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Articles in English

2.11.2016
JBH interview Scotland

Read more

14.9.2016
WHAT´S WRONG WITH EUROPE – AND WHY DON´T YOU FIX IT?

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9.9.2016
WHAT CAN WE LEARN FROM THE NORDIC MODEL?

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31.3.2016
HOW TO SAVE CAPITALISM FROM THE CAPITALISTS - AND DEMOCRACY FROM THE PLUTOCRATS?

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15.2.2016
The Transition from totalitarianism to democracy: WHAT CAN WE LEARN FROM THE BALTIC ROAD TO FREEDOM AND POST-INDEPENDENCE EXPERIENCE?

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All articles in English

20.7.2009

ICELAND: FROM CRISIS TO RECOVERY

INTERVIEW WITH MR. JON BALDVIN HANNIBALSSON
BY WITOLD BOGDANSKY IN REYKJAVIK (JUNE 02, 2009).

The purpose of the interview is to present different opinions on present situation in Iceland, collapse of the Icelandic economy in 2008, issues such as membership of EU and EMU, economic situation, adoption of euro (or a different currency), NAFTA issue and others subjects.



Mr. Jon Baldvin Hannibalsson, is a very well known Icelandic politician: the former President of The Social Democratic Party (1984-1986), the former Minister of Finance (1987-1988) and Minister of Foreign Affairs (1988-1995), and later the Ambassador of
the Republic of Iceland in the United States and Finland.

Mr. Hannibalsson, I would like to thank you very much for accepting this interview,
which is aimed at supporting my Thesis at MBA studies (inter-faculty) at Faculty of Economics of the University of Gdansk (in Sopot). The Master of Business Administration Postgraduate Program at the University of Gdansk was created in cooperation of two UG Faculties: Faculty of Economics and Faculty of Management and three foreign universities: University of Antwerp in Belgium, Copenhagen Business School in Denmark and FHTW Berlin in Germany.

The Thesis “Conditions for and prospects of adoption of the euro in Iceland in the age of the current economic crisis” is a difficult project. So it is essential to present different opinions on the past and present economic situation in Iceland, the issue of EU membership, prospects of adoption of the EURO (or another currency such as USD
or NOK), other issues such as association with NAFTA and other issues.

Questions:

1. Iceland appeared in the world news, due to the almost overnight collapse of its economy in October 2008. A modern globalized economy, and an active participant in the EU´s common market, Iceland was among the first nations to be seriously hit by the global financial crisis. Could it have been avoided?

(1) My answer is yes. How? In April 2008 the National Bank of Iceland, Landsbanki received a report on the Icelandic banking system which they themselves had commissioned. Authors were Willem Buiter, Dutch-British monetary economist and Anne Sibert, an American statistician and econometrican, who is now, by the way, a member of the Monetary Council of the Central Bank of Iceland. They presented their report April 18th, to the directors of The National Bank at the meeting where there were present reperesentatives from the Icelandic Ministry of Finance, from the Central Bank and from Academia.
What did they say, Buiter and Sibert? Well, they said the following : the business model of the banks was in fundamental ways unsound, unsustainable. To have a banking system operating in the international financial markets, based on the Icelandic krona, the smallest currency area in the world, which only had a backup of the Icelandic Central Bank and
the Icelandic Goverment, having grown in six years from 1 GNP to 10 GNP is a house of cards, it will fall inevitably, it is only a question of time. It is not if, but only when.
So, half a year before the fall, the Icelandic authorities had a direct warning from top authorities in the field telling them do something immediately, they did nothing.
So my answer, was it avoidable? Yes it was, and they had been warned, this was the most distinctive and detailed warning, but they had been warned before by others; they had been warned by foreign banks, they had been warned by the European Central Bank, they had been warned by writers in the international financial press, they had been warned by Icelandic economists, they had been warned by foreign economists.They did nothing.

But, what could they have done? They had several options, that were under discussion:
1) They should have expanded the foreign currency reserves, to make sure that they could cover the short term debt of the banks. My answer to that is, well, to begin with yes,
but after it was clear that the banks had grown out of all proportion, Iceland simply couldn’t afford it. So, in the begining they should have expanded the reserves more than they did.
But that would not have been enough.
2) They should have intervened to control the expansion of the banks. They had several means to do that. Number one it could be by expanding obligatory reserves to reduce
the banks capacity to expand their lending. That’s one thing. Number two, they could have forced the banks to relocate their headquartes to abroad, either Britain or to the euro area to reduce the currency risk. They could have done that, but they did not.
They could have done one thing else, that´s a third option. They could have reconsidered their European policy in the years before the situation became absolutely catastrofic, i.e. in the period up to 2006, and started negotiations for membership of the European Union to reduce the weakness of a support system of the weak Central Bank and a weak tax payer base. They didn’t do that either.

So for all sorts of reasons they didn’t do what should have been done to avoid the crash, despite warnings and advice at expert level. Why? Well, my answer is that they were themselves, more or less, under the impact of the fashionable economic theory that the goverment shouldn´t interfere with the markets. They were themselves exponents of the neoconservative thesis that markets would correct themselves, that the state had no business in interfering. That´s it. At least they used that as a justification at the time.

2. There were voices, both from abroad, and in Iceland, warning of possible serious economic problems in Iceland, back in 2007. The economy was overheating and
the Icelandic krona was shaking in both 2006 and 2007. Why were the Icelandic banks allowed to invest abroad almost to the amount of 10 times GNP?

(2) Yes, we can say that though the banks were in Iceland, they were not Icelandic, around 85% of their activity was abroad, only roughly 15% was in Iceland. Yes, they should not have been allowed to grow so rapidly. We are not the first country to face a bank crisis. Bank crisis are very well known. A Central Bank economist should know about previous cases of bank crisis, and one of the most dire indications of something dangerous is a rapid expansion on this scale in such a short space of time. The alarm should have been sounding. When we ask them now: “Why didn’t you do something?” - then they say: Well, it would not have been well received. The answer to that is : The Central Bank is not in
a popularity competition. It is not in the market for votes. It should do what it has to do. It has the duty to maintain the stability of the financial system.

3. Kaarlo Jännäri´s report from March 30, 2009 relates the collapse of the Icelandic banking sector to a combination of several factors that can be described – in the same way as was done in the analysis of the Norwegian banking crisis – as bad banking, bad policies and bad luck. What is your opinion?

(3) The report showing that it was a combination of bad banking, bad policies and bad luck, yes, certainly there were all those ingredients, the bad luck, bad banking and bad policies were being implemented at the same time, as the outside world was also gradually sailing into a downturn. But there is one thing more, which explains why this was particulary of domestic origin. We can say that the starting point in explaining the Icelandic bank crisis was the privatisation of three state banks in the years 2000, 2001 and 2002. In this period from 2001 to the fall of 2008 one of the most venerable Icelandic economists, Jónas Haralz, said, summing up this period from the point of view of the economic policy, said that this was a period characterized by conspicuous lack of coordinated macroeconomic policy. And he has forcefully argued this case in several pronouncements: first, fiscal policy. Iceland was involved in a major macroeconomic project, which was investing in a new power station and a major aluminum smelter with foreign capital. This was all loan-financed and it meant that the capacity of our small economy was, through this project alone, pushed to its limits, in terms of capacity, in terms of employment. Even beyond
the limits, because we had to import a lot of foreign labour for this project. This means that the goverment should have been on the brakes, it should have tried to counter-balance this with contractionary policies in other fields to avoid overheating. But the goverment did quite the contrary. First of all, privatisation of the banks means that the banks started fierce competition among themselves for market share in the domestic market. Numer two: they were allowed into the real estate market where they had never been before, and the limits to loans to individuals for buying new homes were basically abolished. So they could give
a 100% loan. That opened the way for people who had no creditworthiness to have loans. So in addition to a lax monetary policy the government itself made things worse through their undisciplined fiscal policy.

The Central Bank policies also failed in terms of trying to counteract overheating. What did the Central Bank do? Well, they had declared in the year 2001 a new policy with floating exchange rate and inflationary goal of 2,5% with margins upto 4%. And right from
the begining it was quite obvious that this declared policy was a failure. It simply didn´t work. You can count months, a few months, when they actually managed to be within
the limits. Instead, what did they do? They raised the central bank rate. The Central Bank rate is meant in a normal economy to stop lending or to have the impact that the companies would reduce borrowing and thus counteract overheating. But it so happens that this policy had no effect whatsover in the real estate market in Iceland for the simple reason that it is financed basically through a state institution (HFF), by long term lending with fixed interest rates on the basis of price indexation. This is a special characteristic of
the Icelandic financial system. The Central Bank rate does not have any effect whatsoever on this. So a big chunk of the market was outside the Central Bank´s interest.
Second, because of the high Central Bank bank rate, both companies and individuals,
and specifically the banks used the opportunity to go abroad, which was open, where they had access to plenty of foreign capital at very cheap rates. This means that raising the bank rate did not have the planned effect of reducing demand, but it did have the unplanned side effect of strengthening the weak krona. Strengthening the value of the krona meant that imports became cheaper, so in the overheated economy demand was fed with more
and more imports, which meant that indebtedness of companies and homes was encouraged, which meant that the balance of trade went totally out of control. This is what Jonas Haralz meant when he said that this is a case study in a conspicuous lack of coordinated macroeconomic policy. So the macroeconomic policy in Iceland, along with what the banks were doing, and along with what The Central Bank was doing in terms of monetary policy, was all heading for a disaster.

4. Should a politician and a lawyer be a Governor of the Central Bank of any country? Mr. David Oddsson was widely blamed for many mistakes. On the other hand, what about lack of power of FME (The Financial Supervisory Authority)?

(4) Well, we know now at least that this particular politician and the lawyer Mr. Oddsson should never have been appointed the Central Bank director. Why? Well, he had been for
a long time a leader of the Conservative Party in Iceland, the leading party. He had been Prime Minister from 1991 to 2004, for 13 years. He was a very controversial politician and during his political career he, of course, made enemies, although he had his loyal choir of admirers. This simply means that when the politician moves from the Prime Minister’s office to the Central Bank, he never stops being a politician. He was in the eyes of society
a politician, and through his actions, it was obvious, that he continued to act as he was
a leader of a political party. What does it mean? It means that he did not have the trust or the confidence of the community as such. It is obvious from what he has later said himself that his advice was not taken seriously. It was considered to be party politics. We know that he was very active in politics behind the scenes. So his authority as the Central Bank Director was from the beginning zero. Admittedly he lacked the required academic qualifications. But even if he would have been a trained economist his advice would not have been taken seriously as disinterested professionalism, due to his political position in the past and his political connections in the present. Mr. Oddsson was simply controversial to be able to act with the authority of a non-partisan but professional central banker.
This turned out to be a fatal flaw, as was shown by subsequent events. Mr. Oddsson maintains that he warned the government of imminent catastrophe in confidential meetings more that once before the crash. Since the government did not react in any way it seems to imply that the Central Bank was not taken seriously. One of the coalition parties in
the government believed that Mr. Oddsson was all the time continuing to play party politics. The same applies to the Central Bank´s crucial decision to overtake Glitnir (one of the commercial banks) rather than helping them out through lending. This was considered to be a continuation of a long standing feud between Oddsson the politicial and the business tycoons in charge of Glitnir. So, if we can learn anything about from the Icelandic experience it is this : Politicans, good or bad, stay away from the Central Bank!

WB: If the power of FME was bigger, do You think it would have changed
the situation?

JBH: Well, first it is obvious that FME did have powers that they didn’t use. Take the case of Icesave: Icesave was net bank branches of the National Bank of Iceland established from the beginning of the year 2006 in the UK and later in Holland. Why? Well, after the ratings companies started downgrading the Icelandic banks, meaning that
their creditworthiness was lowered, meaning that the risk surcharges on loans to them were getting higher, even prohibitive, they resorted to net banking, retail banking,
by overbidding the rate of interest to savers in those countries in order to save their short term refinancing needs. This started in 2006, it increased rapidly in the year 2007, and even in the year 2008 they opened up for the first time in Holland in April 2008, six months before the crash knowing then that they were in a very risky business.

As a member of the EEA (European Economic Area) since 1994, Iceland was actively engaged in the inner market ofthe EU. EU´s bank directive was part of Icelandic law. This meant that Icelandic banks could branch out in other EU countries. If they did so they were under the home country´s regime, i.e. the branches operated in our case under Icelandic bank licence, surveillance and depositors savings guarantees. If, on the other hand, banks operated abroad as subsidiaries (daughter-companies), they were under the host country´s regime. Since the National Bank of Iceland operated its net banks as branches in the UK and Holland, it means that the EU minimum savings guarantee (20.887 euros) was a part of the Icelandic savings guarantee system. When the Icelandic bank system crashed in early October 2008, Althingi (The Icelandic Parliament) passed an emergency legislation giving state guarantee for all savings deposits in Icelandic banks. That, of course, also included branches of Icelandic banks abroad. This means that Icelandic tax payers are now being presented a bill to the amount of 650 billion ÍKR. This means that the sovereign foreign debt of the Icelandic state is now somewhere between 160-180% of GNP.This makes Iceland one of the most indebted countries in the world. To prevent it the Icelandic authorities would have had to enforce their decision that Icelandic banks operating abroad should be subsidiaries under the host countries savings guarantee system. The fact that this was not done amounts to one of the greatest mistakes made by the Icelandic authorities during the years leading up to the crash.

WB: But maybe politically they couldn’t act because Mr.Oddsson was above...?

The Central Bank has the duty to maintain the overall sustainability of the financial system. The FME has the job of licencing, and surveilling the operation of Icelandic banks at home and abroad. It seems the FME had the power to have the the Icelandic banks abroad operate rather as subsidiaries than as branches. Decision making in this field is so important, keeping in mind that the banks had outgrown the economy by a factor of at least ten, that it ought to have been a part of government policy. In my opinion this fatal failure of policy is in the joint responsibility of the Government, the Central Bank and the FME. The research now going on into the causes of the crash will hopefully reveil the truth.

5. Althingi passed in the end of 2008 a legislative bill restricting temporary cross-border movement of capital (till end of November 2010). Jon Danielsson, professor of Finance at the London School of Economics (LSE) said in the end of May 2009 that there is a mistake of the Icelandic authorities not to abandon these restrictions already. What is your opinion of this Act?

(5) In the ideal world, yes, it is desirable that we have open markets and free flow of capital for the transactions of international business. But, we are talking about Iceland, Iceland went through a major crash in October 2008, it was a crash of the financial system in total and it was a collapse of the Icelandic currency. It so happens that the Icelandic economy as a whole was heavily indebted, Icelandic companies were heavily indebted in foreign currency, Icelandic homes were heavily indebted in foreign currency. This means that restrictions on the flow of capital were asbolutely necessary, bacause if you would have had free flow of capital, meaning for istance that speculative investors who had been investing in the interest rate differential between other countries and Iceland and they were in hundreds of billions (and I use billion for thousand of millions), foreign speculative investement in Iceland in currency dealings was to the tune of six or seven hundred billion, when you add also all the foreign debt in companies and homes, if you would not have put on restrictions on foreign currency transcations, it means that there would have been
a massive outflow of capital from the country. There was no confidence left in the krona and you would have another crash.
So, I am saying that it was imperative to impose foreign currency restrictions as
an emeregency measure in the beginning. For how long? Well, for as so long as it takes to solve the outstanding , underlying problems: (1) an agreement with the UK and Holland on the Icesave debt, (2) to reach an agreement with foreign creditors with claims on
the bankrupted banks, (3) refinancing the new state run banks, (4) lower the Central Bank rate in accordance with the fact that the Icelandic economy is in a deflationary spiral,
but not facing inflation. Unless you do all of those things you cannot lift the restrictions foreign currency earnings unless you are ready to face another collapse of the krona.

6. Professor Danielsson has also criticized government for lack of information on
the situation of the State and of the banks, which creates doubts about the Icelandic economy. He also points out that the new government is a few months behind the schedule. Is the nation not informed?

(6) On that issue I absolutely agree. It is amazing that now, 8 months after the crash, these crucial issues have not been clarified to all those concerned and to the public at large. Admittedly the Icesave-debt has been settled. The Icelandic government accepts obligation for the minimum savings guarantee to the amount of 650 billion ÍKR at the rate of interest of 5.5%. This is a heavy burden for the years to come. But at least the issue is settled.
The complex issues dealing with the bankrupt old banks and the establishment of the new banks under the ownership of the state, are still unsolved.
What are they? They are that the goverment under the emergency law has authorised to
the FME to establish new banks and to take over from the bunkrupt old banks basically
the domestic part of the old banks, namely the guaranteed savings deposits, and the loans to Icelandic companies. This calls for negotiations between the state and foreign creditors on the price of the overtaken assets. This was meant to have been finalised in February, now we are in June, they are not finalised yet. What does it mean? It means that the crucial issue: will the new banks be profitable banks and will they be creditworthy and will they get positive ratings, will they be able to serve the Icelandic companies? These questions remain open. That depends entirely on what they take over, will the loans that they take over be bad loans, basically failed loans, and at what price is it negotiated. We know that foreign loans to the old banks which were basically in the form of debtor obligations, they have been sold in the financial market abroad as junk, something that was originally a loan from The Deutsche Bank to Kaupthing to the value of 100 million euros has now been sold for something like 1 or 2 million. Should the Icelandic state honour these obligations at their original nominal value or should they negotiate on the basis of the market price? We still don’t know, 8 months later. This means that with all those outstanding issues unsolved the status of the currency is totally precarious, and all the time Icelandic companies are unable to really plan the future, reschedule their debts, or make any plans for instance for further employment, not to speak of any investment. So we are in a waiting game still. This is extremely bad and should be criticised severly. Because there is no justification for delaying this for months and months and months. It is imperative to finalise that.

7. The nation is angry, some say that, quote:
“Iceland is seen internationally as a real mess of corruption and mafia of bankers and politicians who have betrayed the nation and defrauded billions out of the country. Iceland is seen as a corrupted country, like any other third world place” Would You agree on that?

(7) Well, in your question you say like any other third world place, it is quite sufficient to compare us to Italy. In recent years Transparency International has rated Finland
and Iceland as the least corrupt countries in the world. How are these polls made? They are done through questionaires that this institution sends to leaders in business with detailed questions: “Are the any bribes, do you know of any under-the-table transactions, do you know of tax evasions”? etc. The Icelandic business leaders as well as the Icelandic community as such until the crash simply believed, yes, that were an exemplary honest society. Now, suddenly, an entirely different truth has been reveiled.
First of all, there are no judicial proceedings yet eight months after the crash. No one has been charged in a court of law for breaking the law. So even if there have been appointed commities for investigations, a parliamentary committee, one committee with judicial authorities, all in all three bodies have been empowered and authorised to start investigating what went wrong, some with overall, general powers, at least one with judical powers, but so far, not a single individual has been charged.

So what I have to say it is something that doesn’t have the validity of the court of law or judicial result , but we know certain things for facts. These were three major banks,
the commercial banks of Iceland that were privatised in the year 2001-2002. It is now obvious that they changed rapidly from normal commercial banks into what has been described as not only investment banks but hedge funds. They were extremely risk seeking.Who were the owners? They were very very few. An American economist has written a book with the tittle “The Best Way to Rob a Bank is to Own a Bank” and it seems from what has been published already about the loan policies of those major banks in
the last two years, it seems that they concentrated on lending to holding companies that were in their own ownership or in the ownership of their cronies. The crossownership-ties between those three major oligarchic groups are very complex. We know that they established hundreds of holding companies which were mainly created with the assistance of the banks through the facilities of their subsidiaries in the Grand Duchy of Luxembourg, finally to take refuge with their legal residence in tax heavens. All of a sudden the tiny islands of Tortola in the Carribean is a household name in Iceland. It’s a place with
20 thousand people. Hundreds of Icelandic companies have been registered there. Why? Well, there is no court result yet, but there are only two reasons why this was done, number one : to hide ownership relations, and second : to evade taxes. Does this indicate corrupt business practices? Yes, it does.

The business elite in Iceland behaved as if they were running private hedge funds, the risks they took were totally unreasonable.They seemed to have been able to do whatever they wanted without taking seriously any sort of surveillance or regulation or risk of punishment by the authorities. The picture that we have from the scattered news that have come out from the committees that are investigating the bunkrupt old banks is, that there was a large measure of corruption. There was market manipulation; there was insider trading; there was artificial trading which had only the purpose of trading that was meant to increase or keep up the level of the price of equity. There was a lot of book-keeping artistry also for the direct purpose of giving false information to the stock exhange, to the smaller shareholders, and to hide evidence about indebtetness and risk.
I was ambassador of Iceland in Washington during the time when the Enron case was going through the courts. My conclusion is simply this : Most of the methods, most of
the strategic methods of fraud that were unvealed in the Enron case are subject of investigation in Iceland.

8. Mr Svein Harald Øygard, Governor of Central Bank of Iceland since 27 Feb, 2009 said (Morgunbladid, Apr 01, 2009) that “the Icelandic economy has been undergoing severe difficulties, but with measures now being taken and those that are being prepared, it is his belief that the basis for recovery is now being put in place”. Among the four elements that were said to be critical to laying the foundation for recovery he mentioned the monetary policy aimed at stability, and inflation expected to be at 2,5% in early 2010.Wishful thinking, especially in view of May’s price increase of oil, tobacco and alcohol?

(8) It seems that this statement by the Norwegian Central Bank Director is a primary of example of wishful thinking. The fact is that the monetary authorities, namely the Central Bank under the new direction has failed to stabilize the krona. The devaluation of the krona prior to the crash and after the crash amounts to at least 80% on an annual basis of the value of the krona, meaning the foreign currency related loans in Iceland or debts in Iceland by homes and individual companies have doubled. This is almost unique in the world. I know of no other example, that the value of the domestic currency has fallen almost 100% in
a week! It is a total blow to any healthy economy. You cannot survive such a blow on your own. The purpose of the IFM program in conjuction with the monetary policy by
the Central Bank was to stabilize the situation. How? (1) restore confidence in the currency,
(2) fiscal austerity through deep cuts in expenditure and heavier taxation, (3) agreements with international creditors on the settlement of debts. Since the first aim depends on
the successful implementation of aim number 2 and 3, you cannot make the currency stable unless with an overall solution. You have to have a comprehensive longterm plan where each constituent part support the others. The government has so far failed to sort parts 2 and 3. The IMF uses this as a pretext for keeping the rate of interest far too high (13.5%). There are several solid reasons why this high bank rate is causing great harm to the chances of recovery: (1) Iceland is in deflation – not inflation. High interest-rate cause inflation, instead of restraining it. (2) since the Central Bank has imposed restrictions on the outflow of capital, capital flight cannot cause further weakening of the currency in the short term. (3) all over the world governments are administering stimulus packages and central banks are taking interest down close to zero in the hope of restoring economic growth through new investments and increased consumption. In Iceland the IMF is doing exactly
the contrary. Why?

In other words what’s being applied abroad is the Keynesian recipe against depression to stimulute, to present stimulus package to get the wheels of the economy moving again. This is the correct policy in Britain, it is in the Eurozone, it is in Central and Eastern Europe and is in America. This goes contrary to the policy being implemented in Iceland. First of all, rise in the Central Bank rate, the first thing that IMF did was to raise the rate from 12 to 18% and even if it has been reduced in small steps it is still far too high. Despite the fact that we are working in an economy which is contracting, and in the danger of becoming
a deflationary economy, we apply a policy which is meant to fight inflation.
The inflationary spurt was linked only to the fall of the value of the krona which means that imports have risen in price which should go down rapidly if you can stabilize the krona, the currency.

But basically we are in an economy that is contracting, but we are applying a policy as if we were in an inflationary spiral.The IMF is imposing a program of massive austerity in public finances, namely cutting expenditure and increasing taxation both on companies and individuals, squeezing demand and sucking what little there is left of operating capital in our indebted companies. The conclusion is that the imposed IMF policy is killing off
the hope for recovery of the Icelandic economy any time soon. This is confirmed by
the statistics on bankruptcies and unemployment.

9. If we stay at monetary policy, though the interest rate was decreased from 18% to 17% on 19 March, again down to 15,5 % on 8 April , and recently on 7 May down to 13 %, it is still the highest in Europe. This is very crizitized by the Icelandic business. Maybe the Central Bank of Iceland is ruled by the IMF commissoners who do not allow to lower it, or would lower interest rate not function in a precent situation?

(9) Yes, the lower rates would change radically for the better the hope for keeping the companies alive, for them to survive, to stabilize the situation in the employment, labour market, to reduce the risk of increasing unemployment. Yes, because the remedity is, I mean Iceland is no different from other countries. All countries are now indebted, but we are more indebted than others. We are in a contracting situation in the deflationary economy. The same laws, the same policy should apply namely to try to stimulate
the economy, in order to keep production, investment and demand going, because that is the only way we can pay our debt , if the companies are squeezed to death, I mean, it will be obvious that we will end up by defaulting, we will end up by defaulting on our debt.

10. So most likely be no further reduction in the prime interest rate as it does not help the current situation at all, as the problem from the beginning of the crisis has been the weakened the Icelandic krona?

(10) Yes the krona is weak. It has lost all confidence. How can you straighten it? You can only straighten it by straightening the economy. You can only create a moticum of confidence in the currency if you can prove that the economy is no longer continuing to contract, if companies are solvent, if they are active, if they are, if not investing, at least producing, this will gradually straighten the currency. There is no other way to straighten the currency. If you are in a country that is so indebted, and now you have closed any chance of foreign borrowing, I mean Iceland doesn’t have any creditworthiness abroad.
So now the high rate of interest of the Central Bank is very affecting and cutting off any deamands for loans and increasing the heavy debt burden. If you do this you are simply squeezing the weak economy and it is only a question of time when you safocate it. Lowering the rate interest would be the most needed and the most effective single act to improve the situation.

WB: What rate is needed, You think?

JBH: 5% to 7%

11. Can Iceland ultimately become a symbol of rapid economic recovery ? This is
a hope and belief of Mr Svein Harald Øygard, who based this potential turnaround on “the experience from the Norwegian banking, currency, and debt crisis in the early 1990s and from the Swedish State debt crisis in the mid-1990s” But how can it be achieved?

(11) Well, first I must emphasize that we should not compare the Norwegian crisis in early 90’s to the Icelandic crisis in 2008 and 2009 for a simple reason that the Norwegian crisis was a bank crisis in an international environment of the upswing, the Icelandic crisis is both: the total ruin of the financial system, not only individuals banks and total collapse of the currency. That never happened in Norway at that time. So the Icelandic crisis, I say this to remind us that the Icelandic crisis is much, much more serious than the Scandinavian bank crisis in early 90’s in Norway and Sweden and even much more serious than
the Finish crisis from 1990 to 1995. Do we have any chance of a rapid recovery? Possibly, that on certain conditions. Number one: it is of course a good thing for our exports and for our competitiveness that the value of the krona is now extremely low. It means that we have a competitive edge in our markets compared with competitors who are with high related, strong currencies. Then the question is: will we be able to utilize this advantage? And we will only be able to utilize this if we can domestically save our economy, our productive companies and expand our exports, which is necessary to earn foreign currencies through positive balance of trade. So what was the most calamitous, what was the worst about the crisis the crash of the currency is, when it comes to building up what was negative becomes a positive, our relatively weak currency is an advantage. That… at the same time since our debts are so heavily in foreign currency our weak currency (laughs) is again… has the impact of increasing the debt service in domestic currency so it is
an ambiguous thing. This is sufficient to say that we are in an extremely precarious situation. There is some chance for Iceland to reach rapid recovery on basis of a weak currency if other conditions are there. And what are they? Number 1: the question is if our foreign debt service is beyond our ability to pay. That is my main worry. And then I come to the bank system again. I mean those negotiations that lay ahead between the old bankrupt banks and the new banks. I am simply saying that the new banks will only be able to fulfill their central role in helping finance, a healthy recovery if they are not over burdened by bad debt. That means that in the negotiations with foreign creditors we must make it absolutely clear that when it comes to private debt or private banks or private companies which have now been totally discredited in the markets we are not going to pay those debts as tax payers, as a state in a nominal line. If we do that, the new banks will be burdened, they will go down with bad ratings, they will drag down with them the rest of
the economy and we will be unable to earn the foreign currency earnings that are necessary for a rapid recovery. So everything inches on those negotiations.

12. Goran Persson, former prime minister of Sweden, said in his lecture given in December 2008 in Reykjavik that Icelanders would make it through the depression though it would be very tough. Persson said that it is important that actions wound start immediately even though they may be very unpopular. Icelanders may not wait, they have to take the initiative. Are we are running out of time now?

(12) I attended this meeting. Since then we have had three governments and an intervening parliamentary election. So, there is political turmoil in the land. Persson made the point, that we should immediately start our recovery program, we should have it all above board, it should be totally transparent, it should be presented as a restoration plan, at least for 3 or 5 years, presented to the nation, explained in detail, in order to prove that it was based on some premises of equity and justice. This is what Persson said, this is what he advised. Now when we look back, eight months later, this seems to have been totally ignored by Icelandic authorities. This is not what has been happening up here. There is lack of information, there is lack of clearity, there is lack of transparency and, there is a delay of primary decisions, negotiations drag on, eight months later and the basic problems have not been solved. But Sweden’s indebtness at that time was a small fraction of ours.

13. Mr Persson went through great economic problems in the years after 1990 in Sweden. The problems were mostly around the banks and the Swedish financial system that went through great changes after the problems. Persson was at that time the Financial Minister of the Swedish Government and it was his job to solve the problems that the nation was facing. The Swedes decided following this to apply to join the EU, and Persson said that it had changed everything for Sweden. So another advise for Iceland to follow and start talks with EU ?

(13) Well, Sweden applied for membership and negotiated their membership in the wake of financial crisis. So did Finland, so have many other countries, so it’s nothing new that
an economic crisis has been an impetus for countries to seek sort of security through membership of the European Union. And Iceland is no different. The basic lesson that we have to learn from the crisis is this: the experiment of running an open economy with free flow of capital and full participation in international financial markets, on the basis of the smallest currency area in the world, with the weakness of our institutions - this experiment that we carried out from 2001 to 2008, it failed miserably. It should have taught us
the lesson for good: Never again. It is hopeless to try to do this again. We can not seek recovery, we can not successfully recover unless we have access to stronger institutions. I’m talking about: the European Central Bank system and the adoption of the euro.

Keep in mind the weakness of our currency and of our economy. After the crash there is
a special risk fee for lending money to Iceland. If we would have a loan with a rate of 5% percent it is a 3% addendum because it is to Iceland. There is a special Iceland addition because of the risk involved. We need to have all these things negotiated because if we don’t, I have come to the conclusion that our total debt service is beyond of our ability to pay. So, yes, the long term solution is to learn from the failed experiment, that we need
the stability of a stronger currency union. The only way to secure it for Iceland is to negotiate membership. We know that it will take some time, we know that we are not going to fulfill the Maastricht criteria for the euro for some years to come. But we know also that we will be in a better position to restore the economy to health and to fulfill those criteria through membership than outside. Then, there is one thing: in negotiations I would suggest that everything should be up on the table, not only strictly negotiating “acquis communautaire”, not only discussing and negotiating the vital national interest of Iceland, which deals with the fish sector, but also the consequences of the crash and to what extend the European Union can assist Iceland to ovecome those short term difficulties, which are enormous. So the way to solve some of our problems is through negotiating with European Union.

14. It looks like the the present goverment coalition of the Social Democratic Alliance and anti-EU the Left-Green Movement would finally agree on EU matter in July. Althing would vote against the parliamentary resolution on launching membership discussions with the European Union, which Foreign Minister Össur Skarphédinsson would submit to parliament in the coming days. What is next?

(14) We had elections, parliamentary elections on April 25th. For the first time, as
a consequence of the election’s results, we now have a parliamentary majority for seeking negotiations with the EU for membership. The Social Democratic have until now been
the only party to have a clear pro-European policy. Before the elections the Progressive Party adopted a resolution recommending negotiations and a new party, the so called Citizens Movement with four members is of the same opinion. The party against is
the traditional, conservative Independence Party and the Left Green. But the point is that there is a parliamentary majority if we take seriously the basic resolutions of those three parties. The complication is that the government is a coalition of two parties, the leading party the Social Democrats is pro Europe; the Left Greens are officialy against, (although opinion polls indicate that roughly half of their voters are for starting negotiations). Some in the parliamentary group are also for starting negotiations.

My conclusion is: yes, there is a parliamentary majority for giving a mandate to start negotiations. I think it will be done. I think it will be complicated in parliamentary terms, because I admit, it is not very trustworthy that the government that is going to be responsible for this is not united, but the parliamentary majority is there. It will be precarious, meaning that they will have to do this in a very consiliatory way. Parliamentary solutions are always more complicated, they need more negotiations, so the background is
a bit weak and specially unpredictable. So it is by no means certain that the whole process giving the mandate, starting the negotiations, agreeing on the negotiating results and winning the referendum in two years time – that this will go according to plan. Specially because all of this is going to happen in an environment of deep economic crisis which means that the government is very likely to become increasingly unpopular because of
the economic hardship that people are going through. On the other hand the economic hardship might also convince more people to conclude that there is no other way out.

14. Do we need a national referendum to join EU in the end?

(14) Not by law, but all the parties have promised to bring the final agreement before
the people in a referendum.

15. What kind of changes must be made to the constitution in case of admission to
the EU?

(15) The present constitution does not allow further transfer of power (legal, judicial and executive) to supranational institutions than has already been done through the EEA.
So this has to be changed. Now constitutional change requires a simple majority in two parliaments and intervening parliamentary elections. The present government plans to change this. Instead it would suffice to have the proposals for constitutional change accepted in a referendum.

16. But joining the euro is a different matter; the road to the euro is a hard one, because of the strict rules governing the euro zone under the Maastricht Treaty. We would have to join the exchange –rate mechanism (ERM II). Can Iceland succeed
and when?

(16) Because of our extreme indebtedness it will take Iceland a long time to squeeze public debt below 60% of GNP. We are not alone in this. Italy, Belgium and Greece are around 100% of GNP or beyond. Due to the international crisis, more and more countries are getting more and more indebted. In the end the euro zone will have to kick out the most indebted countries or change the rules. I am confident that Iceland will fulfill the other criteria more quickly: Low inflation, low interest rate and fiscal balance. Stability of
the currency under the ERM II regime is a tricky one, but then Iceland will enjoy
the support of the European central bank system. That will help.

17. Mrs. Jóhanna Sigurðardóttir, the Prime Minister of Iceland says that Iceland would fulfill Maastricht restriction and adopt the euro. However, the Ministry of Finance clearly stated in the Economic Report that it would take 30 years to fulfill
a restriction of a government debt. Is the report a political one, as Mr. Steingrímur
J. Sigfússon, the Minister of Finance is against the EU membership?

(17) The prognosis that it will take Iceland up to 30 years to get out of our present debt prison is a purely academic exercise and therefore irrelevant.

May I add on the indebtedness: If the IMF is correct in saying that the level of public sovereign debt is only 110% of GNP it means that Iceland is in a league with countries like Italy, Greece and Belgium. They are in the euro area. If there are countries already within the EMU that have a level of debt that is already exceeding the stability pact that raises
the question: Can the euro area countries maintain a double standard: one for those who are already in and another one for those who are seeking to come in. We must realize that
the stability pact is not manna from heaven; it is something that was decreed basically through Germans influence when the Germans accepted to give up their cherished Deutschmark for the euro. They themselves have been in breach of the pact and so has France.

17b. There were some articles, one was published in the Financial Times in April 2009 with a report done by the some economist from the International Monetary Fund, who were basically advising that it will be wise to allow countries, specially talking about Baltic countries, to adopt the euro though they are not fulfilling the all Maastricht Treaty rules. On the other hand, it was immediately criticized by
the European Central Bank. But maybe it is something to support our believes that we might be talking about some changes or a different approach?

And notably it is easier to do in case of small countries like Iceland, Estonia, Latvia,
and Lithuania than for a major country like Poland.

20. Is the Icelandic krona dead? It looks like Iceland cannot adopt the euro in a short time, so what are the other options, like adoption of USD, or even The North American Free Trade Agreement (NAFTA)?

(20) In a desperate search for solutions people have been mentioning a number of options, especially those who are reluctant to join the EU. First: the dollar. There are quite a few countries that are dollarized, meaning that have taken up unilaterally the dollar, from Argentina (in Argentina it ended in a disaster), to Ecuador, which is now probably breaking out of that experiment. This is no realistic option for Iceland for the simple reason that our trade relationship with the United States is rapidly in decline. A few years ago it covered about 20% of our export earnings, now it’s down to 6 or 7%. Number two: during my time as Minister of Foreign Affairs and Minister of External Trade I conducted an investigation into the possibility of Iceland joining the NAFTA. The answer was: that even if they looked through a magnifying glass they never saw any worthwhile interest in having this business relationship included in such an enormous negotiating procedure that had to be presented to the Senate etc for ratification. So this was already ruled out. Number two; the Norwegian krona is out of all logic. The Norwegian krona is extremely strong because it’s a petrol-dollar. Norway is the richest country in Europe on the basis of one resource, it’s an oil kingdom and the krona is of course in the business cycle of oil prices totally different from Iceland. It is no option for Iceland.

This means that we have no other option but to apply for membership of the European Union and the EMU.

21. The European commission is preparing itself for a membership bid from Iceland. An application would be viewed very favourably in Brussels and the negotiations, which normally take many years, would be fast-forwarded to make Iceland the EU's 29th member in record time, probably in 2011 in parallel with Croatia. The EU prefers two countries joining at the same time rather than individually. If Iceland applies shortly and the negotiations are rapid, Croatia and Iceland could join the EU in parallel” said Olli Rehn, the European commissioner in charge of enlargement, will Iceland apply?

(21) If everything goes very favorably from now on this is a possibility, namely that Iceland could become a member along with Croatia sometime in the 2011. Then the time scenario would be roughly the following: the Icelandic parliament Althingi would give
a negotiating mandate this summer. The next six months we would use to prepare
the negotiations and six months are also needed for the European system to start an evaluation and preparations for negotiations from the Council to the Commission etc.
So beginning of year 2010 start the negotiations. Since we are an EEA member country
and since we have adopted 2/3 of the relevant “acquis communautaire” already through the EEA agreement and since we are only negotiating roughly 16 chapters of the 36 that negotiating countries have to go through, it is realistic and confirmed by Olli Rhen that we could actually finalize negotiations with the draft agreement in six to nine months.

So, autumn 2010 for finalizing negotiations. Then roughly half a year to one year for
the presentation and ratification in Iceland. We are a small country. We can do that relatively quickly but it will take much longer time of course for all the member countries of EU to ratify through parliaments etc. but we have a year to do this. If everything goes like this – yes, we could possibly do that at the same time as Croatia. But there is one big ‘’if”. Will we get a majority of the voters to accept the final agreement? Keep in mind that our neighboring country, Norway, with their strong fishing interests have applied twice
and failed twice in a referendum. Iceland is a former colony; it’s a newly independent country with a very, very strong sense of independence, where the political discourse is still very much steeped in the language of the independence struggle against the Danes. It’s easy to fire up suspicion against foreign domination and nationalistic fervor. I know personally because I was responsible for the EEA agreement and having it accepted in parliament, which was only won by a miracle. Nota Bene it was not put through referendum, but there was only one party for the EEA agreement, my party, the Social Democrats.
The Progressives were against, the Peoples Alliance at that time, post communists, were against and the conservatives, the Independence Party, had been against in opposition, too. It was the longest debate we have ever had in the Icelandic parliament since the adoption of the Christianity in the year 1000. It was only in the nick of time and by very, very thin majority that we had it passed. So everything will depend upon how favorable the negotiating agreement is and specifically it will depend on whether the Icelandic basic national interest in keeping control of the fishery resources will go through or not. If not, my bet is that the agreement will be rejected in the national referendum.

22. In 1983 fishing quotas were introduced in Iceland since and in 1991 all fishing fleets were set a quota (of which each ship was given an annual share). They have been hotly debated ever since. Now it is a critical point for Iceland more than ever before. Any comment?

(22) This issue of the fishing quotas is relevant for your major topic and the negotiations with EU for several reasons. Number one: Most people tend to think that Iceland will have to seek some sort of an exception from the common fisheries policy of the union because the common fisheries policy is a total failure and it would be devastating for Iceland to be subjected to it. That’s why fishing is at the top of the agenda in the negotiations. Number two: When it comes to the basic national interest of Iceland we are one of a very few countries in the world where fishing is of such enormous importance. 20 years ago our export earnings came between 70 and 80% from fishing. In the past decade and a half this has changed, meaning that the foreign currency earnings from the fishing sector went down to 36% in 2006. But now after the crash, after the financial sector is down and out and other diversification sectors are weaker, the importance of fishing will also go up, it will again be proportionally higher as a part of, as a percentage of GNP than it was. Take Norway as
an example. Norway’s export earning from fishes sector is less than 5%, ours will in
the next few years be at least 50%.
In the EU fishing is insignificant, it doesn’t really exist but as a marginal sector in distant regions and it is heavily subsidized by the state. So this will be for those reasons,
the biggest issue in the negotiations. Iceland´s negotiating purpose on this issue is
the following: The CFP exists because so many European countries have traditionally through centuries been fishing in common areas, from common fish stocks. They have to regulate this somehow from a central authority. Most of the stocks are overfished, some 30% are in the danger of extinction and from ecological and economics point of view this policy is a disaster. It’s up for review and a new policy should be installed by 2013.
It so happens that the Icelandic economic zone is a totally separate one. The major fishing stocks in the Icelandic zone are local; only about 15% of all fish stocks that Icelanders utilize are migratory, that have to be negotiated with our neighbors, the Norwegians, the Faeroese, Greenland and the Europeans. So our purpose is simply this: Why create
a problem where there is no problem? We are not seeking exceptions from the common fisheries policy, no, we are simply asking that the Icelandic zone should be a separate administrative zone under Icelandic control. Why? Because no other European nation has historical rights to fish within our economic zone. Because of the rule of relative stability which respect that traditional fishing rights should be respected. Because of the principle of moving administrative control to the regions, to those who have to live with it, away from the center. Because we have a fishing policy that has proven itself to be superior to Europe´s in terms of building up the fish stocks and utilizing them in a sustained way.

If we fail in getting this negotiated and if we are simply told ‘no’, this cannot be accepted, you have to accept that control of your economic zone moves to Brussels and that quotas will be issued by the ministerial council - if this will be the result I can tell you that we don’t even need to have a referendum: It will be voted down. So in this sense the issue of fishing quotas is of a major importance.

22b. Can we protect our 200 miles zone them when we are a member of EU? Can any country like Portugal or Spain can come to our 200 miles zone ...?

Yes, the basic rule within EU for allowing another country to come and fish in
the economical zone of another country is based on historical rights extending at least nine years. That is not so in the case of Iceland.

22c. You have mentioned that Iceland should only have to negotiate 16 out of 36 chapters of the Treaty, am I correct?

Chapters, chapters of the acquis communautaire, of the total bulk of legislation, which is 36 chapters. 20 have already included in EEA. 16 chapters are only outstanding, and out those 16 only 4 are difficult because the rest is technical. The difficult ones are: fishing, agriculture, rural policy or rural regional policy, the budget, the cost basically these four are difficult.

23. Any comment on 100-day program of the new Government given on May 10, 09?

(23) My comment is brief. They should have stuck to a few major points on how to negotiate the debt, how to restore the new banks, the economic health and how to secure the stability of the currency. These three conditions for a recovery should be the main business of the government. The government has failed to solve those major problems
and the 100 points are minor issues that I don’t give a damn about if they don’t solve
the major problems.

24. What would you do in you were the Prime Minister of Iceland?

(24) First of all, I would have begun by calling up on on all the best expertise, domestic
and foreign, that I could muster to divice a longterm plan for national recovery. The plan for national recovery dealing with foreign debt, dealing with the currency, dealing with the restoration of the banks, dealing with the fiscal situation and all under the overall heading specifically seek redress on the debt situation and a fast solution for our specific currency problems. This I would have done immediately after the crisis.
Second, I would have presented this plan right from the beginning to the nation, I would have emphasized how deadly serious the situation is and I would have articulated in detail the hardship and the burdens and the method of the plan to try to distribute the burden in
an equitable manner meaning that those who have the broadest shoulders should carry the heaviest burden. Everything would be above the board and fully transparent. I would have told my people to rely on our seafaring experience in heavy storms: bind ourselves to
the mast and carry through.

Thank you very much Sir,
Authorized interview done by Witold Bogdanski in Reykjavik June 2nd, 2009


Jón Baldvin Hannibalsson, viðtal. Höf.: Witold Bogdansky

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20.7.2009 22:41:18
Einar
nice stuff, thanks

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