeed than that offered by IMF staff.
There is surely a case for inviting economists who share the new Parliament’s values and are not the ‘hired guns’ of bankers –to visit Reykjavik to offer independent advice. Only after considering a range of such independent advice, can all those good women parliamentarians make sound judgements and begin the long process of ending the debt bondage of Iceland’s low-income earners.
To make Icelanders once again proud “independent people” in the words of Halldor Laxness, the country’s great Nobel-prize-winning novelist.