Reykjavík Grapevine - 06.03.2009, Page 6

6 | REYKJAVÍK GRAPEVINE | ISSUE 3—2009
INTERvIEw BY IRInA DoMuRATH — pHoTo BY JÓI kJARTAnS
“There were a lot of mistakes made and warning
signs ignored,” he says. “The debts will rise and
the banks’ size need to be controlled, but Iceland
has the resources to surmount the problems.”
How do you explain to the people that they
have to pay the banks’ foreign debts?
First of all, with regard to Kaupthing Edge in Ger-
many, I have been told that it seems almost certain
that there are sufficient assets within the bank to
pay off depositors. There is a much bigger prob-
lem with Landsbanki’s Icesave accounts in the
U.K. and the Netherlands. It seems inevitable that
when all accounts have been settled, some part of
these Icelandic debts will be paid by the Icelandic
government and then, of course, by the Icelandic
taxpayers.
Are the Icelandic banks doomed to remain do-
mestic because Iceland is such a small country
and the banks shouldn’t exceed the GDP?
You can say that for now. The banks over-extended
very dramatically. Our main concern now is to get
the New Banks fully functional in order to be able
to serve the domestic economy. Basically, all their
foreign operations have either been seized or are
waiting to be sold off. At some point their finances
and reputation may recover, and then they may
be able to expand a little bit abroad but that won’t
happen in the immediate future. We have to do
everything that it is needed for the domestic busi-
ness and will not spend resources on expansion.
The Icelandic government has to set up a regula-
tory framework to make sure that nothing similar to
what happened in the recent past will be repeated.
Obviously a number of things went wrong in Ice-
land. There were some bad decisions made by the
bankers and the owners of the banks, but there was
also regulatory failure.
In what way?
In many ways. Our regulatory framework puts very
little limits on how large the banks could become
and there were no serious attempts made to try
to reduce their growth. There was domestic and
foreign criticism before the banks collapsed. But
those voices were not listened to.
why not?
On the surface everything looked extremely rosy.
The banks were growing rapidly, generating huge
profits. They were hiring people left and right on
very high salaries. The stock market was booming.
The real estate market was booming. But the banks
were relying to an ever-increasing degree on hor-
rendous borrowing. There was a real danger that
if there was some disruption in the flow of foreign
capital, we could have a very rapid negative spiral
where the asset prices could fall and the Króna
could depreciate. Which unfortunately is exactly
what happened.
Do you think that the banks should have had
the obligation to advise Icelandic customers
not to take foreign currency loans?
They should have done that. Instead, they adver-
tised risky behaviour and risky products. And it’s
quite clear that when a banker tells a customer,
without any foreign currency earnings, to make a
huge bet on the Icelandic Króna by taking a foreign
loan, the current exchange rate fluctuations can
make the customer bankrupt overnight. But one
more reason why people were taking foreign loans
was the high interest rates in Iceland. This was a
policy mistake by the Icelandic Central Bank.
How highly is Iceland in debt now?
This is complicated. The government will take
on sizable debts as part of the IMF program, the
settlement of the Icesave deposits and also some
domestic debts due to the refinancing of the bank-
ing sector. We will have a sizable budget deficit this
year and next year as well. That said, the gross debt
will be somewhere around one year’s GDP, which
means that the situation here is somewhat worse
than the situation in Belgium or Italy before the
worldwide financial crisis.
How is Iceland supposed to pay these debts
considering the depression, companies going
bankrupt, consumption decreasing and inter-
est piling up?
It’s certainly going to be tough. I don’t want to say
a year or two, because it will take longer than that,
but the immediate future looks pretty grim be-
cause of all those factors and with government tax
receipts falling at the same time. Demands towards
the government, like unemployment benefits, are
also rising. But we have to keep in mind that the cri-
sis doesn’t destroy real assets. We still have a very
well educated, hard-working, flexible labour force.
We have infrastructure and natural resources. We
can use these real assets to regenerate goods and
services, including export. And the government is
getting a lot of assets as well. For example, it now
owns the banks and even if they won’t be sold they
should become healthy companies that provide
revenues. So, the government’s net debt should
end up similar to the ones in the Western European
countries, maybe 50-60% of the GDP, even if we
don’t paint a very rosy picture. Also, our weak cur-
rency, even though it contributed to the downfall
and the big problems, can help to Icelanders re-
cover through exports quicker than countries that
have a strong, stable currency.
Do you think that other countries might face
the danger of bankruptcy in the course of
the worldwide economic crisis, countries like
Greece, Portugal or Ireland?
I certainly hope not. And what is strikingly different
in these countries is the fact that they don’t have a
small floating currency like we have, and they have
the backup of EU Central Bank and maybe even of
their fellow governments within the EU.
Your predecessor said that he regretted not
having pushed Iceland more towards EU-mem-
bership. Do you think EU-membership would
have prevented or reduced the consequences
of the crisis for Iceland?
It would not have prevented a crisis but it would
have made the dynamics different, especially when
it comes to debts and the loans and the crushing
exchange rates. But I doubt that Iceland as a EU-
member with the Euro would have escaped the
financial crisis, if nothing else had changed.
Are you in favour of EU-membership?
I am in favour of finding out what it would entail.
Most economists claim that having its own floating
currency, without any ties to another currency, is
not a viable long-run option for Iceland. We should
start negotiating with the full intention of entering
but of course not decide to enter until we know
what the framework would look like. Icelandic ne-
gotiators would presumably call for some sort of
exemption or special treatment with regard to the
fishing industry. A deal where we lose all sovereign-
ty over the fishing rights would never be politically
viable. Iceland already has almost all other benefits
of EU-membership through the EEA: labour mobil-
ity, freedom of investment, re-trade etc.. So it really
boils down to the fishing rights. But I think that a
reasonable plan of entering and adopting the Euro
would be very helpful to bringing financial stability
to Iceland.
The Immediate Future Looks Pretty Grim
Economist Gylfi Magnússon
warned against the dangers of the
Icelandic economy before the cri-
sis. He mans the post of Minister of
Business Affairs, courtesy of Ice-
land’s new minority government.
He also is a Professor of Econom-
ics at the University of Iceland,
and holds a Ph.D. from Yale and a
Master’s degree in Philosophy.
THe DeBTS wILL RISe AnD THe BAnkS’
SIze neeD To Be conTRoLLeD, BuT
IceLAnD HAS THe ReSouRceS To
SuRMounT THe pRoBLeMS.
HISTORY LESSON
Iceland 1956. Only few years have passed since
Icelanders lived in mud huts and died young. The-
Second World War had made (some of) us rich
and the modern ways were slowly creeping in. Brit-
ish, and then the much hipper American soldiers,
had brought chewing gum and Forties pop music.
Youngsters, being only used to old time psalmody
and Icelandic country songs, got hip to listening to
jazz and pop around the soldiers’ barracks.
Cue in pop singer Haukur Morthens who had
a weekly radio show at the only radio station (The
state radio – Rás 1). One day a foresighted steward-
ess brought him “Heartbreak Hotel” by Elvis and
asked him to play it. “It sounded unworldly and
crass. So much beat and volubility. Today it sounds
just easy and cosy,” commented Morthens, thirteen
years later in 1969. The kids liked what they heard,
but legend has it that in Höfn a farmer had a heart
attack when Elvis sounded on the radio.
Iceland got its share of the international rock
and roll craze. The Icelandic kids went gaga over
the flaming hot new music, just like kids every-
where. More and more rock music got played on
the only radio station, much to the dislike of many.
“This filthy American noise will spoil the youth”,
said the cultural elite, adding, “Thankfully rock
music is just a bubble that will burst soon enough.”
Early American rock films were shown in the-
atres and the first rock combo played in Reykjavik
in 1957, Tony Crombie & and his Rockets, a British
former jazzist who had jumped on the rock band-
wagon to make some quick cash. The band put on
a convincing rock show night after night, playing
altogether for around ten thousand Icelanders.
Sometimes the police were brought in to calm
down rock crazy teens.
Icelandic musicians, most of them being jazz
snobs, didn’t like this new thing at all. “This is crap
music, if you can call it music”, they said, all the
while forced to play “the crap” because the kids
and the young audience liked it so much and asked
for it at the dancehalls.
The record industry’s initial attempts with
rock fumbled at best. Pop singers were given slight-
ly “rock-ish” songs to sing; sometimes the only indi-
cation of them being of the genre was that the word
“rock” was mentioned in the song. Skapti Ólafsson
was the first to nail the new thing. He sang six rock
songs on records that sounded pretty convincing
between 1957 and 1958. The most famous song was
“Allt á floti” – an Icelandicized version of “Water wa-
ter” by Tommy Steele (Britain’s first rock n roller).
The song was banned from the radio, presumably
because radio personnel thought it included sexu-
al messages. This was the best publicity possible
and the single sold like a motherfucker. Eventually
Skapti was to buy a refrigerator for the income.
By Dr. Gunni, based on his 2000 book Eru ekki allir
í stuði? (Rock in Iceland). A revised edition of the
book is forthcoming in 2010.
BY DR. gunnI