As Europe teeters once more, staring
financial collapse and slump in the face, we provide an analysis of what
happened in Iceland, the first country to go under as a result of the
global crisis of capitalism.
As Europe teeters once more, staring
financial collapse and slump in the face, we provide an analysis of what
happened in Iceland, the first country to go under as a result of the
global crisis of capitalism.
Protests in Reykjavik in January 2009. Photo: finnur malmquistIn
2008, Iceland suffered the biggest financial collapse any nation has
ever had, if we consider the size of its economy. Even more striking is
the fact that Iceland is no emerging country, mesmerized by the sirens
of Western finance, but a modern, affluent nation with a Scandinavian
welfare state.
Before the crisis erupted, Iceland, a remote Atlantic island, with
the inhabitants of a medium sized European city, was a country famous
for its natural wonders visited by many people from all over the world
as well as for its music. The collapse of the country’s three major
banks (Kaupthing, Landsbanki and Glitnir) led to financial disaster and
street protests that toppled the government.
The popular anger and the size of the bankruptcy forced the country
to refuse to repay the debts its banks had amassed abroad, earning the
island a legendary status among left-wing activists across the world.
Faced with the rising tide of national debt “do as Iceland did” has
become an appealing alternative. As we shall see in this article, this
could be the case only if one is prepared to draw all the correct
conclusions from the Icelandic events. Otherwise it is a useless detour
from reality.
The years before the collapse
The Icelandic economy in the past was based on fishing and its
natural resources, and, in the last decades, on modern industries like
aluminum and ferro-silicon as well as tourism. Although on a
small-scale, Iceland had the appearance of a “Scandinavian democracy”,
with a high standard of living and social peace. The previous
significant political incidents dated back to 1949, when the island
joined NATO, primarily to allow American planes to use it as a natural
aircraft carrier.
All this changed when David Oddsson came to power[1].
A lawyer who also worked in the theatre briefly like Reagan, whose
policies he deeply admired, first as mayor of Reykjavik then as Prime
Minister. Oddsson decided that the country deserved more than the
welfare state, cod and factories and it was about time to import the
ideas of Milton Friedman and the Iron Lady to the glaciers.
Oddsson became Prime M inister in 1991, leading a coalition
government with the Social Democrats, and soon put in place a broad plan
of gradual economic liberalization. In 1994, he brought the country
into the European Economic Area in order to encourage economic
integration with Europe. To attract foreign capital, he cut taxes on
profits and wealth, started large-scale privatization, and began to
deregulate the labour market.
At the heart of the project of economic liberalization was the
banking and financial sector. The solid and mostly publicly owned banks
were privatized and deregulated. In 2001, the national currency (the
krona) was free floated. Icelandic authorities became enthusiastic
followers of the free-market religion, inviting banks to do what they
wanted. The LTV of mortgages was taken from 60 to 90%, capital
requirements of banks were reduced[2]. Everything had to bow to the superior interests of the markets.
Oddsson, having completed his Thatcherite mission, left the post of
Prime Minister in 2004 and, after serving briefly as Minister of Foreign
Affairs, became head of the Central Bank of Iceland (CBI) to ensure
that his policies would continue.
For ten years laissez-faire policies seemed to have brought
prosperity. From 1995 to 2005 the Icelandic economy grew at a rate of 5%
per year, bringing the wealth per capita to fifth place in the world.
Behind the glittering facade, however, those policies had turned a
peaceful and prosperous community into a casino. The booming decade was
based, as in other countries, on a financial, as well as real estate,
bubble. The political excuse for setting in place the bubble was the
same Clinton used in the US to start the subprime era: let’s give
everybody a house.
In 1999 the Icelandic government modified a public fund using it to
finance the purchase houses, burying the idea, considered too
old-fashioned, of public housing at affordable prices. The fund began to
dole out loans at a rapid pace. The increase was colossal. To remain
competitive, Icelandic banks began to lower the criteria for granting a
mortgage and to lower rates, exactly the same as what was happening in
the US with subprime mortgages. The fund this the banks started to apply
higher and higher LTVs, provoking a huge rise in prices. As many house
loans were linked to inflation, the house price increase meant a
spiralling of debt.
Despite the huge growth of Icelandic big banks, given the economic
size of the country, their domestic expansion was limited. So they
rushed towards European markets like hungry wolves, being able to
benefit, paradoxically, from the fact that they had been until recently
state banks and thus maintained a high rating. With an aggressive
commercial policy, they gained significant market shares, particularly
in the United Kingdom and the Netherlands. Before the collapse, they had
almost 500,000 customers throughout Europe. To give an idea of what
this meant in relative terms one only has to remember that the entire
population of country is just over 300,000.
Although according to the IMF, the banks’ geographical
diversification was positive (as noted during an official visit in
2004), it was not the only blatant folly in the country’s economic
growth mechanism. Investment flocked from abroad, pushing up strongly
the krona, which made it cheaper to import. The growing dependence on
exports increased inflation, forcing the central bank to keep rates
high, thereby making domestic financial assets even more attractive,
thus leading to further capital inflows. The low-priced imports, rising
house prices and booming stock market, gave the illusion of wealth. As
in any bubble, the debt exploded. Net debt with foreign countries was
36% of GDP in 1980; it rose to 246% in 2007. Household debt as a
proportion of income was just 21% in 1980; it rose to 227% by 2007. The
debt of companies rose above 300% of GDP by 2007, more than four times
the proportion in the United States. The trade deficit was also out of
control: 30% of GDP in 2006.
Despite the imbalances, the authorities did not seem worried about
this debt drunkenness. The central bank stated that the structural
changes in the housing market and sustained economic growth were
permanent. Financial speculation held sway. University students switched
from fishing or engineering faculties to finance. Why bother getting
your hands dirty in the fishing industry or producing aluminium when
money was falling from the sky of finance? Whereas in 2001 2,000 new
cars were registered, in 2008 the figure had shot up to 16,000. As in
Putin’s Moscow, Icelandic oligarchs, the bosses of big banks, were seen
in lavishly expensive cars, spending fortunes on parties and gifts. From
2003 to 2006 the stock index rose to the equivalent of the GDP of the
country. In the four years preceding the collapse, the Icelandic stock
exchange had risen by 900%. Anyone could get rich, or so it seemed! Even
if wages were not keeping up with prices, debt seemed to square the
circle.
If the growth of debt has been a global phenomenon in recent decades,
in Iceland not only the pace of growth was folly but also its
composition. In fact, given the high domestic interest rates, borrowing
in foreign currency seemed convenient. When an Icelander bought a car,
the salesman offered the option of taking out the loan in a foreign
currency based system. Between 2002 and 2005, debt in foreign currencies
increased by 550%. Just before the crisis, it was over two-thirds of
the total debt. This was not just about individuals. Banks were heavily
borrowing abroad, where most of their customers now lived. They had an
easy way: their deposits and their bonds carried very high yields and
excellent ratings. Everybody wanted them. International markets could
not help but buy Icelandic bonds. Despite the fact that public finances
were in good shape[3], in 2007 the government issued more than 5 billion euros, almost 40% of the GDP of the country, to meet the demand from abroad.
In this orgy of speculation, cracks began to appear and grow. In
April 2006, the rating agency Fitch downgraded the country, causing a
crisis (the stock market lost 25%), but it was quickly over. The global
financial environment was favourable and the two main Icelandic banks
began to grow even more rapidly, creating online banks to gain market
shares in Europe by offering such competitive conditions that investors
lined up to deposit their money. They did not imagine they would soon
have to queue to try and get it back.
Enter “Kreppa”
International banking is a worldwide phenomenon. Big banks dominate
the financial world intervening in dozens if not hundreds of countries,
getting larger and larger. If financial concentration has created huge
banks vis à vis the French or Swiss economy, one can imagine what it
meant to Iceland. In 2007, the three major Icelandic banks had total
assets amounting to eleven times the GDP of the country and held 50
billion euros of debt, against a GDP of 9 billion.
In practice, the Icelandic economy was being held up like an inverted
pyramid by the continuous inflow of foreign capital and the real estate
bubble. Even if more than half of the assets of the big banks were
abroad, those within its national borders were still four times the GDP.
Any slight gust of wind could destabilize the situation. The hurricane
of the global financial crisis came instead.
By early 2007, The Economist pointed out that the krona was the most
overvalued currency in the world, yet everything seemed fine. At the end
of September 2008, the rating of the country was still very good,
although declining. For example, Standard & Poor’s attributed the
country an A-rating, the same as Italy now. Free-market ideology had
completely poisoned the minds of Icelandic leaders. The CBI wrote in its
report on financial stability of May 2008: “Critics have asserted that
the Icelandic banks have grown too large. This might be true if a major
financial crisis were imminent and the Icelandic Government were forced
to resolve a critical situation affecting banking operations both in
Iceland and abroad” and it continued by explaining why this was
impossible[4].
And this months after the outbreak of the crisis! In August of 2008,
the Banking Supervisory Authority published the results of its stress
test[5]
on the three big banks whose conclusion was that the banks were solid
and could withstand considerable financial shocks. Six weeks after this
statement, those banks no longer existed.
In 2008, world financial markets began to deteriorate. The international bubble was beginning to burst. When on 15th
September Lehman Brothers, one of the largest investment banks in the
world, announced its bankruptcy, it was like Armageddon. The fear that
many other banks could collapse led to the total breakdown of the
interbank lending markets, those where banks lend money to each other.
The Icelandic banks, that were heavily dependent on them for funding,
soon found themselves in dire straits. Within a few days they were
bankrupt.
If the failure of the banks led to fiscal crisis in all countries,
including the strongest, in Iceland it had connotations bordering on the
ridiculous. How could banks be helped by a government that presided
over an economy smaller than a tenth of their assets? The disproportion
was striking. For example, the central bank reserves were not low
compared to the economy in general (13% of GDP) but the currency debts
of the banks exceeded that figure by more than fifty times.
Totally unprepared to face the crisis, the authorities were stricken by panic. On 6th
October, the Prime Minister Haarde made a televised speech in which he
admitted the problems and concluded with the words “God bless Iceland”,
not exactly a call for calm. People started to visit bank branches. The
krona plunged. Foreign workers were prevented from changing their pay in
currencies. The same day, trading on the six banks’ shares was
suspended on the stock exchange; on the 9th, the stock
exchange was closed altogether and remained closed throughout the week.
Obviously, this solved nothing: on its reopening it lost 77% in one day.
Facing a bank run, the government decided to fully guarantee bank
deposits. The thing itself was already an accounting trick, since
deposits exceeded the size of GDP. However, this is was a detail
because, with the interbank markets not working, Icelandic banks could
not survive. There was no other way but to nationalize them. On 7
October, the government nationalized Landsbanki, and soon after,
Glitnir. On the same days, the governor and former PM Oddsson issued
passionate declarations swearing that the state would not pay for the
debts of the banks. Obviously the markets took these warlike statements
as proof of the total confusion that had overwhelmed the leaders of the
country. The simultaneous collapse of the currency, the stock exchange
and the banks worsened even further.
Panic stricken in the face of the crisis, the Icelandic authorities
resorted to desperate moves. Faced with the collapse of the krona, on 7th
October, the CBI decided to peg the krona to the euro at a rate which,
however, was much higher than the real one, not even discussing it with
other central banks. Within hours, the measure collapsed, proving to be
probably what was the shortest peg in history. The central bank was then
forced to switch to direct controls such as restrictions on the
purchase of foreign currencies. At the same time, it increased the
interest rates to curb the flight of investors, strangling the real
economy.
The decision to shift bank losses to the state has been taken by
governments across the world. However, on the island, it did not solve
the problems. Reykjavik had just announced this measure when the British
authorities called to know what the fate of UK citizens’ deposits was
going to be. Having understood that Iceland was neither able nor willing
to pay back British savers in full, in time and maybe at all, the Brown
government decided to freeze Icelandic assets in the country using the
Anti-Terrorism Act of 2001. This was how Iceland was finally rewarded
for allowing, for decades, British ships to its shores.
The decision of the Labour government to equate Iceland to the
Taliban was taken by the markets as a signal that the country was
unreliable, not only financially but politically. Nobody wanted to lend
money to Icelandic companies or banks anymore, and bankruptcy was
inevitable. Across Europe, branches and subsidiaries of Icelandic banks
were closed or absorbed by domestic banks. The absurdity of the choices
of the government in Reykjavik and London was astonishing. Both were
badly bluffing. Where the Icelandic government thought it could force
its old friends to help, the Labour government needed an external enemy,
with which to relieve the popular anger for internal economic
difficulties. The issue was substantial. When the crisis hit, there were
4.5 billion pounds sterling at stake, two thirds of the GDP of Iceland.
Interestingly, among the customers of Icesave (the main Icelandic
internet bank) there were not only small savers. 20% (more than 800
million pounds) was from dozens of British local authorities. For
example, Transport for London had 40 million pounds deposited in
Icelandic banks. In the face of deep cuts to local authorities, this
seemed a way bringing in more interest… with tragic results.
Ironically, given that Iceland has no standing army and the other
NATO countries send in turn planes and ships to protect it, in December
2008 the Royal Air Force was to take over duty, but Iceland was not very
eager on that so nothing came of it, a proof that clashes over banks’
interests are more important than military alliances. Apart from legal
issues, English and Dutch governments’ claims that Iceland would cover
the debts of its banks were foolish, considering that they exceeded by
several times the Icelandic GDP. Even after the First World War, the
victorious powers limited war reparations on Germany to 85% of GDP. What
else could the Icelanders have done but to repudiate those losses?
Articles in the financial press suggested the island could sell its
natural resources and liquidate pension funds, but no amount of such
perfidious advice could do the trick; the sums involved were such that
even selling all Icelandic citizens off as slaves would not have raised
revenues that could cover even a small fraction of the gaping hole. The
steps taken by the Brown government also led to the failure of the only
surviving big Icelandic bank, Kaupthing, which was also nationalized on
October 9. British banks, for their part, were very happy that the
government had just got rid of some dangerous competitors.
At the mercy of the crisis, the Icelandic government began to ask
informally some old friends for help, but no one came forward, with all
of them telling them to call the IMF. The President of the Republic
Grímsson complained to diplomats of friendly countries that they had
abandoned Iceland in its time of need, threatening that the country
would seek alternative help. Sensing an opportunity, Russia declared to
be ready to help Iceland! The Icelandic politicians were all too happy
for the lifejacket. The PM’s statement was striking: “We have not
received the kind of support that we were requesting from our friends.
So in a situation like that one has to look for new friends”. This
helped to put pressures on the EU and US. A few hours after the
announcement, a Western loan started to materialize. On 19 November, the
IMF granted a loan of 4.6 billion dollars, half of this coming from
Scandinavian countries. Poland, too, and even the Faroe Islands, did
their small bit, with 200 million and 50 million respectively. The next
day, Germany, the Netherlands and the United Kingdom announced a further
loan of $6.3 billion. However, the Icesave dispute caused enormous
delay to this help. The UK and Netherlands government used their
political influence to block them as long as the negotiation on Icesave
was not brought to a satisfactory conclusion. Therefore, the first loan
to the country was paid only in December 2009, more than 14 months into
the crisis. This dispute caused a huge resentment in the population.
The largesse of creditors was only apparent. The lifeline served to
cover the debts of the banks, not to lift the Icelandic economy which
continued to plunge. In fact, the collapse of the krona resulted in a
massive tightening of loans in foreign currency, thus provoking the
virtual failure of most companies and households in the country. House
prices started to fall. Foreign exchange reserves at end of 2008 were
not enough to import goods but for few weeks.
In the face of economic meltdown, the government that was so fond of
deregulation and privatization was forced to nationalize and regulate,
moving to a war command economy. Buying currencies was restrained, the
stock exchange was closed, bank shareholders were wiped out, deposits of
foreign investors were ignored. In fact the government denounced
globalization as a noose around the neck of the country, after having
praised it for twenty years. “Kreppa”, Icelandic for crisis, had
defeated even the most foolish of free-marketers.
Political crisis
The crisis shook the stagnant waters of Icelandic politics sparking fury[6]. On January 26th
2009, PM Haarde was forced to resign: a few hours before, he had been
surrounded by a threatening crowd and was barely saved by the police.
The collapse of the government, however, was mainly due to the fact that
the Social Democratic Party, deeply divided, could no longer contain
the pressure from below to quit the coalition government. The party
failed to provide an alternative to the disastrous gamble that Oddsson
had imposed on the the country. They even participated in two
governments with him, from 1991-1995 and from 2007 up to the crisis.
Once the crisis had broken out, the rank and file of the party pushed to
break with the bourgeois parties.
Thus, a week after the ouster of Haarde, the first left government
was formed, originally with the backing of the Progressives (a moderate
bourgeois party) and after the election with its own majority. As its
first act, it sacked the now chief of the CBI Oddsson, the man that had
most contributed to leading the country into bankruptcy. But, apart from
this gesture, the Social Democracy had no alternative solutions to the
crisis. On several occasions the government tried to pass legislation
(such as “Icesave Law”) aimed at paying the debts of domestic banks to
Britain and the Netherlands for an amount that exceeded half the GDP of
the country even before the collapse. According to the original
agreement, 6% of Icelandic GDP, for 15 years, would be allocated to
repaying British and Dutch depositors. The government also proposed
joining the European Union, a proposal about which Icelanders –
correctly – have always been sceptical. Bailing out the banks and
abiding by the Maastricht Treaty, this was what social democratic policy
was about.
The population, however, refused to be sacrificed on the altar of the
banks. Thanks also to the feud between the government and Presidency of
the Republic, the law on the terms of the payment of Icesave was
subordinated to a referendum and soundly rejected. In March 2011, the
second referendum results were clear and overwhelming: 93% of Icelanders
confirmed their refusal to pay for the banks’ mess.
“After” the crisis
The end of the debt bubble has left deep wounds in the economy of
Iceland. The sectors at the centre of speculation were the first to
collapse: the stock market lost 95% from its peak in 2007 and house
prices fell by 30%; construction also plunged badly. In 2009-2010, GDP
fell by over 10% and unemployment shot up to 8%, when it had never
exceeded 3% in the ten years before the crisis. Workers were fired or
had to accept wage reductions and furthermore the collapse of the krona
has made imported goods more expensive, leading to high inflation and
the fall of living standards (by 20% in 2009 alone).
The crisis has also caused the most massive emigration since the
nineteenth century. In 2009-2010, about 7,000 Icelanders emigrated,
which is, as a percentage of the population, as if more than a million
Italian or British citizens were to emigrate in one year; and one third
of the population as well as many companies were considering relocation.
Meanwhile, hundreds of useless SUVs filled the ports of Reykjavik, an
illuminating monument to the greed of the Icelandic bourgeoisie.
To appease the popular fury, a commission of inquiry was established
in April 2009 to investigate financial fraud and the behaviour of the
banks. Although obvious for Marxists, interesting conclusions started to
emerge, such as the fact that privatized banks were giving huge loans
to friendly entrepreneurs, hence allowing these sharks to use the
deposits of the population for their financial raids. Almost half of the
loans made by the Icelandic banks were given to groups of companies
related to the banks themselves. In the meantime, it seems that most of
the oligarchs have fled the country, if only because champagne and
caviar will not be common for some years in Iceland[7].
A key part of the attempt of the government to put the Icelandic
economy back on its feet has been its so-called “cooperation” with the
IMF, that is, applying the Fund’s classical anti-worker recipes: drastic
cuts in public services, taxes on workers, while public debt was
spiralling out of control (28% of GDP in 2007, 116% in 2010). The fall
in living standards was brutal. Unemployment in 2010 was 7.6% (it stands
now at around 8%). Inflation peaked at 8-10%, causing a huge increase
in debt servicing for homeowners, while the devaluation of the krona and
economic hardships dried up the flow of trade. The country had to
export more and import less creating a trade surplus of around 20%. In
this mayhem, the banks that had been created out of the ruins of the old
ones, started to make big profits again. To calm the people’s rage, the
authorities have had to adopt measures, agreed with the banks, that
include procedures for reducing the burden on debtors such as writing
down mortgages to 110 percent of collateral value (i.e. the house). Many
people were forced to apply more than once, due to inflation.
Surprisingly, after few months from the default, the country managed
to get back onto the international markets by issuing, in June 2011 $1
billion of government bonds. It is also worth noting that in 2011, the
protection from the default risk of Iceland was less costly than that of
Italy[8].
Witnessing the agony of Greece, it is only logical that many may
consider the repudiation of debt, as an example to follow. The intention
is correct but the analogy invalid. First of all, Iceland was allowed
to repudiate the debt of its banks (not public debt) for two basic
reasons: the small absolute size of the default (some billions euros, a
drop in the ocean of world markets) and because it was impossible, even
in centuries, that Iceland could ever repay a debt equal to 12 times its
GDP. Secondly, the debts of Icelandic banks were passed to the state,
as happened all over the world, from US TARP programme to European
bail-outs, only it was not the Icelandic state that was asked to foot
the bill but European taxpayers. In any case, the workers paid for it,
even if not Icelandic ones. Moreover, public debt in Iceland is now at
“Mediterranean” levels and we know what this means in terms of future
economic policies. The Greek example shows that even joining the EU will
not avoid savage cuts in the future, quite the contrary. What is
different between Athens and Reykjavik is that the former cannot
devalue, while the krona depreciation of 60% has definitely helped the
economic recovery of the island. Greece should therefore repay the debt
in euros with a drachma depreciated by at least 50%, which would mean
losses in the order of 100 to 200 billion euros for the big banks. For
Italy, this figure would exceed 1,000 billion. Moreover, even after a
default, workers will be called on to make huge sacrifices, as is the
case in Iceland now.
What is wildly simplistic in the arguments of those who glorify the
Icelandic default, is the idea that it is possible to do such a thing on
the sly, without offending anyone or, even better, with the agreement
of the creditors and with automatic beneficial results for the working
class. The proponents of a “guided default” in Greece or in Italy that
seriously think that the market would welcome it as a curious detour,
must be living on Mars. What is possible under capitalism is a debt
renegotiation heavily paid for by the workers with the demise of welfare
state, wage cuts and so on. Is such a measure really of any benefit for
the workers? On the contrary, what is needed is a complete repudiation
of the public debt in the hands of the bourgeoisie, the banks, etc. But
this is possible only by waging an all-out war against the global
financial markets. The idea that such a war is winnable with a mere
stroke of a pen or a ballot box is as realistic as thinking a nice
speech is all that is needed to stop a hungry tiger from eating you.
Either we are ready for such a war against the markets, an absolutely
sacrosanct idea for any genuine socialist, with everything that goes
with it (quitting the European Union, nationalisation of banks and the
big corporations, etc.) but simply talking about default without
preparing the battle only serves to deceive ingenuous people.
In the end, like Italy of the 1980s, Iceland has delayed the problems
with inflation, devaluation and public debt. Is this the policy of the
left for the crisis? For their part, the markets warmly welcomed the
return of Iceland as sovereign debtor, just like any casino manager
would welcome the return of an avid gambler that has been away for a
short break but who left a few drinks unpaid[9].
Although doing as Iceland did in Greece or in Italy will require a
lot more than words, what happened there can, in any case, provide
important political lessons. First, it has to be noted that a right-wing
politician like Oddsson nationalized the banks in more punitive terms
than those applied by the Labour government in Britain or Obama in the
USA, confirming that the political “progressives” are even more slaves
to the markets than conservative governments. Secondly, what saved the
country, after years of infatuation with laissez-faire, were the
measures taken against the markets: capital controls, nationalization of
the banks and, in general, what remained of the Scandinavian welfare
state. This, too, should be remembered by the “innovators” who infest
the left parties and are always lecturing us on the need for “reform”.
Finally, the most important point to note is that it was neither the
referendum nor the popular assemblies rewriting the constitution, but
the mass protests that led to the default. At each stage, the
spontaneous movement of the masses forced the Social Democrats to make
some gesture on the left, to sack Oddsson, to renegotiate the terms of
repayment and to repudiate the debt. The Icelandic workers and youth
have shown that the struggle is what changes things. This is the main
lesson to be drawn from these events. Obviously, the more is at stake,
the more brutal the battles are. Icelandic workers did not have to
organise general strikes to force the government to a referendum on the
debt, but in countries like Greece or Italy, the working class should be
prepared for a very different war. However, it is also true that the
Icelandic labour movement has not managed to put its stamp on the course
of events yet and this is clear now with the policies the government is
implementing. An all-out class war is what is missing in Reykjavik as
elsewhere.
Lastly, it is worth noting that, as before any major event since the
First World War, the European Social Democracy is split along national
lines. The spectacle of a Labour government comparing its Icelandic
comrades to Mullah Omar is not as tragic as the vote in favour of the
war in 1914, but it reveals the same nationalist and conservative
outlook. For their part, the Icelandic Social Democrats, taking care of
their banks (not of their own people) at the expense of the workers of
the rest of the world have shown an equally nationalistic spirit. This
financial protectionism is the music of the future and it has nothing to
do with a left-wing policy.
Iceland, thanks to its bourgeois and Social Democratic leaders,
jumped on the train of globalization in the past and then derailed
painfully with the rest of the world. The courage of the island’s
workers, who refused to pick up the pieces after the banks’ major
shareholders had fled with the loot, is admirable, and saved them from
even worse situation. But this is not enough to protect them in the
coming years from draconian austerity, the contours of which appear
increasingly gloomy with the aggravation of the crisis in Europe. For
them as for all the workers of the continent, the only way out is to
raise the level of the class struggle and fight for an international
socialist solution.
[1] On these issues, see the article Iceland – what happened?.
[2]
The loan to value ratio (LTV) represents the maximum amount a bank can
lend to a client as a percentage of the value of the property he is
buying with the loan. A LTV of 60% means that a bank cannot finance more
than 60% of the value of the house. Increasing the LTV is a way to
encourage the growth of the mortgage market and with it, the risks
incurred by banks. The capital requirement represents the proportion of
equity capital that banks must hold against a certain asset. Again,
reducing capital requirement is a policy to promote growth by increasing
the riskiness of the banks.
[3] That year, public debt/GDP ratio was only 28% and the state had a budget surplus of around 6% of GDP.
[4] The document is available at the Sedlabanki website, p. 7.
[5]
The stress test is a tool used by banks and supervision authorities to
estimate that maximum losses possible in a stressed (i.e. gloomy)
scenario. Of course, before the crisis they had not anticipated that it
was a really gloomy situation.
[6] On protests that led to the downfall of the government see the article Mass protests bring down government.
[7] In April 2010, the Parliament has published the results of the investigation (a summary in English is available at the Althingi website).
[8]
This risk is measured by the differences in the spread of the national
credit default swaps. The Icelandic CDS shows a risk that is lower than
that of all weak countries of the euro area (Greece, Portugal, Ireland,
Spain and even Italy).
[9]
A further confirmation of how the global economic establishment has
welcomed the Icelandic default comes from the OECD report on Icelandic
economy, released in June of 2011, where the default is often commented
positively. They were well disposed also because of the low level of
conflicts in the workplace. In fact, Icelanders made massive
demonstrations for the island’s size, but the level of strikes was
negligible, unlike the Greek case.
