Iceland Myths

Iceland is often held up as the poster child for an alternative approach to the global crisis, but how accurate are the stories about the Nordic nation? My London Review of Books blog took a look.

In April, a video entitled ‘Iceland forgives mortgage debt of its population’ went viral. The 30-second clip, a Spanish-language news broadcast by the Latin American TV network teleSUR with English subtitles, reported that the mortgage relief was ‘a response to citizens’ demands’. Within 24 hours of being uploaded, the report had been watched tens of thousands of times (videos on teleSUR’s English-language YouTube channel often struggle for double digit viewing figures). Activists on Twitter and Facebook hailed Iceland as an example to the world, reposting as they went.

The teleSUR video was not the first story characterising Iceland as David standing up to the Goliath of international finance to go global since the 2008 crash. Last year, an article claiming that ‘this little-known member of the European Union’ had defied the ‘FMI’ and recovered ‘their sovereign rights’ appeared on the popular liberal US blog Daily Kos. The piece was ‘liked’ more than 1200 times on Facebook and reposted on countless blogs.

Like the teleSUR video, the Daily Kos article tells an uplifting story of the population of a small country asserting their collective rights and refusing to kowtow to the demands of bankers and profiteers. If only the stories were true.

Take the claim that Iceland has forgiven mortgage debt en masse. The Social Democratic-Left-Green coalition in the Althingi did indeed introduce a relief package for indebted homeowners, in response to the wave of negative equity and repossessions after Iceland’s housing bubble burst. Under the scheme, mortgage debt cannot exceed 110 per cent of the value of a property (in Icelandic kroner). Any excess is written off. It is a reasonable, well-intentioned policy. But it is not a Biblical debt jubilee. Many Icelanders are still struggling under huge monthly repayments they cannot afford.

Misinformation about Iceland has proved remarkably resistant to correction. Between 2008 and the end of 2010, as the economic crisis unfolded, Alda Sigmundsdóttir regularly responded to inaccurate reports on the Iceland Weather Report. ‘It was like shouting in the desert,’ she says. ‘I was so frustrated, it was just far too much work, it was almost like a full-time job.’

Sigmundsdóttir, a former stringer for Associated Press in Reykjavik, no longer blogs at the Iceland Weather Report, but she still receives emails from all over the world asking about the way Iceland ‘crowd-sourced’ its constitution or let its banks fail (a story that is, at best, only partially true). A man in Greece recently wanted to know if shops in Reykjavik still conducted business in Kroner: an article in the Greek press had claimed that the Icelandic currency was no longer accepted by retailers.

Maybe it’s a language problem: not enough foreign journalists speak Icelandic. Haukur Magnússon, the editor-in-chief of the Reykjavik Grapevine, one of Iceland’s few English-language publications, says ‘that’s a lazy excuse.’ Journalists – whether citizen or professional – should check their facts. ‘People think of Iceland as a Shangri-la, which it isn’t.’

In February, the televangelist Pat Robertson hailed Iceland’s decision to jail bankers and politicians for their role in the finanicial crisis: ‘Iceland is leading the way and their GDP is growing, and all of a sudden, they were in a terrible mess, terrible mess, and look what is happening!’

Prosecutions are ongoing, with mixed results so far. In April, the former prime minister Geir Haarde was found guilty of one out of the four charges against him: not holding enough cabinet meetings. He received no penalty for the offence. There have been more successful prosecutions, though: on 8 June, two former executives at Byr Savings Bank, Jon Thorsteinn Jonsson and Ragnar Zophonias Gudjonsson, werefound guilty of fraud and sentenced to four and half years in prison by Iceland’s Supreme Court.

On 30 June, Iceland goes to the polls to elect a president. The incumbent, Ólafur Ragnar Grímsson, once close to the Viking financiers, has spent much of his last term rebranding himself as the man who faced down the might of global capital.

The Reykjavik Grapevine, meanwhile, after it ran a piece pointing out the errors in the Daily Kos story, was, Magnússon says, ‘accused of being a corporate lackey for trying to debunk these stories.’

Rebuilding Iceland

Iceland after the kreppa. My long-form piece from Sunday Business Post, May 22, 2011.

‘Sometimes it doesn’t feel like there’s been a crash here at all.”

Heather Millard, an English documentary filmmaker living in Reykjavik, is chatting tome over coffee in a trendy bar in the Icelandic capital’s achingly hip 101neighbourhood. ‘‘Yes, incomes are lower and there is less job security, but it still doesn’t feel like something massive has happened.”

It’s a wet Tuesday night, but the rain isn’t the only aspect of Reykjavik that seems untouched since my last visit in August 2008, just weeks before the crisis – which Icelanders call the kreppa – hit.

Now, as then, the lively bars on Laugavegur, the city’s pedestrianised main drag, do a roaring trade.

All the main shops are open for business – empty units are conspicuous by their absence – and a hundred metres or so from where I’m sitting, construction workers are busy putting the finishing touches to the shimmering multi-million euro Reykjavik Concert Hall development.

‘‘It looks like everything is normal,” says Millard, whose film Future Of Hope focuses on the possibilities for Iceland in the aftermath of the economic crash, and features a soundtrack by Irish singer-songwriter Damien Rice. ‘‘But beneath the surface, there is a lot of anger and a lot of problems that still haven’t been dealt with properly.”

As I quickly learn, to understand Iceland today, and what happened in October 2008 when the country’s banking system collapsed virtually overnight, you have to know where to look. Borgartún is as good a place to start as any.

Look up Borgartún on Wikipedia and you will be told that this wide avenue, less than ten minutes’ walk from the throbbing heart of 101, is the city’s financial district. You will also still read that ‘‘although relatively small, Iceland has become a major European financial centre, hosting at least four large investment banks and numerous smaller banks’’.

Iceland is no longer a financial centre in any real sense of the word. Instead, Borgartu ¤ n today stands as a physical testament to the mania that engulfed this small island – 103,000 square kilometres in total, slightly bigger than Ireland or, as Icelanders are fond of saying, about the same size as Kentucky – in the decade up to 2008.

Here, among the ugly mish-mash of glass, steel and concrete that calls to mind the nondescript business districts of a minor north American city, lies the headquarters of every major Icelandic financial institution. Many are empty.

There are half-built apartment blocks, tens of thousands of feet of unused office space.

Towering glass-fronted buildings block the sunlight, and even on a bright spring morning the street feels cold and desolate.

The best-selling Icelandic writer Andri Snaer Magnason calls Borgartún the ‘‘boulevard of broken ideologies’’, and it’s not hard to see why.

At one end is the former headquarters of Kaupthing, responsible for the biggest default in corporate history after Lehman Brothers, WorldCom and Enron, according to the credit agency Moody’s.

Halfway down the street sits H²f-i, or the White House. It was in this whitewashed wooden building, on an open piece of land facing out onto the roaring Atlantic, that Ronald Reagan and Mikhail Gorbachev met in at a 1986 summit often cited as the moment that the Cold War definitively thawed.

Now, states across Europe – including, of course, Ireland – are looking at Iceland as a model for a different kind of revolution: one in which bondholders, and not citizens, shoulder the burden of debt repudiation.

In October 2008,when the gaping financial hole in the balance sheets of Iceland’s privatised banks became apparent, the three major banks carried debts equivalent to almost ten times the country’s GDP.

As the extent of the banks’ exposure became apparent, the government responded by liquidating the banks and moving their saleable assets and loans into three new institutions.

Since then, the Icelandic public have twice rejected referendums on paying back the British and Dutch governments some €4 billion for losses incurred in reimbursing customers of Icesave, the online savings account that collapsed two and a half years ago.

But has Iceland really ‘‘burned the bondholders’’, As many in Ireland have called on us to do? Huginn Thorsteinsson, an economist seconded from the University of Akureyri to the ministry of finance in Reykjavik, rejects the suggestion.

‘‘Some people would say that we made the creditors bleed, but the government would never say that,” he says. ‘‘We would say that there was just no other option.

By necessity, we had to create the new banks.

That’s why these creditors are not worse off – repaying their liabilities in the old banks was just impossible.”

Thorsteinsson, a bright thirtysomething with a degree in philosophy, is in the process of explaining the complicated financial machinations that took place in Iceland’s banking sector in October 2008 – when Kaupthing, Landsbanki and Glitnir were transformed into the imaginatively titled New Kaupthing, New Landsbanki and New Glitnir – when an unexpected guest arrives at his door.

It is Steingrímur Sigfússon, the Icelandic minister of finance. ‘‘I heard you were here and wanted to come and say hello,” he tells me.

The minister of finance heard that a reporter From an Irish Sunday newspaper was in his ministry, and took unscheduled time out to meet him? It might sound like poetic licence but, as even the casual visitor soon realises, this is how life works in a country of just 320,000 people, hundreds of miles from continental Europe.

Nobody schedules interviews until the day before, if at all; the parliament or a ministry are as easy to visit as any cafe or bookshop; every major building is less than five minutes walk from another; and everyone with any power knows everybody else with any power.

The finance ministry occupies just one floor of an uninspiring stone building off Laugevagur in the centre of Reykjavik.

When Iceland’s banks were privatised in the 1990s, regulation was reduced to a bare Minimum and, as the private banking sector mushroomed, the ministry was effectively relegated to the sidelines.

Now, with capital controls in place, the Icelandic krona closed off from international currency trading and an IMF-approved fiscal plan to administer, this rather bijou office is a seat of real power in Iceland.

Sigfússon, a balding and athletic man in hismid-50s,makes a good fist of talking up the Icelandic economy – growth for 2011 is projected at a healthy 2.5 per cent, compared to the 3.5 per cent contraction recorded last year – but he seems to over-sell the country’s prospects. ‘‘We are through the worst,” he says more than once, without looking like he fully believes it himself.

In truth, the economic outlook for Iceland is decidedly mixed.

Unemployment is hovering around 8 per cent, which is much lower than many feared, but which is nonetheless a serious problem in a country without any real history of joblessness.

Until the 1980s, fisheries provided jobs for anyone that needed them; thereafter the boom in finance, construction and services took up the slack caused by the privatisation of the fishing industry. But not any more.

Most ordinary Icelanders are still paying off massive debts on houses, cars, university degrees and much else.

That many of these loans were taken out in foreign currency is one of the more unbelievable aspects of Iceland’s incredible story.

Due to its small size, the Icelandic krona has historically been particularly volatile and sensitive to fluctuations. It was a closed currency for most of the 1980s, and continued to oscillate wildly during the 1990s.

When the currency stabilised at a very strong position from 2003 on, however, Icelandic banks began encouraging customers to borrow in cheap foreign currency – even doling out 75-year mortgages in dollars and yen as the Icelandic housing market boomed.

When the banking system collapsed, so did the krona.

The result, in some cases, was the cost of loans doubling or trebling. The government responded by passing a law that debts, regardless of the currency they were taken out in, could not exceed 110 per cent of their Icelandic value.

This measure was well received by the Icelandic public but, unfortunately, inflation began to spiral at the same time, peaking at almost 20 per cent in 2009. As Icelandic loans are tied to inflation, a product of the currency fluctuations of the 1980s, Icelandic debtors found that even if they had taken out loans in krona, the cost of their debt soared.

One Reykjavik architect tells me that he bought his house for 25 million krona in 2007.Now, despite paying off nine million krona in the intervening years, the mortgage stands at 34million krona, due to the rise in inflation since the kreppa.

Inside the ministry of finance, Thorsteinsson is sympathetic to such problems, but believes that it is time for a shift in Iceland’s collective mindset. ‘‘People are angry, they are frustrated, they see their loans getting bigger.

They want the Finance Vikings [the sobriquet given to the bankers who sprung to prominence during the boom] behind bars. It’s all understandable, but we need to get past it now. It’s cold and difficult to say, but we can’t let this five-year period in Icelandic history haunt us for ever.”

While the cause of the collapse has been well-documented – a report by a special investigations committee to the Althingi, Iceland’s parliament, found government and regulators guilty of ‘‘extreme negligence’’ in the run-up to the crisis – discerning the kreppa’s long-term effects is much trickier.

Anger and denial, evinced in last month’s rejection of the second Icesave referendum, remain the leitmotif of post-crash Iceland. But effective political change has proved more elusive.

‘‘There’s a very strong feeling in Iceland that politics is still tied in with special interests, that it’s either partly or totally corrupt,” says Ottar Proppe, a popular Icelandic singer who was elected to Reykjavik City Council last year.

Proppe, who looks like a 1970s glam rocker, complete with unkempt long hair and dark sun glasses, is a leading member of the Best Party.

Formed by Icelandic comedian Jo¤ n Gnarr after the crash, the Best Party unexpectedly won the 2010 Reykjavik council election on a manifesto that included everything from improving equality and transparency, to free swimming pools and bringing a panda to the local zoo.

‘‘We have a long history in Iceland of political parties coming together in the national interest, usually after natural disasters, like in the 1960s when the herring stocks collapsed,” he says when we meet in City Hall.

‘‘In those times, all the political parties had an easy time coming together to fight for the same thing. But now, because the disaster is unnatural, it’s not happening the same way.

There is a lot of shifting around, a lot of blame, and not a lot of consensus. All political parties and institutions here have a very low approval rating still.

We are trying to bring a more common sense approach to it, to try and get out of this culture of confrontation.” Despite some creative policies and a refreshing approach, the new Best Party leadership at City Hall has had a difficult political baptism.

Having taken almost 35 per cent of the vote last year, support for the party in Reykjavik has recently slipped to less than 20 per cent.

Nationally, the coalition government between finance minister Sigfússon’s Left-Greens and the Social Democratic Alliance led by Jóhanna Sigurardóttir has also seen its popularity dwindle

since winning the 2009 general election. The main benefactor of these shifting political tides has been the right wing Independence Party – the party responsible for Iceland’s financial crisis in the first place.

Defeated in 2009 for the first time since its formation in 1931, the Independence party now regularly polls 40 per cent, and looks set to return to power sooner rather than later.

In the wake of the crash, there was a purge of the Independence Party’s upper echelons. Many famous faces retired, while one, the former leader Geir Haarde, prime minister on that fateful October day, is to stand trial for misconduct.

Yet much of the political and banking class that oversaw Iceland’s disastrous experiment in mass privatisation – first in fishing, then in banking and energy – remain in prominent positions.

Haarde’s predecessor David Oddsson, Who was the head of the Central Bank when the crash hit, is now editor of Morgunbla -i-, Iceland’s most influential daily newspaper, and many big names from Iceland’s failed banking experiment are still major players in the fishing industry.

Over at the dinky Althingi building, home to Iceland’s 63-member parliament and literally across the street from Reykjavik City Hall, Thrainn Bertelsson, a popular writer and filmmaker turned Left-Green politician, expresses frustration at the continued power of conservative voices in Iceland.

‘‘Every day here [in the Parliament], I watch the members of parliament from the party responsible for the economic collapse shout till they are blue in the face that wages aren’t doubling, that the sun isn’t shining.

There’s not a word of regret. Nobody has ever said: ‘We got the nation into a terrible mess.

We’re sorry. We promise not to do this again’. What really scares me is that 35per cent of the population still buys into it,” he says.

The Irish influence on Iceland is considerable – from Kolumkilli, the Irish sorcerer spirit in Iceland’s most famous novel, Haldor Laxness’s sardonic masterpiece Independent People, to place names such as Patreksfjrur in the remote north-west.

But the experiences of the last two and a half years have given this Atlantic relationship a new emphasis: most Icelanders are extremely inquisitive about their south-easterly neighbour, and in 2009 a new initiative, the Ireland-Iceland Project, was created to develop links between the two islands.

Bertelsson, an alumnus of UCD in the 1960s, sees reasons to be hopeful in both countries. ‘‘In both Iceland and Ireland we have a wonderful, frustrating system of government called democracy.

That means that change takes a bit longer, but we are able to change,” he says.

One place where change is definitely on the agenda is Toppst²in, a former coal fired power station on the suburban edge of Reykjavik. Scheduled for demolition before the crash, the intervention of Andri Snar Magnason, arguably Iceland’s leading public intellectual, and others has seen the power station transformed into a space for creative industries, designers and innovators.

The smell of sulphur, ubiquitous in Reykjavik on account of the geothermal water, hangs heavy in the air as Magnason, a passionate but humorous guide, takes me on a whistle-stop tour of the power station.

Clothed mannequins left over from a fashion show the previous week lie dotted among the rusting machinery, while in one of the ground floor units an electric car designer is adapting European vehicles for the Chinese market.

‘‘The climate for entrepreneurship is very positive right now.

There’s a really positive attitude towards trying new things,” Magnason says. ‘‘The negative side is that we are still seeing this ideological struggle, with people trying to reinstate the old system with the old rules which caused the crisis in the first place.”

In 2006Magnason published Dreamland: A Self-Help Manual for a Frightened Nation. The book is a stinging – and incredibly prescient – critique of the Icelandic government’s policy of damming rivers for the gain of aluminium companies.

Two years later, the crash that Magnason foretold hit. ‘‘I was moving into my new house at exactly that time, and we were the only ones buying anything,” he says, recalling the early days of the crash.

‘‘It was really amazing going into all these stores in town – electric shops, lighting shops. It was like going to a funeral. We had a child who was about six months old and normally people would smile at the baby, but they all looked glum.

We were going into all these luxury shops that don’t exist any more. I still remember this uncollected $10,000 lamp in one of those shops. It was so decadent, but beautiful in away, all this junk.”

In the wake of the kreppa, there was also a wave of interest in renewing Icelandic politics, with new forms of democracy based on mass participation and consensus building gaining popularity. One of those at the forefront of this movement was Gu-jón Gu-jónsson, a telecom industry entrepreneur and professor of entrepreneurship at Reykjavik University. Gu-jónsson created the House of Ideas, a loosely-defined office-space/think-tank, out of which came the proposal for a National Assembly for all Iceland.

Early last year,1,500 Icelanders, the majority selected randomly from the National Registry, met in a conference hall on the outskirts of Reykjavik to brainstorm ways to rebuild the country’s economy and its values. Gujónsson explains the National Assembly’s genesis: ‘‘There was a sense of a lack of leadership in the country.

That lack of leadership empowered the grassroots. We felt that precisely because there was a lack of leadership, there was a chance to do something.”

Since its first meeting, however, the National Assembly has run into a series of problems.

Elections to a Constitutional Assembly charged with redrawing the Icelandic constitution were recently ruled invalid by the High Court, while the movement’s momentum has also been blunted by the glacial speed of change in Icelandic public life.

Not everyone even agrees that social and political transformation is possible in Iceland. ‘‘I don’t see serious change happening here. I see everyone admitting they are failures, but I don’t think we fell deep enough to change the system totally.

The people in control have been able to react,” says Gudmundur Oddur Magnusson, a professor at Iceland’s Academy of the Arts, and one of the country’s leading visual artists.

During the boom, bankers and financiers Showered money on Iceland’s burgeoning arts scene.

The most infamous example of this largesse occurred at the 2008 Frieze Art Fair in London when, on almost the very same day that Iceland’s economy went into meltdown, a life-size reconstruction of a popular Reykjavik bar, Sirkus, knocked down to make way for luxury apartments during the boom, was unveiled.

Budget airline Iceland Express sponsored the project, which has since became a symbol of national folly.

Magnusson rejects the popular sentiment That most Icelanders are innocent victims of the excesses of global capitalism. ‘‘Although we blame some bad people in the banks for what happened, we should feel guilty too. Everyone has a tad of guilt.

We allowed this to happen, we were all part of it,” he says. Reclining on an armchair among examples of his work in a down-at-heel lock-up not far from Reykjavik’s putative financial district, Magnusson exudes the air of a man more comfortable in Iceland’s current climate.

He cites the country’s plentiful fish stocks, easy access to cheap, sustainable energy, retention of a Nordic social model and a national history of over-coming adversity as factors working in the country’s favour. ‘‘We have an in-built predisposition to self-help – it’s the old family system that is still in place in Iceland.

We are still able to produce food and warmth, and it’s always been cheap to live here,” he says. ‘‘The lesson we’ve learned from the crash is that we have to face reality.

We have to be much more realistic about the way things are. Although our income has been cut by 30 per cent, we can easily live on that.”

Magnusson may well be right, but Iceland’s old order still retains plenty of control. The night before I leave Reykjavik, I eat dinner in my hotel. Directly across from my table sit a group of well-dressed Icelandic and continental European businessmen.

Towards the end of the meal, an Icelander is asked what happened during the boom. ‘‘Well,” he says, holding a glass of dessert wine in front of him, ‘‘we tried to create Hong Kong in Reykjavik.”

He pauses for a moment and looks around the table. ‘‘I think we still can.”

His European guests, who look genuinely shocked, laugh nervously. His compatriots nod approvingly.

Despite the turmoil of the last two and a half year, it seems that the ending of Iceland’s most recent – and inglorious – saga hasn’t been written just yet.

Eyjafjallajökull One Year On

Like Z-list celebrities, volcanoes are often more infamous than famous. Vesuvius, Krakatoa, Etna: all owe their household name status to the destructive force of their periodic eruptions. Last year, another, more difficult to pronounce name entered the pantheon of volcanic infamy – Eyjafjallajökull.

The Eyjafjallajökull glacier, in south-west Iceland, had been dormant for some 200 years when on, April 13 2010 it erupted for the second time in less than a month. The first explosion, in late March, measured just a 1 on the Volcanic Explosivity Index (VEI) but was so powerful that it ripped a 1km-long fissure in the ice-sheet, spewing basalt lava, which streamed in rivers creating awesome lava falls.

But is it the second phase of Eyjafjallajökull’s eruption that everyone will remember. Registering 4 on the VEI, it was one of the biggest ever recorded in Iceland – and one of the most disruptive. A plume of ash, estimated at some 300 million cubic metres, was sent around 11km into the earth’s atmosphere, bringing chaos to our skies as aviation authorities struggled to access the risk for air travel.

The closure of much of Europe’s airspace between April 15 and 20 was the largest disruption of air travel since the Second World War. ‘I hate Iceland,’ one grounded Scottish tourist memorably roared at a television crew vox-popping disgruntled would-be passengers in one British airport.

For Icelanders, however, volcanic activity is simply part of life in the land of fire and ice. While scientists from around the world continue to monitor the island’s myriad volcanic sites, famers living in the shadow of the spectacular Eyjafjallajökull glacier have, for centuries, used a rather more traditional method to detect ashfall. Each night a white plate is placed next to the main door to the farmhouse: if, next morning, the plate is black with dust and ash then has been an eruption somewhere in the vicinity.

‘This is a volcanic island, there is activity, it’s just a fact of life,’ Heather Millard, a documentary film-maker, originally from Cambridge now living Iceland, explained to me in a café in downtown Reykjavik recently.

Millard is currently working on ‘Ash: Aftermath Under the Volcano’, a film following the lives of three Icelandic families living in the ferocious shadow of Eyjafjallajökull. ‘People by the volcano are still really worried,’ she says. ‘One of the famers’ wives has recurring nightmares of lava coming towards here.’

Arguably the most surprising aspect of last year’s eruption was not the force and scale of the explosion and its aftermath, but that it happened at Eyjafjallajökull and not Mount Hekla.

Located in the south of Iceland, Hekla is overdue a major eruption. Nicknamed the ‘Gateway to Hell’ in the Middle Ages, the effects of an eruption at Hekla could be far more devastating than anything witness last year: many historians trace the roots of the 1848 revolutions that swept across Europe to a series of massive explosions here in 1845 and 1846 that led to crops across the continent being ruined.

Given increasingly levels of global uncertainty about resources and climate change, another massive eruption could have equally sweeping effects.

Iceland's no vote on Icesave was a public display of anger

Which way now? The neoliberals who created the bubble are resurgent, but many Icelanders want to move away from finance. My analysis from the Guardian’s Comment is Free.

Even before the final result was in, the tenor of national and international reaction to the Icelandic public’s latest rejection of a deal for Icesave was crystal clear. “We must do all we can to prevent political and economic chaos as a result of this outcome,” prime minister Johanna Sigurdardottir said early yesterday morning. Around the same time, at the Treasury in London, Danny Alexander warned that the British government would see Iceland in the international court.

In all likelihood, the UK government will eventually claw back the £2.35bn lost when it stepped in to guarantee British depositors’ cash in Icesave accounts, but the “see you in court” rhetoric from Westminster won’t go down well in Reykjavik. Many Icelanders still hold the then prime minister Gordon Brown responsible for worsening the crisis (or kreppa as it’s known in Iceland) when he decided to use anti-terrorism laws to freeze the assets of Icelandic banks in the autumn of 2008.

Despite arguments to the contrary, the size of the Icesave debt owed by the Icelandic government is relatively small – even for a country of just 320,000 people. A sale of assets belonging to Landsbanki, the bank that created Icesave, will provide much of the cash to reimburse the British and Dutch governments. Indeed, earlier this year an independent report estimated that the Icelandic people might be on the hook for as little as £125m (or as much as £1.5bn, still a minor sum compared with other government debts).

The main motivating factor behind Saturday’s no vote was anger, not economics. Icesave has become a psychological symbol of the collapse for many Icelanders, a visceral reminder of how much they lost but also of the international community’s role in the kreppa. Vast swaths of the Icelandic public remain wholly opposed, not unreasonably, to the notion that their government should be responsible for the debts of private banks in global markets.

Last week, a cartoon in the newspaper Morgunblaðið depicted Iceland as a weak child in a playground been beaten up by three bigger boys. The names on their hoodies? Standard, Poor and Moody – in reference to the companies who have been rating European countries’ creditworthiness.

The strongest political opponents of the Icesave deal were the very neoliberal voices responsible for Iceland’s economic collapse in the first place. The editor of Morgunblaðið, which spearheaded the campaign against the vote, is none other than former prime minister and ex-head of the central bank, David Oddsson. As head of the rightwing Independence party, Oddsson, a Milton Friedman acolyte, privatised the nation’s banks – with disastrous consequences.

When the crash came, the total debt of Iceland’s three privatised banks was almost 10 times the GDP. Most ordinary Icelanders are still paying off massive debts on houses, cars, university degrees and much else.

Yet, less than two and a half years later, the centre-right Independence party is enjoying a resurgence. Defeated in the 2009 general election for the first time in its history, the party is now polling around 40%, while Jóhanna Sigurðardóttir’s coalition of Social Democrats and Left-Green representatives’ grip on power looks increasingly precarious.

The neoliberal dogma that turned Iceland into the world’s biggest hedge fund hasn’t gone away, but at the same time many Icelanders would like to see their country move away from finance and aluminium smelting and become the world’s first fully sustainable society. It certainly is possible: Iceland has fishing rights to 1% of the world’s stock, produces more energy per capita than just about any nation on earth and has a long history of self-preservation.

As the first anniversary of the eruption at Eyjafjallajökull draws near, the dust is finally beginning to settle on Icesave. Now the battle for Iceland’s social and political future really begins.

Public anger is understandable but there will be a price to pay

In MANY respects, a lengthy legal battle over the Icelandic public’s latest rejection of a deal for Icesave is the least of the country’s worries.

Finance minister Steingrímur Sigfússon was at pains to stress yesterday that the “no” vote will not affect Iceland’s application to join the EU.

But the result has placed a huge diplomatic strain on relations with European neighbours, just as
country is trying to move out of self-imposed international isolation.

There will be economic ramifications, too. Ahead of the vote, credit rating agency Moody’s warned a rejection of the deal would see the status of Icelandic debt further downgraded. Although Iceland is expected to return to growth in 2011, a downgrade could have a serious impact on the country’s short-to-medium-term economic prospects.

The latest Icesave deal was a significant improvement on that rejected by 93 per cent of voters last March. The interest rate was reduced from 5.5 per cent to 3.3 per cent and the country would have had until 2046, not 2024, to complete repayments. However, vast swathes of the Icelandic public remain wholly opposed, not unreasonably, to the principle that their governments should be responsible for the debts of the country’s private banks, in this case Landsbanki and its internet arm Icesave.

Two and a half years on, public anger at the role of the political classes and the international community remains high. The government in Reykjavik, a coalition between Social Democrats and the Left-Green movement, is unpopular and might not survive this latest reversal. The fact that the British government is Icesave’s major creditor did not help the “yes” cause, either. The decision by Gordon Brown to use anti-terrorism laws to freeze the assets of Icelandic banks after the 2008 crash is still a source of bitterness.

This latest “no” is not necessarily the end of the world for Iceland. It has fishing rights to 1 per cent of the world’s stock, produces more energy per capita than just about any nation on earth and has a long history of self-preservation. But it will need to harness all this – and reject the neo-liberal dogma of a resurgent Independence Party – to get back on its feet.

This article appeared in the Scotsman 10 April

Iceland still divided over deal to repay UK for online bank losses

By Peter Geoghegan
in Reykjavik

Public opinion in Iceland is split over a deal to repay the British government £2.35 billion for losses incurred following the failure of online bank Icesave.
Icelanders will vote on the issue in a referendum on Saturday, with opinion polls suggesting the result is too close to call.

A recent survey for Icelandic business weekly Vidskiptabladid put support for the new Icesave legislation at 52 per cent, with those opposed to the deal on 48 per cent.

A significant number of Icelanders are still undecided. In March 2010, an earlier agreement on Icesave was rejected by over 90 per cent of voters.

Icesave, a high-interest internet bank with the slogan “clear difference”, was created by one of Iceland’s largest banks, Landsbanki, in 2006. It operated in both the UK and the Netherlands, with over 400,000 customers in the two countries.

When the global downturn struck in October 2008, Lansbanki, along with two other banks, Kaupthing and Glitnir, were declared bankrupt. The total debts of the three banks, which were privatised in the late 1990s, was almost ten times Iceland’s GDP.

As Landsbanki collapsed the UK government stepped in to guarantee British depositors’ money. The Netherlands did likewise. Under the terms of the subsequent International Monetary Fund bailout, Iceland’s government agreed to accept a degree of taxpayer liability for the losses incurred in reimbursing Icesave customers.

Saturday’s vote comes after a deal was reached between the Icelandic government and their counterparts in London and the Hague was passed by Iceland’s parliament, the Altingi, but president Ólafur Ragnar Grímsson refused to ratify the bill, which would see Iceland repay over £3.6bn.

Speaking to The Scotsman in Reykjavik, Iceland’s finance minister Steingrímur J Sigfússon was cautiously optimistic the referendum will be passed. “It’s a lot to demand of the public to say “yes” to such an such an obligation but it’s something we have to do,” Mr Sigfússon said.

Not all Icelanders agree. Gisli Palmason, who runs an outdoor centre in Iceland’s remote Westfjords region, believes that the Icelandic government should not foot the bill for the failure of the country’s private banks.

The new deal is a significant improvement on the one rejected last year. Where Iceland was formerly asked to pay back its debt at a 5.5 per cent interest rate between 2016 and 2024, it now has until 2046 at a rate of 3.3 per cent.

A “no” vote would greatly strain relations between Iceland and Europe. It could also hinder the projected return to economic growth in 2011 as credit rating agencies downgrade the status of Icelandic debt.

Even if the referendum passes, the amount that the Icelandic government will pay is uncertain. The proceeds of a sale of Landsbanki’s assets, currently under way, will go towards repaying the British and Dutch governments.

However, it is estimated that the government will still be anywhere from £125 million to £1.5bn short.

This article first appeared in the Scotsman 7 April