Reykjavík Grapevine - 04.06.2010, Page 10

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The Reykjavík Grapevine
Issue 07 — 2010
Turninn Höfðatorgi
105 Reykjavik
Tel: 575 7575
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Thu-Sat. 11.00–24.00
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World peace: Soon
As the Icelandic financial system came
crashing down in the fall of 2008, Ice-
landers woke up to realise that the
much-hyped “Icelandic economic mir-
acle” had only been a mirage. A giant
bubble that had popped. The recession
that followed in the wake meant the
death of the economic dreams of count-
less ordinary Icelanders, who were all of
a sudden saddled under debts that spi-
ralled upwards as the currency plunged
downward and inflation took off.
But the crash also represented the
death of a different dream—a vision
promoted by politicians, the spokesmen
of the banks, the Chamber of Com-
merce and free market ideologues: The
dream of Iceland becoming a “global fi-
nancial centre”.
More than anything, it was this
dream that had set the stage for the
bubble. And it was this dream that had
allowed policy makers and common
people to ignore warning signs that a
huge bubble had developed in the econ-
omy and that banks had grown “too big
to save”.
The history of this dream is one of
the most interesting parts of the story
of the ‘rise and fall’ of the Icelandic
economic miracle. Primarily because
of how revealing it is—how well it cap-
tures the unrealistic ideas and ideologi-
cal convictions that lay at the heart of
the euphoria of the boom years.
But there is another interesting twist
to the history of the dream of Iceland as
a global financial centre. Namely its ori-
gin.
“THE NExT SWITzERLANd”?
The dust had barely settled after the col-
lapse of the last round of misguided and
over-leveraged investments, when the
idea of turning Iceland into a global fi-
nancial centre was first hatched. At the
beginning of the ‘90s, Iceland was going
through one of the worst recessions of
the post-war years. Large sections of the
financial system were virtually bank-
rupt and Icelanders experienced pro-
tracted unemployment for the first time
since the 1930s. The mood was gloomy.
In a poll taken in 1993, 46% said they
feared the nation might actually go
bankrupt. It was in this context that the
idea of Iceland as a global financial cen-
tre first surfaced.
In the summer of 1990, a govern-
ment committee—established follow-
ing the 1986 Reagan-Gorbachev sum-
mit in Reykjavik to suggest ways for
Iceland to cash in on its global image –
concluded that Iceland should 1) market
its pure and unspoiled nature, and 2)
seek to become a global financial centre.
The government jumped on the latter
idea, and KPMG Management Consult-
ing was hired to evaluate the proposal
and figure out how exactly this grand
scheme could be realized.
The (very) small Icelandic financial
community found the idea appealing.
At a conference organised by the minis-
try of commerce in 1991 to discuss the
idea, Gunnar Helgi Hálfdanarson, CEO
of Landsbréf, the securities subsidiary
of Landsbankinn, argued that while
Iceland might not be able to become
“the next Switzerland or Luxembourg,”
there was no reason not to try. The fact
that global financial centres were pop-
ping up in places like the Caribbean and
the Middle East was proof that Iceland
might be able to compete. The key, ac-
cording to Gunnar Helgi, was lower
taxes and less regulation.
The foreign experts were not as op-
timistic. Cutting taxes and red tape was
not enough; in their view Iceland sim-
ply lacked all requisite preconditions.
Among other things, they pointed out
the fact that the regulatory authorities
and institutional infrastructure were
weak and underdeveloped, and were
not ready to handle the complexities of
international finance. A second criti-
cism was that Icelanders simply had no
experience within the world of global
finance.
This conclusion should not have
come as a surprise. Describing the state
of the Icelandic financial market in
1991 as “developing” would be a gross
understatement. Until the mid ‘80s, the
few stocks that happened to exchange
hands in the country were traded at face
value, and looked upon as curiosities
rather than investments. There was a
more vibrant market for antique books
and stamps than for stocks, and people
were far more likely to invest their sav-
ings in philatelic rarities than corporate
securities. In fact, there hardly was a fi-
nancial market in Iceland at the begin-
ning of the ‘90s.
ExCESS AMBITION ANd IdEOLOGy
Still, labelling the idea of turning Ice-
land into a global financial centre a
delusion might be too harsh. It would
perhaps be more apt to speak of exces-
sive ambition. Or ideologically infused
ambition.
The depression of 1988-1993 marked
the bankruptcy of the state controlled fi-
nancial system that had characterised
the country since the great depression.
In the late ‘80s, government invest-
ment funds had poured money, based
on political connections and patronage,
into various ill-conceived and misman-
aged business adventures, including
countless salmon farms that wound up
bankrupt. Most experts and commenta-
tors believed that the root of the reces-
sion was in fact government meddling
in the financial markets: If government
was scaled back, state owned firms—
especially the banks and investment
funds—privatized, red tape cut, and
the invisible hand of the marketplace al-
lowed to work its magic, who could say
what was, and what was not possible?
This ideological component explains
why the idea kept popping up during
the 1990s despite the fact that it had
been f latly rejected as unrealistic by the
aforementioned foreign experts. It also
explains its spectacular comeback in the
fall of 2000. By then the results of the
free market reforms and privatisation
policies initiated by the Conservative
party and Davíð Oddsson, who served as
Prime Minister from 1991 until 2004,
were well under way. Iceland now had
a modern stock market and aggressive
investment banks. The state owned in-
vestment funds had been merged into a
single investment bank, which was then
sold to the public along with stakes in
the two state owned commercial banks
in 1998 and 1999, sparking a intense
stock mania among the public, which
helped fuel the millennium bubble.
Perhaps it was fear that the bursting
of this bubble would create a backlash
against the excesses of the financial
markets, or perhaps it was the growth
of the Icelandic banks, who were by
then taking their first steps in foreign
markets, through acquisitions and new
subsidiaries, but in the fall of 2000 the
Federation of Young Conservatives
called upon the government to take ev-
ery step to make Iceland a global finan-
cial centre. The steps to be taken were
simple enough: Corporate taxes should
be lowered enough for Iceland to be con-
sidered a global tax haven—“a tax para-
dise.”
By this time Hannes Hólmsteinn
Gissurarson, the tireless advocate of
neoliberal economic principles, chief
ideologue of the Conservative move-
ment and a close ally of Davíð Oddsson,
had positioned himself as the main pro-
ponent of this idea, making it a central
argument in his 2001 book “How can
Iceland become the richest country in
the World?”
“I HAvE A dREAM...”
In September 2004 the dream of turn-
ing Iceland into a global financial cen-
tre finally became official government
policy. At the annual congress of the
Chamber of Commerce in February of
2005, Davíð Oddsson’s successor in of-
fice, Halldór Ásgrímsson, the leader
of the Progressive party, declared that
“he had a dream”. The dream was—
you guessed it—that Iceland become
a global financial centre. In November
of that same year, Halldór appointed a
committee, chaired by then-Kaupthing
director Sigurður Einarsson. That same
Sigurður is currently a fugitive from the
law, wanted by Interpol for a variety of
financial crimes and forgery.
The policy recommendations of cut-
ting taxes and red tape were warmly
embraced by both the Chamber of Com-
merce and The Federation of Financial
Firms, a lobbying group funded by the
finance industry. In 2006 the chamber
made the idea a keystone of its policy
document, “Iceland 2015,” in which it
argued Iceland should brand itself as
a “Freedom country”, and by slashing
taxes and regulation become “the most
competitive economy in the world.” Us-
ing the logic of trickle down economics,
this was presented as a great boon to the
general population.
But even if the foreign banks and
financial firms that were supposed to
f lock to the country if only their de-
mands, as articulated by Hannes Hólm-
steinn and the Chamber of Commerce,
had been met, never materialized.
But then again, when one reads the
arguments for turning Iceland into a
global financial centre a bit more care-
fully, one is immediately struck by their
strange hollowness. There is no short-
age of people praising the vaunted ben-
efits of turning Iceland into a tax haven
for investment banks, some kind of
North Atlantic Tortola. But it is almost
impossible to find serious discussion of
the specifics.
“THE PLAN”
It was never really explained how this
would come about. It is equally strik-
ing to find that the proponents for the
idea don’t seem to have been bothered
by the fact that there was never any in-
dication that any foreign financial firm
ever considered relocating to Iceland.
One would have expected that this
would have caused some concern. But
no. Equally, there is no debate about the
possible drawbacks to attracting foreign
banks in large numbers to Iceland? For
example: How would their deposits be
covered?
The closest we can come to a “plan”
are the constant calls for lower taxes
and lighter regulation. Conservative
MP Guðlaugur Þór Þórðarson stated in
an interview with Morgunblaðið on Sep-
tember 18 2005 that it was in fact quite
“easy” to turn Reykjavík into a centre of
finance. All that was needed were tax
cuts and less red tape.
Perhaps that was all there ever was
to this whole idea? If one ascribes to
Hannes Hólmsteinn’s philosophy of
laissez-faire economics, there was abso-
lutely no reason to come up with a more
complicated plan: All that needed to
be done was to scale back taxation and
regulation, and the market would magi-
cally take care of the rest. If the foreign
firms did not come f locking in, it was
only because we hadn’t slashed taxes
enough or cut enough red tape.
Perhaps the idea of Iceland-as-global
financial centre simply served as the
justification for pursuing neoliberal
economic policies.
Next issue: A nation as hedge fund.
Article | Finance
delusions Of Financial Grandeur
The dream of Iceland as global finance centre
MAGNúS SvEINN HELGASON
In September 2004 the
dream of turning Iceland
into a global financial
centre finally became
official government policy.
Look for more of Magnús' historical analysis in our upcoming issues.
He is a very smart man, we feel, and what he says always makes a lot of sense to us.