Reflections on Iceland and the financial crisis - Part 9
By 250 News
Wednesday, November 09, 2011 03:45 AM
Iceland's President is flanked by authors Dawn Hemingway and Peter Ewart
Part 9 - Interview with President Olafur Grimsson
By Peter Ewart & Dawn Hemingway
(Click here for previous articles in the series)
Tastefully decorated, the room had an austere, old world touch to it, with the high ceiling of a building erected in some previous century and a floor planked with polished birch. A gold-coloured sofa with intricate floral patterns was tucked against the wall and several stuffed antique chairs sat across from it. At the other end of the rectangular room a heavy desk squatted, and, behind it, a tall mahogany bookcase stacked with volumes of books. Framed photos of famous world figures stared out from shelves and end tables. Through a window, we could glimpse the green of a rolling, treeless meadow and in the distance, glittering waters.
It was a sunny August day in 2011 and we were waiting in a reception room of Bessatidur, the President of Iceland's official residence. Olafur Grimsson, the president, had agreed to give us an interview to talk about Iceland's banking crisis. President Grimsson was someone who could certainly speak to the issue, as he had played a key role in forcing a national referendum to be held on the controversial "Icesave" bailout agreement that the Icelandic government had negotiated with Britain and the Netherlands.
The official residence has a long history; the site was once claimed by the King of Norway as a "royal stronghold." For a time, the complex of red-roofed buildings situated there functioned as a school, then a farm. During the early 1940s, a local farmer donated the buildings to the Icelandic government. And there they sit today, on a windswept meadow near an inlet of the Atlantic ocean – plain and somewhat modest, yet strong and solid - perhaps fitting for a country with deep egalitarian traditions. No metal detector or elaborate security process. Just handshakes. As President Grimsson would later tell us: “…we are still a society fortunately organized on the principle of trusting people, assuming that everybody comes as a friend”.
Arni Sigurjonsson, Director for the Office of the President, ushered us into a library room where we met and shook hands with President Grimsson. In his late 60s, tall, with white hair, and dressed in a dark blue suit and tie, he definitely cut a "presidential" figure. But, sitting down across the table from us, he was engaging and informal in his conversation, and interested in answering all of our questions in detail.
After coffee was brought in, President Grimsson began by elaborating on some of the origins of the financial crisis in Iceland. One of the principal causes was the influence of what he described as "economic theory" which put forward the idea that the more a country "privatized" and "deregulated", the more "success" its economy would have. Embracing this perspective, the government then in office began to privatize the state banks, a process which was completed by 2003. This privatization happened at a time when, unfortunately, banks could get easy access internationally to loans and other forms of liquidity.
Although Iceland was not a member of the European Union, it did belong to the “European Economic Area” which was associated with the EU. So Icelandic banks expanded rapidly into the European market which, also unfortunately, lacked an effective regulatory authority. Parallel to the rapid expansion of Icelandic banking abroad, the people of Iceland were encouraged to use equity in their homes to borrow and then invest in or purchase large ticket consumer items, such as cars and second homes.
The President explained that, when the financial crisis hit in 2008 and the banks collapsed in Iceland, it was "a monumental shock to the economy and the nation." The shock was so severe that it almost created a breakdown in Iceland's political structures, as well as in its social cohesion. This showed the "destructive power" of market failure even towards "a stable, democratic country like Iceland."
One of the main reasons why Iceland was able to recover from this financial calamity, according to the President, was that, unlike other countries, Iceland did not treat it as simply an economic problem, but rather also as a legal, political and social problem to be grappled with and solved. In the aftermath of the crisis, a special commission was struck to examine the banks and corporations involved, special prosecutors were appointed, and other legislative and political investigations were undertaken. In addition, a democratic process was begun to enable ordinary Icelanders to participate in developing a modern constitution for the country – a process that continues today.
In no other country, to the President's knowledge, was the banking crisis dealt with “in such a comprehensive, political, judicial and social way”. Indeed, part of the problem in Europe and the United States is that "they are still treating the crisis as purely an economic problem" and using only economic solutions to cure it.
Iceland was helped in that it had the kroner, its own currency. But, more fundamentally, it didn't pump a lot of public money into saving the banks. It let them fail, just like any private companies fail in the capitalist market system. Britain and Netherlands put a lot of pressure on Iceland to take on the debts of one private bank, i.e. Icesave, but the people turned that idea down in two referenda (see Part 7 of this series of articles). As President Grimsson explained: “…it really raises the fundamental questions…these banks like most banks in the western world were private banks and when they succeeded, the bankers got big bonuses, and the shareholders got a lot of profit. So, if they then failed, are we going to have a system where you send the bill to ordinary people – farmers, and fisherman, and teachers, and doctors, and nurses and social workers and so on? If that was so, we would be bringing together the worst features of capitalism and socialism. They [ordinary citizens] are not responsible for the failure of a manufacturing company or a shopping mall … And is a private bank somehow different from other private companies?"
In regards to Britain's prime minister Gordon Brown using "anti-terrorist" legislation to classify Iceland as a "terrorist" state because it wouldn't bail out depositors of the Icesave bank, President Grimsson commented how this unjustified action caused "monumental damage" to Iceland's economy. Many companies internationally, with which the country had successful and responsible arrangements for decades, suddenly stopped dealing with Iceland. What was particularly galling to Icelanders was that, during the Second World War, Iceland had "fed" England with shiploads of fish during some very difficult and dangerous times.
Icelanders have a long historical memory, he commented. They still talk about the Viking settlers a thousand years ago, as if they lived yesterday. Thus Gordon Brown will be a "famous" figure in Icelandic history for many centuries to come.
When Iceland let its banks fall and, in the two nation-wide referenda, refused to bail out the Icesave bank depositors, many pundits and politicians predicted that Iceland's economy would be hit even more catastrophically, that the country would become an international “pariah”. However, President Grimsson explained, all of that turned out to scaremongering and flat out wrong. The economy "fared much better" than the experts predicted. In fact, for 2009 and 2010, the outcome for pharmaceuticals, tourism, energy, fishing, airlines, agriculture and so on, were among the best years for those industries. And the information and technology sector gained tremendous strength.
That being said, the president noted that there will still be "problems to solve" and that some people were still struggling with home and consumer loans. Others had lost savings because they had bought shares in banks and companies hit during the crisis. Nonetheless, Iceland's unemployment rate of 6 or 7% was still not high compared to Europe or the U.S.
In his concluding comments, President Grimsson talked of how, just 100 years ago, Iceland was the poorest country in Europe, having suffered from volcanic eruptions and other problems. Since then, it had achieved its independence with no one killed or imprisoned, and it was able to extend its fishing rights 200 miles out into the North Atlantic ocean, thus ensuring a viable fishing resource for the nation. Furthermore, besides modern industry and agriculture, it was able to establish a vibrant culture, as well as an advanced education, public health, and social service system.
As we said goodbye to the President, we gave him a small bowl of pine wood, fashioned by a local wood carver from a tree that had been killed by the mountain pine beetle epidemic in northern British Columbia, explaining how it represented the resilience of the people in our region of Canada, who, like Icelanders, have also had to overcome natural disasters in the course of their rich history.
Next instalment in series – Part 10 – Current situation
Peter Ewart (peter.ewart@shaw.ca ) and Dawn Hemingway (hemingwa@unbc.ca ) are columnists and writers based in Prince George, British Columbia.
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Posted by: Eagleone on November 9 2011 11:24 PM
Thank you Dawn and Peter. I am looking forward to your concluding chapters.