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Why should the European Union – or individual member states – worry about Iceland in her current distress? A country with a tiny population in the North Atlantic, on the margins, of Europe having fallen victim to an economic crash, which is beyond the nation’s means to recover from, on her own? Are there any interests involved, justifying that the EU should incur effort and expense – although a miniscule amount seen from the vantage point of Brussels – to help Iceland to recover from this major setback?

Does it change anything that Iceland has now, belatedly, presented a membership application to the Swedish Presidency, although the conservative power elite has hitherto maintained that the island nation would be better off outside the Union? Madame Joly, a member of the European Parliament and advisor to the special prosecutor, investigating the fall of the Icelandic banks, raises those questions for consideration in an interesting article, published 1st of August, in influential newspapers in France, the UK and Norway – as well as in Iceland. Because of her fame (some say notoriety) as a special prosecutor in the Elf-case, the biggest financial scandal of the post-war era in France, influential people listen, when Madame Joly speaks up. Her initiative in drawing the attention of the general public as well as influential persons to those issues is praiseworthy.

Madame Joly made it clear that she is not a spokesperson of the Icelandic Government. The motivation for her action is genuine sympathy for a small nation that has been led astray. In her article, Madame Joly is asking for mercy for the victim. Her article is an appeal to the high and mighty in our part of the world to give a helping hand to a small nation which has become an innocent victim, in the sense that the Icelandic people neither asked for, nor benefited but marginally from the foreign loans given to the Icelandic oligarchs. Nonetheless the IMF and the EU now insist, that Icelandic taxpayers should pay - or else suffer the consequences.

Qui Bono?

Are there any vital interests at stake justifying such a rescue operation? During the Cold War Iceland was militarily important for both the US and NATO and hence for the trans-Atlantic relationship between Europe and North-America. There are strong indications that Iceland may regain that position in the near future. The melting down of the Arctic ice due to global warming, makes the abundant resources of the high north accessible for the first time. When the northern passage alongside the shores of Russia and Siberia will become passable all year round, it opens up a new route for moving cargo between the emerging economic powers of Asia to Europe and back. Those changes can be on such a scale that they are nothing short of revolutionary.

“Increasing Russian interest in this area is no secret”, says Madame Joly. Have those future prospects gone unnoticed by the mandarins in Brussels? Is the EU so preoccupied by their own internal quibbles that radical changes just described, that touch upon vital, long-term European interests, are nonetheless invisible on their radar screens? Despite her small population Iceland is rich in natural resources: They include rich fishing grounds, clean and renewable energy resources and, according to the most recent research, plentiful oil reserves. It would be befitting for the Swedish Presidency to draw the attention of the European leaders to the promising future opportunities on its northern flank.

As everyone knows, the world economy has recently been on the brink of falling victim to a new world depression, which in many ways reminds keen observers of the Great Depression of the thirties, which lead to the Second World War. Fewer know that Iceland has suffered the worst fate of all, so far, due to the international financial crisis. Iceland has come under a triple attack: The entire financial system has collapsed; the value of the national currency (the krona) has fallen by up to 100%, doubling the capital of foreign debt in the process. Icelandic taxpayers have had to take upon themselves to pay the minimum saving insurance to 400 thousand depositors with the branches of Icelandic banks abroad, most of them in the UK and Holland, to the amount of four billion euros (minus reclaimable assets).

In consequence, Icelanders will, during the next few years have to cut down their budgetary expenditure on health-care, social insurance and education to the barest minimum and raise taxes as well, to be able to service our foreign debt. The doubling of the capital of the foreign debt, due to the devaluation of the krona, means that most companies are already technically bankrupt and about a fifth of Icelandic families will foreseeably lose their homes. This amounts to a national emergency situation. In her article, Madame Joly draws attention to the fact, that paying the savings-insurance to foreign depositors alone, is comparable to the British having to pay 700 billion pounds sterling or Americans undertaking to pay USD 5600 billions to foreign citizens. Does anyone believe that Mr Brown and President Obama would get away with presenting such a bill to their voters and taxpayers, to be paid to foreign citizens, although their own citizens had never incurred the loans nor enjoyed but a small fraction of the benefits? Most of those debts, it should be remembered, were invested outside of Iceland.

World Record

It could stretch the imagination of foreigners to comprehend the scale of indebtedness left behind by the fall of the privatised Icelandic banks, in proportion to the small size of the Icelandic economy. Believe it or not, but on Moody’s list over the eleven biggest financial bankruptcies in history, all three of the Icelandic banks made the list. All the other financial corporations are American. No European bankruptcy can make this claim to fame (or infamy). The biggest Icelandic bank, Kaupthing, leaves behind the fourth biggest bankruptcy in history. This must be a world record, remembering that the US economy is a bit more than one thousand times bigger than Iceland’s.
The biggest question the Icelandic nation is faced with is the following one: Do we have the means to repay all those debts? Or will the debt burden turn out to be so heavy in the next few years, that there will be nothing left in foreign currency, beyond debt service, for investment, innovation or maintenance. Will the nation simply collapse from under the strain? Imagine a nation which a year ago was listed amongst the top ten, in terms of per capita income, to have become, a year later, a pauper amongst nations. Many other nations have suffered this fate. Argentina is one. Many of the so-called developing nations are suffering such a fate. In the worst case scenario Iceland may be heading in that direction.

The IMF has assessed the national debt (the foreign debt of the state and the municipalities, companies and homes) to be approaching 240 % of GDP. That is close to the demarcation line of unsustainable debt, leading to inevitable default, under the Fund’s own definition. A year ago the Icelandic state was almost debt free. The Icelandic Government maintains, that based on certain (optimistic) premises for the annual growth of the economy and export earnings, that the state can honour its obligations. The Economic Institute of the University of Iceland points out that this prognosis, 15 years into the future, is highly unreliable. Under any circumstances, economic forecasts of this type are uncertain, to say the least, not to mention that the international financial crisis doubles the risk and uncertainty involved. Another major factor of uncertainty concerns the value of assets of the fallen banks in the years to come. Almost every day reports are made public about huge loans, given without collateral, and hence unlikely to be repaid in full which undermines traditional assessment of the ultimate worth of outstanding loan obligations.

The biggest uncertainty concerns the people of Iceland themselves. They are after all, expected to remain and undertake to repay all those debts. How many of them will register their protest by voting with their feet against future bondage? An unusually high proportion of the younger generation of Icelanders have actually studied and worked abroad. They, therefore, belong to a privileged group of people who can relatively easily seek well paid jobs abroad, in their fields of specialisation, despite the dim economic outlook. The exodus has already begun. If nothing will be done to change our future prospects from the current malaise, hardly anything is in sight to stop the exodus. This is the worst case scenario. Then, fewer still, will be left to pay the debts and carry the burdens of past mistakes. That is hardly in anybody’s interest – least of all that of foreign creditors.


There are those who think that the prospects just described are too pessimistic. They point out that the huge devaluation of the krona enhances the competitive position of Icelandic exports – fish and aluminium – in foreign markets. That is why, they maintain, Icelanders should be quicker to recover than for instance our relatives in Ireland or e.g. the Latvians, to take two examples of other small nations within the EU facing severe difficulties. Unlike Icelanders, those countries, one within the euro-area and the other aspiring to membership, cannot devalue to improve their competitive position in the short-term.

Those who pin their hopes on devaluation conveniently forget that 100% devaluation has already doubled the debt burden of Icelandic companies. On the average, companies in the fishing sector owe up to their annual income for three years in foreign currency. Where are such companies meant to seek capital to refinance their debt collection? The creditworthiness of the Icelandic state has been reduced to “a junk-bond status”. Icelandic businesses have forfeited all creditworthiness. The IMF imposed and sky high Central Bank rate, is sucking up what little there is left of private capital in Icelandic companies.

Hence, it cannot be ruled out, that there will be no working capital left for investment and innovation in Iceland for the next few years. In that case, more and more companies will file for bankruptcy, the level of employment will dwindle and the economy will end up stagnating. This situation is, in my opinion, so serious that the Icelandic Government and business leaders cannot deal with it alone. Iceland needs help. But for that help to be on the way, the leaders of the nation must have the honesty and the courage to face reality, to seek help on their own initiative. This is the essence of the message which Madame Joly, the council to the Special Prosecutor investigating the fall of the Icelandic banks, has now directed to the leaders of the EU. I agree with her. We have no time to lose.

Jón Baldvin Hannibalsson

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