Reykjavík Grapevine - 28.09.2013, Blaðsíða 6

“You Icelanders have done the right thing
in letting the banks fail instead of bail-
ing them out. And now Iceland is back to
growth and unemployment is falling,” an
Irish banker said recently, when discuss-
ing the status of the Icelandic economy.
“The capital controls? No problem, they
don’t touch ordinary people.” Right, but
the capital controls do touch the economy.
One economist calls the controls a “slow
death.”
Iceland will not have escaped the col-
lapse of its banks in early October 2008
until the capital controls restricting out-
flow of foreign currency are abolished.
The new coalition government between
the Progressive Party and Independence
Party, led by the former, seems to be split
on how to go about it. As has so often been
the case in Iceland’s history, this split is
partly about how to engage with the outer
world. Foreign investors are being courted
and yet some politicians dream of squeez-
ing money out of the last lot of foreign
investors, not only to abolish the control,
but also to create the opportunity for the
much criticised debt relief promise that
brought the Progressive Party to power.
The very short story of the
Icelandic boom and bust
Iceland is not the only country to have ex-
perienced a spectacular boom in the years
leading up to 2008, followed by a no less
spectacular bust, forcing it to seek outside
help. Ireland, Greece, Portugal, Cyprus
and Spain have, to varying degrees, been
bailed out by the troika—the European
Union, the European Central Bank and
the International Monetary Fund. Not
being a member of the EU, Iceland took
the classic route to the IMF, which lent the
country 2.1 billion USD in order to save
it from a total collapse as its banks failed.
But Iceland is the only debt-ridden
nation that has had an answer to the
question: why did the banks fail? This
impertinent question was answered
quite thoroughly in a 2,600 page report
published in April 2010 by the Special
Investigative Commission (SIC) set up by
Al#ingi, the Icelandic Parliament.
In clear, jargon-free language, the SIC
report tells the story of failed economic
policy in the decade or so before the col-
lapse in 2008. The varying governments,
which always included the Independence
Party (in most governments since 1944),
celebrated the growth of the banking sec-
tor which, like the UK banking sector,
sucked talent from other sectors by offer-
ing salaries only banks could offer. In ad-
dition, the government added fuel to the
booming economy with public spending.
With low interest rates in international
markets, the Icelandic banks behaved like
drunkards at a free bar. The three larg-
est banks concentrated their lending on
the banks’ largest shareholders and their
business partners, in many cases lend-
ing them, their employees and other cli-
ents money beyond the legal limits to buy
shares in the banks, thereby artificially
inflating their value.
Banking the Icelandic way
All of these practices have been seen else-
where, such as in the Irish banks, but as
far as can be ascertained, it was practiced
nowhere else to the extent that it seemed
to have been in Iceland. The question of
why this way of banking was so prevalent
is an intriguing one.
There is probably no single answer,
but it is worth keeping in mind that in
spite of the banks being fully privatised by
2003, the new owners did not bring with
them new managers. The management,
and to some extent board members, re-
mained the same.
There is anecdotal evidence that Ice-
landic banks have engaged in two-tier
lending for a long time: the majority of cli-
ents were made standard offers for loans
that had to be repaid; a chosen minority
could borrow large sums against weak or
no collateral. When these practices were
based only on lending Icelandic depos-
its, the danger was somewhat contained.
When the lending was based on foreign
loans, in endless supply on international
lending-happy markets, the banks grew to
ten times the size of the economy and cre-
ated an enormous risk which proud and
somewhat clueless politicians and regula-
tors ignored.
Weak collateral is also one reason why
so many of those who borrowed the most
have more or less escaped the effects of
the crash. Large holding companies of
well-known shareholders collapsed under
their burden of debt when the banks were
no longer there to keep on lending, extend
loans or to refrain from recovering loans.
With only a couple of exceptions, the larg-
est shareholders in the banks—the own-
ers of these holding companies—were left
unscathed.
The centrifuge of debt
and assets
One of the reasons why the boom bil-
lionaires, the so-called ‘útrásarvíkingar’
(“Outvasion Vikings”), have not been
bankrupted is a mechanism that could
be called a centrifuge. All of these billion-
aires owned galaxies of off and on-shore
companies, i.e. groups of companies that
stretched from Iceland to other countries,
such as well-known secrecy havens like
the British Virgin Islands, the Isle of Man
and Guernsey.
A loan goes into one company and
assets are bought. Over time, assets and
debt are split, for instance by paying divi-
dends and/or via sales and acquisitions
between companies within the group, or
to related parties. When bad things hap-
pen, the company that holds the debt goes
bankrupt and little of value is found there
for the creditors.
This is no Icelandic invention. Highly
specialised and well-paid lawyers and
accountants in London and elsewhere
construct these galaxies each and every
day. The Icelandic boom billionaires have
practised this with great skill and great
help from the banks, meaning that almost
none of them have gone bankrupt.
In fact, some famous Icelandic billion-
aires still own companies in Iceland, such
as Björgólfur Thor Björgólfsson of Lands-
banki fame, Jón Ásgeir Jóhannesson of
Baugur Group and Glitnir bank fame,
and Ólafur Ólafsson, the second largest
shareholder of Kaup#ing bank.
Prosecuting the past
Shortly after the Icelandic collapse, the
Office of the Special Prosecutor (OSP)—
now a permanent serious fraud prosecu-
tor—was founded in Iceland. None of the
big cases have yet been resolved in the Ice-
landic Supreme Court, but recent rulings
on white-collar crime cases indicate that
the Supreme Court is far from lenient on
punishment.
Top-level managers in all the banks
as well as a few major shareholders have
been charged. Two of those charged are
Jón Ásgeir Jóhannesson and Ólafur Ólafs-
son, but their cases have not been ruled
on yet. By next year, the OSP plans to have
filed charges on all collapse-related cases.
Compared to Ireland, where there is
great anger over the fact the management
of the collapsed banks have not been in-
vestigated for alleged fraud, it seems safe
to conclude that prosecuting the bankers
and shareholders, seen to be partly re-
sponsible for the crash, changes the pub-
lic mood. Nonetheless, many Icelanders
complain that investigations are taking
too long. Compared to complicated fraud
cases in other countries, the Icelandic cas-
es follow a familiar pattern and the exten-
sive galaxies of companies partly explain
the time it takes to get to the bottom of
what went on and how things were done.
In addition, the administrators of the
collapsed banks are suing managers,
board members and accountants of the
banks, in order to recover assets. The out-
comes of these cases, especially against
the accountants, are interesting in an
international context since it is widely be-
lieved that the role of accountants in failed
banks has not been scrutinised enough.
Legacies and lessons
The SIC report was written partly to ex-
plain what had happened and partly to
provide lessons. Many public institutions
spent some time studying and discuss-
ing it, but it is difficult to say if the report
helped provide the necessary lessons.
Compared to other debt-ridden Euro-
pean countries, another unique phenom-
enon in Iceland following the collapse was
debt relief. People whose mortgage repay-
ments spiked, either because of the fall of
the króna or because loans were indexed,
have been offered various measures to
make their debt sustainable.
The fact that the Progressive Party was
voted into power by making promises of
further debt relief shows that some voters
believed that not enough had been done.
The expectations are still high, although
research shows that households in arrears
are now fewer than before. In addition,
the debt problem seems to be much more
contained than certain politicians and
popular opinion indicate.
The fact that some currency basket
loans have been ruled as illegal has also
changed the financial status of many
households. Normally, a loan agreement
is utterly unchangeable. Now, with many
loan agreements either being torn up or
changed, there is anecdotal evidence that
Icelanders might be learning that legal
agreements need not be adhered to, and
some fear this might not be a good lesson
for the future in a country that has had
chronically high household debt.
Did the crash change anything more
fundamental in Iceland than many peo-
ple (mainly women) taking up knitting?
Time will tell, but there are doubts. Some
bankers whisper that they still dream of
2007 happening again and salaries in the
banking sector are rising. The return of
2007 might be good for a few bankers
and some chosen clients but, as tried and
tested, it would be decidedly bad for the
Icelandic economy.
The battle for the soul of Ice-
landers
Iceland is certainly not the only country
that finds it easier to blame foreigners for
its misfortunes than their own country-
men. In Greece, Cyprus and Ireland there
is wide-felt anger towards the troika, as
if it had caused the deadly debt in these
countries rather than their own countries’
actions or inactions.
The same is felt in Iceland. Until the
SIC report clearly spelled out what had
happened, many Icelanders felt that the
British had caused the collapse of the
banks. Now it is the foreign creditors of
Glitnir and Kaup#ing who get to bear the
blame for the capital controls. And EU
membership, seen as a salvation in an
uncertain world just after the collapse,
no longer has the majority support of Ice-
landers. Yet, a majority of voters would
like to see the negotiations for member-
ship concluded and the agreement sent to
a referendum.
Compared to the other debt-ridden
European countries, the Icelandic econ-
omy bounced back quickly and well. But
Iceland does not “graduate” from the
“kreppa” until the capital controls are
abolished.
Five years ago, when resolving the big
issues around the collapse, the attitude
was “fuck the foreigners,” meaning that
Iceland would, understandably, first and
foremost pay attention to its own interests.
At the time, the action taken enjoyed a cer-
tain understanding abroad since Iceland
clearly was in dire straits in October 2008.
Again, Iceland needs to resolve a prob-
lem, the capital controls, where foreigners
are one part of the equation. There now
seems to be a tension within the coalition
government as to how the foreign credi-
tors should be treated. Some think it is
still legitimate to say, “fuck the foreigners”
while others fear the possible consequenc-
es. These diverging attitudes seem to
hinder the first steps towards abolishing
the capital controls, which will no doubt
be done in steps over the course of several
years.
The story of Argentina since its de-
fault in 2001 is the story of a country that
seeks to write its own rules, ignoring the
international community. Iceland did not
default in 2008 and the collapsed banks
are now private companies. But after
changing Iceland’s currency laws this
past spring, the minister of finance has to
agree to measures regarding the estates of
the banks, meaning the government is in-
volved. This also exposes the government
to the risk of being sued by foreign credi-
tors.
Most countries have their Faust stories
but the Icelandic Faust, Sæmundur the
wise, is the only one to have defeated the
devil. Maybe that partly explains the dare-
devil attitude Icelanders often take when
resolving their national problems.
Five years after the collapse, economists all over the world carefully
study Iceland’s recovery—some even call it a “miracle.” Icelanders
themselves are, however, less in awe of this miracle. Although the
country has moved from recession to growth and unemployment has
been reduced, household debt is still a big topic and the coalition gov-
ernment seems painfully at a loss as to how they can fulfil promises of
debt relief and unshackle the country from capital controls. The small
group of businessmen and bankers, who many think caused the crash,
have lost jets and yachts, but are otherwise mostly doing remark-
ably well. Anecdotal evidence indicates that the Icelandic lesson from
the collapse and the ‘kreppa’ is that loan agreements can always be
changed, and nothing is ever final.
Magnús Andersen
The Collapse And Beyond
6The Reykjavík Grapevine Issue 15 — 2013
The Collapse | Anniversary Special
“Iceland will not have
escaped the collapse
of its banks in early
October 2008 until
the capital controls
are abolished.”
Ólafur G. "orsteinsson
Sigrún Daví!sdóttir is a
London-based journalist and
writer working for the Icelan-
dic State Broadcaster.
5 YEAR
ANNIVERSARY
OF THE
COLLAPSE
2008- 2013