Amid Greek debt crisis, Iceland still recovering from its own collapse

While Greece battles its debt crisis, Iceland – where major banks collapsed in the wake of the global financial meltdown – is gearing up for a referendum on whether its taxpayers will shoulder the burden of paying back billions of dollars of debt.

Looking on as Greeks took to the streets in recent days in protest at an economic crisis often blamed on powerful individuals and forces beyond the control of ordinary citizens, many Icelanders must have felt a sense of déjà-vu.

A little more than a year has passed since Iceland became the 2008 global financial meltdown’s worst casualty when all three of its major banks collapsed and the government was toppled.

While the spotlight this week fell on Athens, where the rulers of debt-stricken Greece are braced for a public backlash against severe spending cuts and hundreds of finance and customs ministry workers took the streets on Wednesday to protest budget cuts, those behind Iceland’s own citizen uprising against their country’s banking and political elites insist that anger is still bubbling away here.

“We are not asking for people to be executed but we want them to face the consequences for what they did,” says Hordur Torfason, a folk singer and key instigator of the "saucepan revolution" – so called because of the kitchen implements participants took along to bang outside Iceland’s parliament.

Sipping coffee in a bustling cafe yards from where he led the protests, Torfason indicates that the next spark for a resurgence in popular anger may be just weeks away.

In what could be a perfect political storm, an eagerly-awaited official report into Iceland’s "riches to rags" economic crisis will be published days before a referendum planned for March 6 on a hugely unpopular deal to pay billions of dollars to Britain and the Netherlands arising from the collapse of an Icelandic online bank.

The poll was initiated when Iceland’s president refused to endorse the "Icesave" package, named after the bank which had offered high-yielding accounts to British and Dutch customers who were subsequently reimbursed by their own governments. Icelandic foot-dragging on paying that money back has caused a vital $4.6 billion International Monetary Fund-led loan to be frozen.

Dire warnings

Ahead of the vote, a battle for the nation’s hearts and minds has been underway with Iceland’s prime minister, Johanna Sigurdardottir, warning Iceland would effectively be opting out of the international financial system if it were to say no to the deal.

In addition, a "no" vote to the Icesave deal would also spell the end of Iceland’s hopes of joining the eurozone – a crucial difference between its predicament and that of Greece, with investors expecting a bailout for Greece from wealthier eurozone partners like France and Germany. Sigurdardottir’s opponents claim Iceland has every right to reject the deal, accusing Britain and the Netherlands of bullying the smaller country into unfair terms.

Weekend reports said Iceland is to meet Britain and the Netherlands in London on Monday to present a new proposal for repaying the money owed from the Icesave debacle, with the Icelandic government hoping to avoid the need for a divisive referendum and unlock the IMF aid. But with the UK and the Netherlands also facing testing economic times it remains unclear if they will be willing to give Iceland a break.

The battle is taking place at a grave time.

The President’s actions led the Fitch credit ratings agency to downgrade Iceland’s sovereign debt status to "junk," unemployment has risen past 8 percent, and many face losing homes when a moratorium on repossessions runs out later this year, particularly those with expensive foreign currency loans.

Against this backdrop, commentators like Egill Helgason say opposition to the Icesave deal is being manipulated to stage a revival by the right-of-center Independence Party, which oversaw a boom-time era of light-touch regulation and privatization during the 18 years it ruled until its ouster last year.

“Basically they have won the propaganda battle to rebrand themselves,” adds Mr. Helgason, who hosts an influential television current affairs talk show for the state broadcaster.

At the Independence Party’s headquarters, its new young leader suggests any revival of its fortunes has more to do with its policies for getting Iceland’s economy back on track. But while admitting that mistakes were made during his party’s rule, Bjarni Benediktsson also strikes a note of defiance.

“The global financial crisis was a spark that ignited a barrelful of dry powder,” he says.

“It came at a very inconvenient time for our banking sector, which could have used the months ahead of October 2008 to sell off and downsize their balance sheets. I am of the opinion that that could have saved them.”

Bank collapses

In the end, all three of Iceland’s major banks collapsed. Benediktsson’s analysis, say critics, is symptomatic of a rewriting of history now taking place.
This new narrative veers away from holding Iceland’s former rulers responsible for a situation in which its greedily overleveraged banks were always destined to hit the rocks – bringing the country with them - with or without the global crisis.

Indeed, there are cries that the rewriting is happening in a very literal sense at one of Iceland’s largest newspapers, Morgunblaðið, where quotation marks have begun to appear around mentions of the word "collapse."

Observers detect the influence of a new editor, David Oddson, who just happens to have been Iceland’s prime minister from 1991-2004, before becoming chairman of the Central Bank between 2005 and 2009.

These days, no other individual in Iceland is more vilified.

Mr. Oddson now gives few, if any interviews, but has been accused of being the guiding force behind the opposition to the Icesave deal.
At the government’s headquarters, Iceland’s Minister for Finance, Steingrímur J. Sigfússon, is under no illusions about the struggle to secure a ‘yes’ vote in the referendum.

He adds however: “I would be hopeful, provided that the debate is balanced, subjective and rational, that we would have a chance to win.”

Paying the Brits, and spending cuts too

It’s not hard to find those with sympathy for Sigfússon, who was a voice of warning in the days of Iceland’s unlikely role as a global financial power but who now finds himself burdened with selling both the hugely unpopular Icesave deal and forthcoming deep cuts in spending on public services.

At the very least, he can expect others to come under fire at the end of February when the truth commission set up by parliament releases its "Black Report" into the causes of the collapse.

Its contents remain secret for now – but its chairman has warned Icelanders to brace themselves for “some of the worst news anyone could have to convey to their country."

Whether the report will firmly blame any particular individuals – politicians or bankers – is also unknown, although it’s clear that the general public expect heads to roll at some point.

Most have more faith in a separate criminal investigation into Iceland’s discredited financial oligarchs, which is being assisted by Eva Jolly, a Norwegian-French politician and magistrate with a track record as a sleaze-buster.

Those expecting this investigation to deliver at least some scalps are unlikely to be disappointed if Mr. Sigfússon’s comments are anything to go by.

“Given the enormity of this situation and what happened and what is already visible about the behavior of some, one would guess that is a very likely outcome that some people will be severely penalized or put [in] prison,” he says.

If not, could there be a repeat of last year’s "saucepan revolution?"

“The whole political system is very unstable and discredited in the eyes of the Icelandic people,” according Mr. Helgason. “We don’t have a tradition of populist parties coming to the fore but there might be an opening if there was a new election.”

He also points to another ominous sign: “Basically, all the big companies are bankrupt and they are in the hands of the banks, so the wealth of Iceland is being redistributed, including fishing quotas, [which is] the most valuable thing.”

“Already though there are signs of corruption. That’s the big question: whether you can restructure society to be a healthy one, or whether there will be a new phase of corruption.”

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