A fair deal for Iceland

8th January, 2009

This piece appeared on the Guardian’s Comment site:

“Today the people of Iceland, a country whose population, at 317,000, is somewhat smaller than Leicester’s, are required by the British political, financial and economic establishment to carry the full burden of the losses suffered by Landsbanki’s depositor programme Icesave.

We consider this to be unfair, for the following reasons.

First, the British political and financial establishment bear co-responsibility with Icelandic regulators and bankers for the losses of British investors. Indeed Iceland’s financial policies and practice fell foursquare within the deregulated and liberalised framework set in Britain and the United States since the 1970s. We therefore bear a greater share of responsibility.

Well after the credit crunch froze interbank lending in August 2007 – a day we have dubbed “debtonation day” – the then-president of the Royal Economic Society of Britain, Professor Richard Portes, published a report on the state of Iceland’s financial sector.

His November 2007 report was uncontroversial with Britain’s and Iceland’s regulators, economists, bankers and investors. It assumed that the Anglo-American liberalisation model to which Iceland’s government had succumbed was a fixed, sound and immutable system – for Iceland and the rest of the world. It commended the “successful and resilient” banks of Iceland. That small country’s financial system, enthused Portes, was based on “an exceptionally healthy institutional framework. The banks have been highly entrepreneurial without taking unsupportable risks. Good supervision and regulation have contributed to that, using EU legislation.”

Portes went further, complaining that “market suspicion” had caused the mini-crisis of early 2006, and that Icelandic banks “had lower ratings than their Nordic peers”. He saw “no justification for this in their risk exposure.” We now know that Portes was profoundly misguided, and that his report was misleading. Iceland’s banks were dangerously over-leveraged, and dismissive of exchange rate risks. Supervision and regulation by the British government and the European Union was far from good. It was lax, irresponsibly so, and created victims of those investors that had, in good faith, trusted the judgment of orthodox economists and the supervision of regulators.

Given this co-responsibility for the crisis, Britain, the EU and other governments should not resort to force majeure to put Iceland in a “debtors’ prison”, to quote the Financial Times.

Britain is a country of 60 million people. If we took full responsibility for the losses incurred by private investors in Icesave, it would cost every UK citizen about £36 in total. If the burden for these nationalised losses is to be carried wholly and exclusively by every Icelandic citizen – man, woman and child – the cost would be a prohibitive £6,800 each, impacting harshly on their lives and public services.

Acceptance of co-responsibility would help rebalance this inequitable division of losses. The postponement by the Icelandic president of the debt repayment legislation, pending a national referendum, gives the British Treasury the chance to withdraw its punitive approach and reach a fair outcome to the crisis.”

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2 comments to A fair deal for Iceland

  • Robin Mitchell

    Well Alex, why shouldn’t the British taxpayer bear this burden? Iceland was simply part of an international pack of financial

    cards orchestrated as much out of London as New York. The citizens of Iceland have no greater responsibility for what happened than the citizens of

    London (and a lot less than the suburbs British bankers favor). They certainly have no greater responsibility than British voters who supported

    Margaret Thatcher and her economic snake oil theories and who subsequently reveled in London’s reputation as an international financial hub and

    the false prosperity it brought for a time.

    It was imprudent British investors/depositors who, forgetting the relationship between risk and

    reward,fell for the blandishment of international financial salesmen and put their money into Iceland (and elsewhere overseas). Did British

    depositors/investors lose money in American banks? If so, when will Britain declare a propaganda war on, or threaten, America on behalf of British

    taxpayers?

    It was British politicians who subsequently decided that all British taxpayers should bail out both the imprudent depositors and

    bankers. Therefore, if taxpayers are hurting, they should vent their anger in that direction. In particular, why chase Iceland for funds that could

    be recovered in the long term from the British banking system.

    It is hard for people like we in Australia to see the justice of Britain’s

    attempts to financially crush the Icelandic people. The sight of Britain attempting to behave like a colonial power again would be hilarious if it

    wasn’t for its potential to further destroy the lives of the Icelandic people already crushed by the results of economic policies enthusiastically

    espoused by Tory Governments and the subsequent and inevitable perfidy of international bankers.

  • Why on earth should U.K. subjects be held liable for losses incurred by commercial entities (presumably)

    operating within and under the legislative framework of a sovereign nation?

    With hindsight we should have been shouting long and loud about

    deregulation since Thatcher/Reagan, but we didn’t and we’re now under the yoke for 20 years to pay for that mistake.

    Why on earth should

    we be paying for a similar like of involvement, oversight or understanding in Iceland???

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