“The
Icelandic economy is prosperous and flexible” (IMF 4 July 2008)
(There
is) “a very real danger…that the Icelandic economy, in the worst case, could
be sucked with the banks into the whirlpool and the result could be national
bankruptcy.” (Iceland’s Prime Minister Geir Haarde – address to the nation 6
October 2008)
What
happened to Iceland
in the period of three months to explain this change? Of course we have pointed
out in the past the arrogance and stupidity of the bourgeoisie and its
representatives in such institutions as the IMF, who clearly made a mistake in
their assessment of Iceland’s economy. But Iceland has been particularly badly
hit by the current world-wide crisis of the capitalist system.
To
explain the particular crisis with Iceland’s banks, we can do no better to turn
to an article written in the Financial Times on 1 July 2008 by Robert Wade, a
Professor at the London School of Economics. Professor Wade explains that prior
to 2000, most of Iceland’s
banks were publicly owned and run with a conservative approach to issuing loans
and credit. Real interest rates, i.e. interest rates taking Iceland’s
relatively high inflation rate into account, were low and even negative. Credit
was not given easily and it was hard for individuals to obtain a loan. Under
the pressure of the capitalist class, envious at the massive profits being made
by banks elsewhere, Iceland’s
banking system was deregulated and privatised in 2000.
To quote
Professor Wade: “The banks were privatised in 2000 in a hasty and politically
driven process. Ownership went to people with close connections to the parties
in the conservative coalition government which had scant experience in modern
banking.” The banking regulators “preferred as light a regulatory touch as
possible.”(Robert Wade – FT 1 July 2008). Of course what the good Professor
means is that the elite in Iceland
saw the opportunity to make a quick buck out of the banking system and arranged
matters accordingly. Parliamentary democracy was seen as merely a means to this
end. These actions were, of course, applauded by the capitalist class worldwide
and lauded by such institutions as the IMF.
The
banks, hitherto operating mainly as domestic clearing banks, extended their
operations to investment banking. Deregulation allowed banks, companies and
individuals to borrow vast sums of money and this fictitious capital led to a
massive boom. Much of this money came from outside of Iceland in what is known
as the ‘carry trade’. This is a way for capitalist speculators and swindlers to
borrow money outside Iceland, e.g. in the Eurozone, at low interest rates,
exchange it into Icelandic Krona, and to lend it to banks, companies and
individuals in Iceland at higher interest rates. The difference between the two
interest rates was pocketed by the capitalist as profit.
While
interest rates in places like the Eurozone remained low and credit in these
places freely available, the merry-go-round continued. Banks and companies
borrowed heavily to fund investments both in Iceland and abroad. They engaged in
an overseas investment drive buying up stakes in Europe
including many leading British companies. The Icelandic Central Bank gave up
reserve requirements and tried to curb the rising inflation caused by the
financial boom by increasing interest rates as high as 15%. This just led to a
greater influx of foreign capital, an increase in the carry trade and further
boom. The miracle of Iceland’s economy
was proclaimed, indeed some bourgeois ideologue announced that it was “the
world’s first country run like a hedge fund”, implying that Iceland was a model
for the future.
Of
course the merry-go-round could not continue for ever. Over the past year, as
the economic crisis has intensified, banks have been reluctant to lend and have
been calling in their loans. The carry trade into Iceland ended and the loans made to
Icelandic banks had to be repaid. The problem was that by now Icelandic banks
had a high level of leverage, i.e. debt to real assets. The FT reported on 8
October 2008 that according to the central bank of Iceland,
the money owed by the country’s banks to foreigners amounted in the second
quarter of 2008 to six times Iceland’s
GDP (annual national income). Iceland
had become in capitalist eyes a “reasonably large banking system with a small
country attached” (FT 8 October 2008), but the banking system itself was in
crisis. The Icelandic Government introduced panic measure and ordered banks to
sell foreign assets and repatriate the monies raised. On 5 October the
Government announced that there was no need to introduce special measures. In
the midst of the world financial crisis the very next day a bill was introduced
into Parliament, and passed with opposition support, allowing the Government to
take over the banks. That same day the Prime Minister addressed the nation and
announced “the outlook is grim for many”.
The
stock market was suspended and as the banks did not have enough money to cover
their debts. One by one they were nationalised. Landsbanki was nationalised on
7 October which prompted the British Government to freeze an estimated £4bn of
assets of Landsbanki using anti-terrorist legislation on the basis. The legal
justification for doing this was to combat “action to the detriment of the UK’s economy” –
the British Government claimed that it had used its powers to protect British
retail depositors as it was not clear whether Landsbanki would cover its
obligations. As the Financial Times explained, “For those with money tied up in
its [i.e. Iceland’s]
banking system…the losses threaten to be large”. (FT 8 October 2008). Not
content with labelling the actions of a bank as a terrorist action, the next
day the British Government placed the UK
subsidiary of the Icelandic bank Kaupthing into administration thus causing the
parent company based in Iceland
to go into technical default. The Icelandic Government were thus forced to
nationalise Kaupthing also.
Of course this is the way the capitalists and their representatives behave towards
one another. The British Government does not represent the workers of Britain any more than the Icelandic Government
represents the workers of Iceland.
When the profits of their capitalist class are threatened, the British
Government takes whatever action it can, especially against a smaller less
powerful country. Thus the seizure of assets of Icelandic banks in the UK went ahead
regardless of the effect on their ally. In return the Icelandic Government was
able to play the nationalist card and try to shift some of the blame onto the
actions of the British Government. In reality, the fault lies with the madness
of the capitalist system.
Iceland’s banks were not exposed to the
sub-prime loans which started off the credit crunch last year. They have been
caught up in the speculative bubble that world capitalism has gone through in
the recent period – a bubble that has now burst. Now the Government has
nationalised the banks, the state clearly does not have the resources to meet
all the banks’ liabilities and is facing bankruptcy. In 2000 the combined assets of Iceland’s banks
were just below one year’s GDP, earlier this year, it was estimated that these
assets, funded by debt, were now around 10 times GDP.
It has been reported that the
Government are negotiated a loan with Russia and separately a loan with
the IMF. As the workers of Argentina know, the IMF makes sure that the working
class pay for the extravagance of the ruling class. In any case, whatever additional
debt the Government incurs to meet the short-term crisis, it’s clear that on
the basis of capitalism there are no credible solutions for Iceland’s
workers. In the middle of the bank nationalisations, a woman was quoted in the
British press as saying: “I didn’t have any money before all this, and I haven’t got any now” while
the same woman went on to say: “I know of a guy, he was worth 3bn Krona before
last weekend, and 600m after it. But his wife is still shopping at Prada"
(Guardian – 8 October 2008). What a comparison between the sacrifices the
members of each class have to make in this crisis. Unfortunately, this is just
the beginning; conditions will get worse for the working class. This contrast
between the privileged and poor will not be tolerated for long.
