Reykjavík Grapevine - 28.09.2013, Blaðsíða 16

The 2008 collapse of the Icelandic banks has already
generated some myths. One is that the Icelandic bank-
ing sector was overgrown. There is no such thing as an
overgrown banking sector. It all depends on the area
that the sector is serving and the institutional support
it can expect to receive. Switzerland, Belgium, Luxem-
bourg and the United Kingdom had banking sectors that
were roughly as big proportionally as that of Iceland, and
these sectors did not collapse.
The Collapse | Anniversary Special
Another myth is that the Icelandic bankers were
more reckless than their colleagues elsewhere. But
if they were, how did they then find customers, not
only depositors, but also renowned financial in-
stitutions like Deutsche Bank? And when we read
about HSBC being fined for money laundering and
Barclays for libor rate-fixing, and about the excesses
of the RBS management, the Icelandic bankers be-
gin to appear, not exactly as choirboys, but rather as
normal bankers.
The third myth is that the collapse of the Ice-
landic banks was caused by “neo-liberalism.” It is
left unexplained what exactly would be the causal
connection, but the crucial point surely is that the
Icelandic banking sector operated under precisely
the same legal and regulatory framework as bank-
ing sectors in other member-states of the European
Economic Area, EEA. Therefore, this is a myth, not
a plausible explanation.
What did then cause all the Icelandic banks to
collapse, while most other banks survived? The
Special Investigative Commission (SIC) of the Ice-
landic Parliament correctly identified a systemic
risk in the Icelandic situation: “Of all the business
blocks, which had borrowed liberally in the Icelan-
dic banking system, the most conspicuous one was
business associated with Baugur Group. In all three
banks, as well as in Straumur-Burdaras, this group
had become too large an exposure. The SIC consid-
ers that this has constituted a significant systemic
risk, as collapse of one enterprise could affect not
only one systematically important bank, but all
the three systematically important banks.” The fi-
nancial stability, therefore, would be significantly
threatened by, for instance, Baugur Group, which
had, as indicated in the report, substantial liquida-
tion problems in the latter half of 2008.
What happened in Iceland was that in 2004, the
leader of Baugur Group, businessman and adven-
turer Jón Ásgeir Jóhannesson, became the most
powerful man in Iceland, after his critic, Daví!
Oddsson, stepped down as Prime Minister. The
market capitalism of 1991–2004 was transformed
into the crony capitalism of 2004–2008. Not only
did Jón Ásgeir and his cronies control two-thirds of
the retail business, they also owned almost all the
private media and one of the three banks, while hav-
ing good access to the other two banks. It did not
seem to make any difference to opinion-makers that
Jón Ásgeir was investigated, indicted and convicted
for breaking the law on business practices, being
given a three months suspended prison sentence.
The other systemic risk in the Icelandic situa-
tion was that the area the banking sector served—
the whole of EEA—was much larger than the area
where it could depend on institutional support.
This created a mismatch, or a system error. The
problem was not that the banks were too big; it was
that Iceland was too small. But it did not occur to
anyone at the time that Iceland would, unlike all
other European countries, be left totally to its own
devices. The death knell of the Icelandic banking
sector really sounded on September 24, 2008 when
the US Federal Reserve System announced that it
had made currency swap arrangements—essential-
ly a license to print dollars—with the central banks
of Sweden, Norway and Denmark. It became obvi-
ous to the financial markets that Iceland was not
included, although it remained a secret for a while
that Iceland’s Central Bank had indeed asked to par-
ticipate, but that it had been refused.
Without these currency swap deals, these banks
would probably have folded. In other words: the Ice-
landic banks collapsed because they did not receive
the same support as banks in larger countries. They
were not blameless—one of them being controlled
by Jón Ásgeir, and the other two betting heav-
ily, and inexplicably, on him—but they were not to
blame for an old ally, and the mightiest state in the
world, abandoning Iceland. I am not saying, either,
that the banks should have been bailed out—the
refusal to help Iceland was probably a blessing in
disguise—but only that almost all banks in other
European countries obviously needed support to
survive.
The British Labour government made things
worse when it closed down the two banks in Eng-
land owned by Icelanders on October 8, the same
day it bailed out almost all other banks in the coun-
try, including banks being investigated for rate-
fixing and other questionable practices. Simultane-
ously, the Labour government took the drastic step
of invoking the British anti-terrorism law against
one of the Icelandic banks, with the almost instan-
taneous effect that all money transfers to and from
Iceland stopped. For a while, Iceland’s Central Bank
and the Treasury were also on the list of terrorist
organisations, alongside Al Qaida, the Taliban and
the governments of North Korea and the Sudan.
For the Icelanders, accustomed to peace and
prosperity, the collapse of the banking sector was
a huge shock. They did not realise until later—or
even not at all—that in fact seven European coun-
tries were hurt worse than Iceland by the financial
crisis. The political repercussions were serious. In
came a government of petty, vengeful left-wingers.
Central Bank Governor Daví! Oddsson, the for-
mer Prime Minister and the only Icelandic person
of authority who had consistently warned against
the financial adventures of Jón Ásgeir and his cro-
nies, was driven from his post, and Geir Haarde,
the Prime Minister at the time of the collapse, was
indicted (whereas the Social Democratic ministers
were not). Later, Geir was acquitted on all but one
count, that he had not held enough ministerial
meetings before and during the crisis.
So, what did we learn? That we should both re-
ject the crony capitalism of 2004–2008 and the pet-
ty, vengeful socialism of 2009–2013, and try to re-
turn to the healthy market capitalism of 1991–2004
where the major objective is to create opportunities
for individuals to better their condition by their own
effort.
“The problem was not
that the banks were
too big; it was that Ice-
land was too small.”
16The Reykjavík Grapevine Issue 15 — 2013
Five Years On: What Happened?
What Did We Learn?
Hannes H. Gissurarson is a
professor of politcal science at
the University of Iceland
Bjarni Benediktsson is the
current minister of fincance
and the chair of the Inde-
pendance Party.
Sigmundur Daví! Gunn-
laugsson is the current
prime minister and the chair
of the Progressive Party.
?
?
5 YEAR
ANNIVERSARY
OF THE
COLLAPSE
2008- 2013
What Happened In 2008
And Why? How Did We
Handle The Problem
And What Is The Situa-
tion Today?
Despite several attempts to elicit a response
from them, Bjarni and Sigmundur either did
not find the time or see a reason to engage in
discourse with Grapevine's readers (we sent
identical letters to Bjarni, Sigmundur, Jóhanna
and Steingrímur). Admittedly, being a minister
is probably a pretty busy job. Our pages remain
open to you guys if you ever want to get anything
across.
RUB23 A!alstræti 2 101 Reykjavík
Phone +354 553 5323 reykjavik@rub23.is
RUB23 Kaupvangsstræti 6 600 Akureyri
Phone +354 462 2223 rub@rub23.is
www.rub23.is
Funky, fresh and full of flavor!
You must try it!
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