Letters from Iceland

While Ireland’s mounting debt mountain continues to cause chaos in the Eurozone, I’ve spent the past week in the one country that embraced default back in October 2008: Iceland. Not that Iceland really had much choice about defaulting; the debts of its three privatised banks, Landsbanki, Kaupthing and Glitnir, were almost ten times GDP when the kreppa (or crisis) struck.

The big issue in Iceland at the moment should be next week’s referendum on Icesave. The high-interest internet arm of Landsbanki famously collapsed owing billions of pounds to largely British and Dutch savers. A referendum on a highly punitive deal to pay back Icesave’s creditors was roundly rejected by the Icelandic public (over 90% voted against).

The latest Icesave deal would see the Icelandic government pay £3.1 billion to the British and Dutch governments. The referendum takes place after Iceland’s president Ólafur Ragnar Grímsson once again refused to ratify the government’s Icesave bill.

Until the kreppa, Iceland’s president was a largely ceremonial role (only once previously in Iceland’s had a president called a referendum), but Grímsson, who has looked to distance himself from the ‘Viking capitalists’ he once embraced, has shown himself willing to take a populist tack. Opponents of any Icesave deal, still smarting from then PM Gordon Brown’s use of anti-terrorism laws against Icelandic banks in 2008, argue that Iceland should not pay a penny of the debts of its private banks.

Writing in the English language paper The Reykjavik Grapevine Guðmundur Franklín Jónsson argued that ‘The British government closed the bank down’ and that asking Iceland’s government to foot the Icesave bill contravened EU law.

It is illegal in the European Union to government-secure private banks’ obligations. It is against the principles of the European Union to subsidise a private enterprise, therefore the Icelandic government would be breaking the law by agreeing to pay, using taxpayer money, this disputed claim. The bankruptcy estate of Landsbanki should be responsible for this claim, not the Icelandic public. It is also in breach of article 40 of the Icelandic Constitution, for the Icelandic Parliament to indebt its citizens for an unknown amount that could jeopardize the financial future of generations to come.

The difference in rhetoric (and action) between Ireland and Iceland on the issue of debt and default is marked. One potential reason is the vastly different approaches to bankruptcy in the two countries: in Iceland, there is little social stigma attached to bankruptcy, debts are wiped clean with the demise of the company and starting a new business is basically just a matter of changing the bankrupt company’s tax code (even the original name can still be retained in a new venture).

But while most Icelanders believe in principle that Icelandic tax-payers shouldn’t foot the bill for Icesave, there seems every likelihood that the referendum on April 9 will be passed.

Speaking to people across Iceland over the last week, one recurring reason for voting ‘yes’ is a sense among voters that the Icesave issue has held the country back from addressing other, more pressing problems. For almost two years Icesave has dominated much public debate – but the reality is that the sums involved are relatively meagre in comparison to other fiscal problems faced by the state. Indeed public debate about the forthcoming referendum has been surprisingly muted – good news for the Left/Green administration.

Nevertheless, there might be a lesson for indebted countries in the Icesave saga. Under the deal put before the Icelandic people last year, the country would have had to pay back the debt at a 5.5% interest rate between 2016 and 2024. Now it will have until 2046, and at a rate of just 3.3% interest rate.