Icelanders pelted Althing, the world’s oldest existing parliament which was founded in 930 AD, with rocks almost three years ago demanding their leaders and bankers answer for the country’s economic and financial ruin. That demand for accountability has restored the pride of this tiny North Atlantic nation and people are starting to reap the benefits of their rage.
According to a report published this month by the Icelandic Financial Services Association, debt burdens of more than a quarter of the estimated 317,000 population have been written off by the island’s banks since the end of 2008. The forgiven loans are equivalent to 13% of gross domestic product of the non-eurozone nation.
“You could safely say that Iceland holds the world record in household debt relief. Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that,” said Lars Christensen, chief emerging markets economist at Danske Bank A/S in Copenhagen.
The island has taken effective steps to resurrect itself since 2008 when its ‘out-of-control’ banks defaulted on $85 billion. So good is the improvement that Organisation for Economic Cooperation and Development (OECD) suggests Iceland’s economy will outgrow the eurozone and rest of the developed world on average this year. Most opinion polls show Icelanders are against joining the European Union, where the debt crisis started three years ago and continue to pester the continent as well as the world economy.
The government of Iceland, elected in 2009 with a landslide, helped island’s households by forcing an agreement on the partly state-controlled banks to forgive debt exceeding 110% of home values. To top it up, a Supreme Court issued a historic ruling in June 2010 that termed loans indexed to foreign currencies illegal, meaning households no longer need to cover krona losses.
Even international credit rating agencies are impressed with the nation’s economic recovery. While downgrading forecasts of European economic superpowers like the UK, France, Italy and others, Fitch upgraded Iceland’s sovereign rating by one notch moving it into “investment grade”, hardly three years after the economy collapsed and country’s financial institutions were stamped ‘junk’ status.
The populist Socialist government is pleased with its efforts. Iceland’s Finance Minister Steingrimur Sigfusson told the BBC that his country’s size has been crucial in the pace to recovery. “You are quicker turning a small boat around than a big ship,” adding that the decision to carry on borrowing and spending for another year before reining in spending proved beneficial to the nation.
Fitch has showered its rare appreciation on Iceland, once considered as a pariah state for defaulting on its multi-billion dollar loans and taking stern measures against the bankers. “The decision reflects the progress that has been made in restoring macroeconomic stability, pushing ahead with structural reform and rebuilding sovereign creditworthiness,” the international credit rating agency said in its statement.
REFORM AND ACCOUNTABILITY
While bankers in the US and rest of Europe continue their operations with impunity despite causing the collapse of the global economy due to their reckless policies, Icelandic government vowed respect the voters’ heavy mandate and take the ‘banksters’ to task. The left-leaning Social Democratic Alliance and the Left-Green Movement formed a coalition government under Prime Minister Jóhanna Sigurðardóttir which held a referendum to decide if Iceland’s taxpayers are to bailout country’s banks and pay their bill of $85 billion which they defaulted on a few months earlier. Icelanders resoundingly defeated the referendum, with 93% voting against and less than 2% in favour.
The newly elected government also prosecuted the former Prime Minister Geir Haarde on charges of negligence in office and failing to act during the country’s economic meltdown. Several bankers were also put under trial and their assets went under tight scrutiny by the country’s financial watchdogs.
In a recent move, Iceland’s Financial Surveillance Authority (FME) sacked its director, Gunnar Andersen, following a report into his time as an executive at failed bank Landsbanki. In reference to the Landsbanki’s international operations, the FME said that Andersen abandoned two Guernsey registered companies owned by a foreign-registered company also owned by Landsbanki. The watchdog’s website stated that Andersen did not do anything unethical but the news risked tarnishing his credibility as director of the FME.
The secret of Iceland’s success in dealing with the meltdown was putting the needs of its population ahead of the bankers at every turn.
After it became evident by early 2009 that the island’s wayward banks were beyond saving, the newly elected government stepped in, ring-fenced the domestic accounts, and left international creditors in the lurch. The central bank imposed capital controls to halt the ensuing sell-off of the krona. The government also created new state-controlled banks from the ashes of the old failed banks and remnants of the lenders.
Andrea J. Olafsdottir, chairman of the Icelandic Homes Coalition, doubts the numbers provided by the banks are reliable and demands they should go even further in their debt relief efforts.
“There are indications that some of the financial institutions in question haven’t lost a penny with the measures that they’ve undertaken,” she said.
Iceland’s special prosecutor, under pressure from the masses, announced he may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest failed banks, face criminal charges.
Larus Welding, the former CEO of Glitnir Bank, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. Sigurjon Arnason, former CEO of Landsbanki Islands, has been kept under solitary confinement as part of his criminal investigation.
BANKSTERS HERE AND THERE
According to Kristjan Kristjansson, a spokesman for Landsbankinn, the amount written off by the banks is probably larger than the 196.4 billion kronur ($1.6 billion) that the Financial Services Association estimates, since that figure only includes debt relief required by the courts or the government.
“There are still a lot of people facing difficulties; at the same time there are a lot of people doing fine. It’s nearly impossible to say when enough is enough; alongside every measure that is taken, there are fresh demands for further action,” Kristjansson said.
While across the Atlantic, no top bank executives in the US have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown but the FBI failed to make any arrests and start investigation into the allegations.
The subprime crisis in the US sent home prices plunging 33% from a 2006 peak. Households in the world’s biggest economy don’t have the luxury to get the same degree of debt relief as that pushed through in Iceland. Plans after plans have been proposed by US President Barack Obama to expand loan modifications, including some principal reductions, but situation on the ground is getting worser day-by-day.
According to Christensen at Danske Bank: “The bottom line is that if households are insolvent, then the banks just have to go along with it, regardless of the interests of the banks.”
“The lesson to be learned from Iceland’s crisis is that if other countries think it’s necessary to write down debts, they should look at how successful the 110 percent agreement was here,” Thorolfur Matthiasson, an economics professor at the University of Iceland in Reykjavik, said in an interview. “It’s the broadest agreement that’s been undertaken.”
Matthiasson added that without the relief, homeowners would have buckled under the weight of their loans after the ratio of debt to incomes surged to 240% in 2008.
The tiny Atlantic nation’s $13 billion economy shrank 6.7% in 2009 as a result of the banking crisis. Paris-based OECD estimates that the economy grew 2.9% last year and will expand 2.4 percent this year and next, thanks to renewed confidence-building measures taken by the government. This comes in stark contrast with the eurozone area which is expected to grow 0.2% this year and will expand 1.6%, according to OECD’s November estimates.
(Written by Manasa Kesiraju and Moign Khawaja; Edited by Moign Khawaja)