Reykjavík Grapevine - 14.08.2015, Blaðsíða 10

The Crisis
10
The Reykjavík Grapevine
Issue 12 — 2015
Politics | Bright?
It just so happens that the same man, a
Dane named Poul Thompsen, was the In-
ternational Monetary Fund’s head of mis-
sion in both Iceland and Greece. His task
was to coach the two countries through a
country-specific financial assistance pro-
gramme, to ensure that their loan would
be used to restore the economy. However,
the outcome of the assistance in the two
countries could hardly have been more
different.
The Icelandic programme, which
ended in summer 2011, has been deemed
a total success, much to Thomsen’s credit.
Meanwhile, Greece has staggered from
crisis to crisis and Thomsen has been
much maligned for the unsuccessful at-
tempts to revive the nation’s economy.
The differing outcomes clearly have a lot
less to do with the stoic Dane than they
do with the circumstances in Iceland and
Greece. Unlike in Iceland, the political
class in Greece is unwilling to acknowl-
edge past failures. Instead, there is stub-
born refusal to embrace changes to the
nation’s “clientelismo” economy, wherein
public funds have for decades been used
to buy political favours and support spe-
cial interests.
To stabilise the Greek economy, cred-
itors will either need to accept a write-
down of a substantial part of the nation’s
debt or agree to a debt holiday for up to 40
years, during which time Greece would
not pay off its debt. Yet, doing so is tricky,
as it absolves clientelismo politicians of
all their mistakes.
The fallacy of “happy
times are here to stay”
Iceland was literally flush with success in
the years following the privatisation of its
banks in 2003. For a period of five years,
Icelanders seemed able to both walk on
water and fly. This boom was fundamen-
tally different from past booms: It did
not stem from something as fickle as fish
stocks, but from a financial sector where
all curves pointed firmly skywards. The
nation’s politicians blissfully neglected
lessons from the world’s economic his-
tory, where bust follows boom as night
follows day.
Icelanders’ savings were clearly not
enough to fund a financial system grow-
ing from one GDP in 2002 to nine times
the GDP by 2008. International credit
was cheap and easy to acquire, and every-
thing was going swimmingly. With inter-
national investors seeking to profit from
Iceland’s high-interest environment, the
króna became particularly strong. This
eventually became a millstone on the Ice-
landic economy, as the króna depreciated
through 2008, culminating in a banking
collapse in October.
Despite an unfortunate expansion-
ary policy of lower tax and public invest-
ments during the boom years, there was a
budget surplus and public debt was only
around 30% of GDP when the crisis hit.
Greece, too, was doing well in the
years after joining the Eurozone in 2001.
As in Iceland, the expansion was driven
by a strong domestic demand in an envi-
ronment of unprecedentedly low interest
rates. However, in Greece, the govern-
ment used the boom years to instigate
more deficit and debt, which stemmed
from an unsustainable pension system.
In fact, Greece had been suffering
from a chronically high level of debt and
deficit since the mid 1990s. Miraculously,
these numbers dived down to the Maas-
tricht criteria (public debt below 60% and
budget deficit of no more than 3%) in time
for adopting the Euro. Upon closer scru-
tiny, this upheaval was no miracle, but
simply a case of falsified statistics.
Foreseeable, not
just in hindsight
Differences aside, the Greek crisis is still
worth considering from an Icelandic per-
spective. In Iceland, an over-extended
banking system caused the collapse, even
though public finances had been sound.
In Greece, however, unsound public fi-
nances eventually crippled the nation’s
banking system.
The IMF did not foresee the Icelandic
collapse. Yet, an IMF statement on Ice-
land in June 2007 brought both praise—
“the medium-term prospects for the
Icelandic economy remain enviable”—
and stark warnings: fast-growing banks
might undermine stability. Consequently,
the government should prepare for im-
minent risks stemming from maintaining
such a large financial sector.
Greece got a much stronger warning
in an IMF report in December of 2007.
After the sweet reminder that the Greek
economy had grown fast for several years
there came serious warnings, that had by
then been repeated for a few years: com-
petitiveness was steadily eroding and the
labour market rigid; public debt was high
and rising because of an unsustainable
pension system. As in earlier years, the
government recognised the weaknesses
and claimed to be working on improve-
ment, according to the IMF report, and
yet little had been done so far.
Interestingly, the 2007 IMF message
to Greece was: do not be complacent dur-
ing the good times, instead use them to
accomplish necessary reforms and avoid
later pain. As the IMF foresaw already in
2007, the consequences of inaction have
been severe.
Ignored warnings
Iceland’s government did not pay par-
ticular attention to the words of warning
in 2007. All through 2008, the Icelandic
Central Bank (CBI) was trying to con-
vince other central banks to make cur-
rency swaps with Iceland, which was
growing dangerously short on foreign
currency. Time and again, central bank-
ers in the other Nordic countries, in Great
Britain and the United States, warned the
CBI in no uncertain terms that its gigan-
tic banking sector could be problematic.
The CBI resolutely ignored the warnings.
Meanwhile, the same situation was
unfolding in Greece. The IMF and oth-
ers kept warning the Greek government,
which—like Iceland’s—resolutely ignored
their advice. Iceland effectively lost mar-
ket access in the summer of 2008 as no
one wanted to lend money to Iceland. Not
until late October, some weeks after the
banking collapse, did the Icelandic gov-
ernment turn to the IMF for a loan.
Greece lost market access in March of
2010. On May 2, 2010, the Greek govern-
ment signed a Memorandum of Under-
standing (MoU), receiving a bailout pack-
et from the IMF, the European Central
Bank (ECB) and the Eurozone countries,
worth €110bn, to be paid out over three
years. In return, Greece agreed to follow
the IMF’s adjustment programme. In
2012, the programme was adjusted along
with a new loan package of €164.5bn.
Iceland: from crisis
to a steady recovery
During the first weeks and months of dis-
belief and shock following the banking
collapse of October 2008, Iceland’s par-
liament, Alþingi, took action in several
matters that have later proved to be steps
in the right direction. Alþingi established
an independent Special Investigation
Committee (SIC) to look into the causes
of the banking collapse, which published
its report in April 2010.
Also, the Office of a Special Pros-
ecutor was established to investigate
and eventually prosecute alleged crimes
connected to the overgrown banks’ op-
erations. Strictly speaking these were not
measures to improve the economy but it
can be argued that this aided the econo-
my by freeing political energy from the
blame game; instead it could concentrate
on more constructive work to rebuild the
economy.
Later on, the Social Democrat-led
coalition with the Left Green party,
in power from early 2009 until spring
2013, instigated measures to write down
mortgages. This helped alleviate non-
performing loans in the banks and set
things in motion again. Another helpful
measure was a change in bankruptcy law,
which shortened the time limitation of
bankruptcy to two years from the earlier
four, ten or twenty years, depending on
the kind of claim.
By mid summer 2011, Iceland had
entered a steady growth phase. Yet, the
mood in Iceland changed slowly, and it
took the country some years to get out of
crisis mode. Icelandic households have
always been good at spending on credit,
but since 2009 households have actually
been paying down their debt.
Greece: from ignored
warnings to ignored
measures
Greece has followed a more unfortunate
path. Changes that the IMF had been ad-
vising for years before Greece lost market
access in March of 2010 were part of the
prescriptions in the bailout programme.
However, the Greek authorities did not
embrace the changes suggested by their
lenders, nor did the Greek governments
find other means to reach the goals of a
sounder economy.
Greek politicians behaved much like
Icelandic politicians did in 2008: they
made empty promises in order to secure
much-needed assistance. Understand-
ably, lenders today worry that Greek
politicians will behave as they have in
the past: promising all they could and
then delivering on only a fraction of
the promises.
Greece also has a history of cheating
on statistics and giving erroneous in-
formation on certain financial transac-
tions—swaps—made with the US invest-
ment bank Goldman Sachs in 2001, in
order to hide loans and make it look as if
the state finances fit the Eurozone. These
deceptions surfaced in early 2010, just be-
fore the bailout.
Since a new president, Andreas Geor-
giou, took over at the Hellenic Statistical
Authority, ELSTAT, in August of 2010,
the statistics have been in accordance
with international standards. However,
Greek politicians have continuously
threatened Georgiou and two ELSTAT
managers with charges of treason—for
correcting upwards the deficit number
for earlier years. Being sentenced for
treason could have resulted in a prison
sentence for life. These charges have
been dropped but Georgiou still faces
minor charges. Yet, those guilty of wil-
fully reporting false statistics have never
been touched.
Embracing change,
or resisting it
After some initial resistance to seeking
help from the IMF, politicians in Iceland
have came to value the expertise that
the IMF had to offer in dealing with the
crisis. Iceland’s governments, first on
the right and then on the left, cooper-
ated with the IMF. As planned, the pro-
gramme ended in summer 2011.
Meanwhile, politicians in Greece
have fought and resisted changes, ac-
cepting IMF prescribed programmes to
access funds but failing to fulfil them.
Two committees set up by the Greek
parliament are less occupied with inves-
tigating the causes of the Greek collapse
than proving that the crisis was caused
by foreigners and their Greek emissar-
ies, and that Greece’s public debt should
therefore not be repaid.
All of this, in addition to the falsified
statistics, has caused huge irritation and
eventually a breakdown of trust among
lenders to Greece. It was no coincidence
that there was great emphasis on the
need for renewed “trust” in the July 12
Euro Summit statement, which formed
the basis for a new programme.
Write-down
and securing change
for good
Much of the debate about Greece will
seem familiar to any Icelander. There
are foreign pundits who feel tremen-
dously sorry for the Greeks, and want
their debt written down for humanitar-
ian reasons. This, however, seems based
on the assumption that things were done
to Greece—that the nation’s govern-
ments were somehow blameless—which
is a misconception. As mentioned earlier,
there was no lack of warning signs, which
Greek governments chose to ignore for
more than a decade.
Mistakes have certainly been made
by creditors, from Greece’s first bailout
in 2010 and onwards. As the IMF has
already admitted, demands for cuts in
public spending were too great, caus-
ing a needlessly harsh contraction in
the economy. A write-down of approxi-
mately 50% of Greek debt in 2012 helped,
but only briefly, partly because the Greek
government again did not do what was
advised, nor did it come up with solutions
of its own.
Still, it’s evident that Greece needs
some form of a write-down of its pub-
lic debt or an extension of its loans. The
German government, as well as the Finns
and many other stakeholders, oppose
this, but there are some indications that
it will eventually happen.
Until some compromise is reached,
Greece is stuck. But then again, not much
will happen if Greek politicians continue
to dig in their heels to protect the status
quo, which caters to special interests.
Greece is yet to come up with sustainable
solutions, and the lenders have failed to
come up with the right incentives to push
the nation into the right direction.
However, absolving Greece of all its
debt, as if nothing had happened, will
only bolster the political forces that
caused this mess in the first place—and
in the long run, this will not help Greece.
This is not about crime and punishment,
but about a country that needs to learn
good governance and sensible lessons
from a crisis long in the making.
In October 2008, Iceland was hit by a ton of bricks in the
form of three collapsing banks. The International Mon-
etary Fund (IMF) agreed to help Iceland out with a loan
of $2.1bn, then approximately 20% of the country’s GDP.
Greece, too, was hurting at that time, though it was not
until March 2010 that it had to seek assistance and the
IMF—in addition to European institutions and EU mem-
ber states—came to its rescue with a loan of €110bn. But
this did not solve the debt problem and it received anoth-
er loan package in March 2012, this one worth €164.5bn.
Now, as Greece’s public debt reaches 180% of its GDP,
a third rescue package worth approximately €90bn is
being negotiated.
Words by Sigrún Davíðsdóttir
Photo by Jói Kjartans
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