It wouldn’t happen here, would it? Iceland’s former Prime Minister Geir Haarde was put on trial this week, facing charges relating to his failure to prevent the island nation’s 2008 financial crash, one that has been rivalled only by ours and Greece’s.
He faces up to two years in prison if found guilty.
Haarde, once a finance minister, was prime minister from 2006 to early 2009. He is charged with gross negligence for failing to take proper measures to prepare for a financial crash. He is also accused of failing to rein in banks whose balance sheets grew to around nine times the size of the island’s economy in the years leading up to the crisis.
“I believe that we did everything possible to urge the banks to downsize their balance sheets,” said Haarde two years ago. “We believed until the end that saving one of the banks would be sufficient. It wasn’t until the last few days before the collapse that we, or certainly I, realised how interlinked they all were — they were more or less one and the same.” He continued in the same vein in court this week: “None of us realised at the time that there was something fishy within the banking system itself, as now appears to have been the case”.
There are many similarities between this country and Iceland. It was the recklessness of the banks that did for both. Iceland’s top three banks collapsed in late 2008 after years of debt-fuelled expansion. The country of just 320,000 people was forced to borrow about $10bn from the International Monetary Fund and other lenders.
Whereas our banks went mad with lending to property developers, Iceland decided to gamble the proceeds of a massive privatisation of national resources on a madcap acquisition spree of foreign assets. The start had been the sale of fishing rights, allowing a large section of the population to monetise their right to the sea’s annual harvest. Iceland exploited the advantage of very cheap, clean electricity by smelting aluminium for other countries. Local investment companies started buying assets with loans in foreign currencies, leading to external debt amounting to almost three times the size of the Icelandic economy.
This week I came across Haarde’s speech to the Icelandic people that he delivered on Oct 5, 2008 (less than a week after our bank guarantee went into place). He likened the effects of the world’s banking crisis to an economic natural disaster. “The Icelandic banks have not escaped this banking crisis any more than other international banks and their position is now very serious. In recent years the growth and profitability of the Icelandic banks has been like something akin to a fairytale. Major opportunities arose when the access to capital on foreign money markets reached its peak, and the banks together with other Icelandic companies, exploited these opportunities to launch into new markets,” he explained.
“Over this period the Icelandic banks have grown hugely and their liabilities are now equivalent to many times Iceland’s GNP. Under all normal circumstances larger banks would be more likely to survive temporary difficulties, but the disaster which is now engulfing the world is of a different nature, and the size of the banks in comparison with the Icelandic economy is today their main weakness.”
By this stage I’d imagine that you’re remembering similar claims by Irish politicians during that era. Here’s an even more remarkably similar one: “When the international economic crisis began just over a year ago with the collapse of the real estate market in the US and chain reactions due to the so-called sub-prime loans, the position of Icelandic banks was considered to be strong, as they had not taken any significant part in such business. But the effects of this chain of events have turned out to be more serious and wide ranging than anyone had expected.” At least he didn’t complain about the banks having their testicles everywhere.
The similarities with Ireland had been obvious earlier. In March 2008 we had our warning when shares in Anglo Irish Bank slumped. Our Government’s reaction was to ban so-called “short selling” of the shares. As it happened on April Fool’s Day, Haarde claimed that bear raids by hedge funds and stock market manipulation were trying to deliberately wreck the Icelandic banking system. He insisted that an overheated economy, mountainous external debt, galloping inflation and a collapsing currency were not symptoms of an imminent financial crisis. Again the parallels are obvious.
But just as our banking crisis hit in the autumn of 2008 by Oct that year three Icelandic banks, the Landsbanski, Glitnir and Kaupthing, which owed around six times the island’s GDP, were unable to refinance their loans when the world’s credit markets dried up. Their collapse wiped out the savings of thousands of ordinary Icelanders who had put their money in banking stocks. The Icelandic currency, the krona, lost a quarter of its value and interest rates soared to nearly 20%. The country was forced to impose capital controls to prop up the value of its krona.
Unemployment rose from under 2% in Sep 2008 to 10% by the spring of 2009. The Icelandic government was removed in a peaceful revolt, far quicker than ours. In Jan protesters surrounded Prime Minister Geir Haarde’s car and pelted it with eggs. He resigned soon after, citing cancer of the oesophagus as one of his reasons. The foreign minister Ingibjorg Solrun Gisladottir was treated for a brain tumour and President lafur Grimsson had heart surgery.
In 2010 a report into the banking report accused Haarde and David Oddsson, head of the central bank, of acting with “gross negligence” in allowing the financial sector to overheat without adequate oversight. The 2,300-page government-commissioned report detailed a litany of mistakes made in the lead up to the bank meltdown. Seven former officials, including Haarde and Oddsson, were singled out for particular criticism.
At first glance what the Icelanders are doing is impressive. No other country has brought similar charges against its failed leaders. But it would be even more impressive if a larger number of people were charged. Haarde has been referred for prosecution and he has claimed that the charge borders on political persecution. He may have a point. What about the other six in public life? And what about the bankers and the mini-oligarchs who made the mad investments throughout Europe? Haarde’s errors were, arguably nowhere near as calamitous as those made here by our politicians and officials. He didn’t guarantee all the debts of the banks, for example. The country has started to recover, having borrowed on the international bond markets last year and getting its investment grade back from the ratings agency Fitch in February. Contrast that to our position.
Our position was complicated by membership of the EU and the euro of course. We could not devalue our currency. We did not want to risk the flight of multi-national by the imposition of capital controls, or by forcing the loss of their deposits. It is all hindsight of course. But it would be great if we at least had an honest report into what caused our collapse, one that named and shamed individuals. And if we then had special trials of politicians, officials, property developers and bankers. But we all know that it won’t happen.
* The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.
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