Iceland, a small, rocky outpost in the North Atlantic and home to just over 318,000 people is not a country that easily makes international headlines. But back in the 1970s, Iceland was a staple feature of the nightly news in the UK at least, as that country’s small navy did its best to repulse British fishing vessels in what became known as the ‘Cod War’. More recently, Iceland which had prided itself as being one of the most egalitarian societies in the World had moved rapidly to de-regulate and privatise its economy, in a bid to boost investment and expand its burgeoning banking sector. This was back in the 1990s, and by the Millennium, the Icelandic Government had largely de-regulated and privatised its banks, thus opening the way to a massive expansion of the financial sector.
As with Ireland and her super soar-away ‘Tiger economy’, there seemed no end to the years of boom. Bust was unthinkable for a small island nation, which is part of the European Union. The economic cycle of ‘book and bust’ appeared to have been abolished. Perhaps in some small way the Icelandic experience had come to feature in the thoughts of the former Chairman of the US Federal Reserve, Alan Greenspan and his early disciple, the former British Chancellor and Prime Minister, Gordon Brown. They truly believed that ‘boom and bust’ had been abolished through a marvel known to them as ‘endogenous growth theory’. ‘Endogenous growth’ was centered around a booming service, software, banking and housing sector would be the motor for permanent economic growth.
And then in 2008, Lehman Brothers fatefully went belly up, as did that other banking giant, AIG. The keenest effect of the sharp wind blowing in from Wall Street was Iceland’s now horribly exposed banking sector. The credit squeeze virtually wiped out the country’s banking sector, presaging an enormous economic slump. Back then, living and working in New York, I remember American friends deciding on Iceland as a cheap holiday destination the following year. But for ordinary Icelanders, life for perhaps the first time in a long time became difficult and hard. Old certainties shrivelled along with the jobs and the easy lifestyle of a country that prided itself in its cradle to grave welfare system. The country’s rulers were obliged to go on bended knee to the International Monetary Fund for a $2.1 billion support programme, and then slowly and quietly Iceland faded from international view, as the contagion spread to Ireland, to Greece and to the rest of the European Union.
But this week something happened that suddenly put Iceland back onto the front pages again. The country’s credit ratings were upgraded from near worthless junk bond status to investment status by Sovereign ratings agency, Fitch. In upgrading the country’s economy from BB+ to BBB ‘with a stable outlook’, the agency said that the country’s “unorthodox crisis policy response has succeeded”. As Iceland’s bouffant haired Prime Minister, Johanna Sigurdardottir, waved and beamed to the cameras, Tamerlan Khassimikov of BST Capital Management added; “A major part of Iceland’s debt has been written off. That means the country has more chances to pay its debts. So Iceland’s bonds are more attractive to investors than those of Greece or Portugal.”
Khassimikov words were no sooner out of his mouth before some sage observers began to speculate that the Icelandic economic recovery could provide both lessons and hope for countries such as Greece, who this week announced yet deeper austerity measures in return to a second Euro bail out, a bail out that many observers believe buys time for others such as Portugal and Italy, but without economic growth, little else.
On closer examination however, the Icelandic experience is one that can’t easily be replicated. For a start the country was not a member of the Euro zone and was able to devalue its currency, the Krona. No Euro zone country has that same massive room for manoeuvre, unless of course it defaults and exits the Euro zone. More than that, when its banks collapsed, the Icelandic authorities simply let them go to the wall – and then they re-nationalised them. Shareholders and depositors lost heavily as did a range of outside investors, such as local authorities and pension funds from countries such as Holland and the Britain. John Stevens, a former Member of the European Parliament and before that a banker himself says; “Iceland has a population the size of an English Midlands town such as Nottingham, where total capitalisation of banks was some 20% of GDP. This compares with 5.7% in the UK, 1% in the US and 0.5% in Germany and France. Iceland simply closed her banks and refused to pay. In Britain we bailed out the banks after they had lost £100 billion, doubling our national debt. We couldn’t do it again”.
When I sought some answers from senior analysts over at Citi Bank, as to what lessons Iceland’s recovery might have for the wider Euro zone, no one was prepared to speak on the record. Off the record, one analyst said; “The Icelandic experience is difficult to replicate in the Euro zone”.
In the words of Iceland’s long serving President, Olafur Ragnar Grimsson; “We followed the will of the people. For in Europe there is a conflict between the democratic will of the people and the financial markets”. Put bluntly Iceland has bankrupted its way to recovery. More than that, its solid economic fisheries and manufacturing base have put real value back into the Krona. In fact the more one studies the Icelandic experience, the more even a detached observer must conclude that a small individual State has been able to use levers of economic and political power that are denied within the Euro zone. Some might argue that Iceland’s political leaders have acted in an altogether old fashioned, Keynesian way, frowned upon by the neo liberal orthodoxies that have held sway for so long. Yet without that IMF loan, it would all have been so different. And despite the recovery under way, some 25,000 Icelanders are still in arrears with their mortgages.
Greece’s deep malaise doesn’t lie so much in a banking crisis. The country doesn’t have much of an international banking sector, but more that it joined the European Single Currency decades before it should. The country’s moneyed elite have largely hidden their wealth offshore and avoid paying taxes; and Greece’s public sector is bloated by political patronage and cronyism of the worst order. According to John Stevens again; “If Greece – and Italy for that matter- can give up their patronage system and the old cronyism is finally broken, they have sound economies underneath. There are signs that this may at last be beginning to happen”.
If there are any lessons for Europe as whole, it is that there is no easy route to recovery. Iceland’s path was unusual and isolated, but economic growth is just as important there as it is to faltering members of the Euro zone in the Southern Mediterranean. The European political class and the bankers who heaved their shoulders in relief at the latest Greek bail out, may soon have to accept that part of the answer lies with everyone paying taxes – not just the little people – that those taxes should be progressive and probably fall heavier on those who can afford them. Progressive taxation, a financial transaction tax and an acceptance of the necessity of Euro bonds may be part of the longer term solution too.