In October 2008, the Icelandic bank, Landsbanki, collapsed. With it collapsed its online Icesave branch and the investments of 340,000 British and Dutch savers. Iceland’s Depositors’ and Investors’ Guarantee Fund lacked the funds to compensate its investors. The Icelandic government initially refused to take responsibility for the failure of a private bank.
After considerable negotiations, Iceland agreed to insure the liabilities of Icesave. The British and Dutch governments provided a €3.8 billion loan to cover the deposit insurance obligations for their citizens. In August 2009, the Icelandic parliament, the Althing, passed a bill setting the interest on repayment of the loan at 5.5 per cent. President Olafur Grimsson, however, refused to sign the bill, forcing a referendum on the issue. In March 2010, Icelandic voters voted overwhelmingly against the deal, with 93 per cent casting ‘no’ votes.
On February 16 2011, the Althing passed a new Icesave bill – the third version – which set out a lower interest rate on repayments and a revaluation of the debt. On April 9, the people of Iceland once more went to the polls, and once again voted against covering Icesave’s losses. Bloomberg reported Grimsson as saying that the referendum “enabled the nation to regain its democratic self-confidence and to express sovereign authority in its own affairs.”
Iceland’s obligations will now in all likelihood be decided through the courts.
Lilja Mósesdóttir is a former member of the governing Icelandic Left-Green party and a member of the Icelandic parliament. She resigned from the Left-Green party in protest at the IMF dictated economic programme being implemented by the government. She visited Ireland last week, and agreed to answer some questions on Ireland, Iceland and banking for Politico.
Do you think Ireland should hold a referendum on our bank bailout?
All countries, including Ireland, should hold a referendum on bank bailouts. The reckless lending of private financial institutions in Ireland is being turned into public debt without a public debate to decide if taxpayers should bail them out as a matter of principle, or not. The money that goes to save the banks and the bondholders are present and future tax revenues that will no longer be available to run schools, hospitals, welfare services etc.
The Icelandic government, composed of the Labour and the Left-Green Parties, has been against a referendum on Icesave. This is a u-turn for the Left-Green Party that was against the Icesave settlement and the IMF agreement before coming into power. The government has emphasised Iceland’s obligation to tax payers in Britain and the Netherlands who bailed out depositors of one of the main Icelandic banks in these countries. Moreover, it claims that Iceland will be cut off from international financial markets if it does not honour its agreement with the IMF and solve the dispute over Icesave.
However, the people demanded a referendum by signing a petition in their masses and our President granted the people this right after the majority in the Icelandic Parliament had said yes to Icesave I (2009) and Icesave II (2010). The claims of British and Dutch governments on Iceland are huge in relation to the size of its population. The claim is contested and based on a very doubtful legal basis. Moreover, the first agreement made on Icesave involved a 5.5 per cent interest rate which the Icelandic taxpayers were outraged by.
Some (see here for example) called the March 2010 Icesave referendum a ‘theatre of the absurd’. Do you agree with this view?
This is the argument of those who want to strike a deal on the Icesave dispute as they are convinced that we have a moral obligation to bail out British and Dutch taxpayers. I totally disagree with this statement, which downgrades the democratic process that must take place before private debt is turned into public debt. We should keep in mind that the British and Dutch claims are most likely unlawful and it would be immoral to require future generations and unborn Icelanders to pay the bill.
Do you think it makes sense for Ireland to look to Iceland as an example of how to deal with a cataclysmic banking crisis?
The central question concerning the rebuilding of the Irish and the Icelandic banking sectors is how to minimise the cost to the taxpayers. In both countries, bondholders and rich depositors have succeeded with the support of the IMF, EU and ECB to pass part of their losses on to the taxpayers. Blanket deposit guarantees have been issued in both countries and the Irish and the Icelandic governments have injected capital into banks without sufficient write-offs. In Iceland, the banks went into receivership and bad debt has been turned into equity that undermines the stability of the banking sector.
As Iceland has its own currency and restrictions on the outflow of money, the capital injected by the government into the rebuilt banking sector does not flow directly out of the economy as is the case in Ireland.
Why do you think reaction to the bank bailouts and EU-IMF package has been so muted in Ireland? Were the far more vociferous protests in Iceland a result of a different culture or simply better political organisation? Do you think the Irish media has had a part to play in muting protest here?
The start of the financial crisis was much more shocking for ordinary people in Iceland than in Ireland. 80 per cent of the banking sector crashed in 10 days and the value of the Icelandic currency fell by 50 per cent. Transactions from and to Iceland came to a halt and Icelanders were unable to obtain foreign currency and use their credit cards abroad. The impact of the Irish financial crisis on ordinary people was postponed by loans from the ECB to temporarily solve the liquidity crisis of the banks and monetary transactions could not be stopped as Ireland is a member of the euro zone.
I find the Irish media surprisingly one-sided or uncritical when it discusses the bailout of the banking sector. It seems that the Irish media regards itself as the messengers of ruling parties and the establishment. I have also heard that the owners of the media participated in and benefited greatly from the Celtic Tiger. Hence, a critical analysis of the bank bailout may bring out how media contributed to the crises by not asking critical questions during the Celtic Tiger.
Iceland and Ireland are similar in terms of lacking a tradition of popular protest. Numerous spontaneous citizens’ meetings played a central role in informing the general public in Iceland about alternatives in the crisis. They were broadcast on radio, TV and on the internet. These meetings were unprecedented in Iceland’s history and turned out to be an essential source for empowering the general public and learning the processes of direct democracy. Irish people should organise meetings like these.
Huginn Freyr Þorsteinsson has said: ‘Iceland has followed a different path in austerity measures than many other countries have done in the past…the tax burden of the lowest income wage earners has decreased after the crisis.’ Has this policy been a successful one, and do you have any views on the harsh austerity measures currently being imposed on the Irish people?
Huginn is only partially right. The purchasing power of wages and benefits has fallen by about 20 per cent and the lower tax burden of low-income groups does not go far in counteracting this trend. In line with the economic program of the IMF, the budget deficit has been cut down from 13.5 per cent of GDP to about 3 per cent at the end of this year. The economic program involving the severe welfare cuts and tax rises was decided on in November 2008. The Icelandic government has stuck to the program, although economic growth has been much slower than the IMF anticipated last year and this year. Hence, the Icelandic economy has entered a vicious circle of deficit cuts that suppress consumption and investment and thereby tax revenues, which in turn increases the need for further cuts or tax increases. By following the IMF´s economic program, the Icelandic and the Irish governments are in fact writing the last chapter of the neoliberal revolution that started in the 1980s with privatisation and deregulation and will end when the welfare state has been devasted to minimise the losses of capital owners.
I have strongly opposed the IMF’s economic program because it deepens the crisis, and I have argued for slower deficit cuts to ensure sufficient demand and employment levels to stimulate growth in the private sector. I and another MP of the Left-Green Party have left its parliamentary group as we oppose the economic program of the IMF.
Iceland seems to have learned the lesson that markets are not self-regulatory, and has turned away from neoliberalism in the wake of its crisis. Why is it, do you think, that there is no political will in Ireland to do this? Where did the political will for this turn come from in Iceland?
Following the bank crash, the critique of neoliberalism grew among ordinary people. However, the ruling political parties and the elite of the labour movement were left untouched by this critigue. This created a gap between the labour movement and the ordinary people that keeps widening. Ordinary people demanded a ‘new Iceland’ that privileged fairness and equality during the elections in 2009 but neoliberals are still powerful among the MPs and ministers of the Labour Party and they have been able to block such policies. We need yet another parliamentary election to undermine the powerbase of neoliberals in the political parties. The critique of neoliberalism in Iceland is first and foremost the result of a spontaneous movement among ordinary people who feel powerless. Soon after the crash, meetings and discussions were organised to discuss the situation and present alternative solutions.
I believe that the lack of awareness and critique of neoliberalism in Ireland is due to an absence of spontaneous political activities among ordinary people. As the crisis in Ireland deepens, more people will be directly confronted with poverty, foreclosures, bankruptcies and emigration among close family members and this will create the conditions for spontaneous protest activities and an ideological shift that will undermine the political establishment and support for the policies of the IMF and ECB.