Reykjavík Grapevine - 08.10.2010, Blaðsíða 16

The Reykjavík Grapevine
Issue 16 — 2010
14
The Watchdog That didn’t Bark
How the media failed the people before the crash
The media is often recognised as the fourth branch of government sitting next to
the executive, legislative, and judicial branches. Recognising its importance in 1787,
United States Founding Father Thomas Jefferson said, "were it left to me to decide
whether we should have a government without newspapers or newspapers without a
government, I should not hesitate a moment to prefer the latter.”
By Anna Anderson Photo Hörður Sveinsson
feature | Media analysis
On April 9, Moody’s issues its annual
report on Iceland, reiterating its decision
to downgrade Iceland’s banks to C- and
lower the government’s rating to negative
in February and March, respectively.
MORGuNBLAðIð SAyS CRISIS IS
uNLIkELy
On April 9, Morgunblaðið reports, “New
Moody’s report says crisis unlikely.” At
once the headline sums up a rosy conclu-
sion of a report from an agency that has
recently downgraded Iceland’s banks
to C- and lowered Iceland’s outlook to
negative. The article begins by stating
Iceland’s exceptional quality in being the
only Aaa ranked country with C- ranked
banks, as if this was almost a good thing.
It goes on to say, “the state of the banks
is said to be concerning, but it’s unlikely
that they will be the cause an economic
crisis.” Additionally, it reports, “Minis-
ter of Finance Árni M. Mathiesen says
discussions during the last two to three
weeks have been moving in a positive di-
rection. Moody’s is very well acquainted
with the country and their positive report
should push discussions in that direc-
tion.”
Thus, it’s generally a positive report.
Morgunblaðið fails to mention that
the banks are nine times Iceland’s GDP,
and does not include Moody’s warning:
“The banking sector in Iceland repre-
sents the most burdensome contingent li-
ability. Moody's considers the three large
commercial banks in Iceland as “too big
to fail,” a concept that is not affected by
the banks having been fully privatised,
meaning that we would expect a very
high degree of systemic support by the
Icelandic authorities for the banks in the
event of a stress situation. Given the scale
of the banks’ international operations,
however, any systemic threat would prove
extremely costly to the government if that
eventuality were to materialize.”
Of course if they had included all of
this, the Minister of Finance would have
appeared incompetent and they couldn’t
have written up such an overwhelmingly
positive interpretation of the report.
fRéTTABLAðIð SAyS SPECuLA-
TIONS ARE RIdICuLOuS
On the following day, April 10, Frét-
tablaðið covers Moody’s report in an arti-
cle called, “Ridiculous speculations.” The
article begins by quoting Prime Minister
Geir Haarde who dismisses speculations
that Iceland could run into insolvency
problems and says, on the contrary, “ex-
ports are increasing, the trade deficit
is decreasing and the state of the banks
is strong.” Yes, he said, “the state of the
banks is strong.”
Then, selectively paraphrasing from
Moody’s report, the article says, “Moody’s
believes Iceland will come out better than
other countries with the Aaa rating and
countries with this rating can easily
shake all kinds of economic difficulties.”
Did Fréttablaðið not find Geir
Haarde’s statement, “the state of the
banks is strong,” preposterous after
reading Moody’s report, which clearly
expresses concerns about the banks?
Perhaps they did not read the report. At
least that would explain why they fail to
point out that a high severity risk sce-
nario makes Iceland different from other
Aaa countries and that Moody’s is “in-
creasingly concerned about the burden
of potential contingent liabilities stem-
ming from Icelandic banks…the system
has grown to nine times GDP…the risk of
contagion among these banks has raised
concerns about a system-wide crisis.”
April – Moody’s is worried about Iceland's banks
Moody’s Annual Report, April 9, 2008
“…Moody’s has become increasingly concerned about the burden of potential
contingent liabilities stemming from the Icelandic banks. Iceland’s banking sys-
tem has rapidly internationalized: the system has grown to nine times GDP…The
downgrade of all three major commercial banks to C- in February 2008 means that
Iceland is the only Aaa-rated country to have a banking system with an average
financial strength rating below C. The risk of contagion among these three banks
has raised concerns about a system-wide crisis. Moody’s considers such a crisis
to be a very low probability but high severity risk scenario distinguishes Iceland
from other Aaa sovereigns, and accordingly has changed the outlook on the gover
nment’s ratings to negative. The government’s direct debt is very manageable,
but the negative outlook is meant to signal the pressures emerging from banking
system liabilities, and the incremental increase in the risk that some part of those
could come onto the government’s own balance sheet...”
If fulfilling the role of the 4th branch was the goal, then Iceland’s two most widely read newspapers, Fréttablaðið and Morgunblaðið, by and large failed to
fulfil their duties before the crash. On the contrary, the papers often served as
a mouthpiece of the government and financial institutions, through which they
spewed positive propaganda to the public.
Although, for example, Morgunblaðið’s editor at the time, Styrmir Gunnarsson,
claims the paper, “adequately evaluated external news and information [before the
crash],” an examination of what the newspapers had in their hands in terms of ex-
ternal warnings and what they then passed on to the public reveals a serious lapse
in journalism.
Before the crash, external agencies like Moody’s, the OECD and Merrill Lynch,
consistently issued reports warning about the enormity of the commercial banking
sector and the absence of a lender of last resort. Each time, the newspapers remark-
ably minimised their reports and ignored or refuted any critical information about
the banks.