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In her article: “Iceland – What can be Learnt from the Crash” – published in Le Monde, the Daily Telegraph and Aftenposten in Norway, August 1st, Madame Eva Joly, member of the European Parliament, pleads the case of the Icelandic people, based on the premise that they were innocent victims of events, beyond their control.

True enough, as far as it goes. The Icelandic people are now presented with a huge bill left behind by financial scoundrels, who have ruined the Icelandic economy and left the nation´s reputation in tatters.This misfortune has befallen the nation because the conservative leadership, returned to power in three consecutive elections, betrayed the trust of the people. But this means that the majority of the population must also bear a part of the blame.

It was not until after the event, when the economy lay in smouldering ruins, that the people, in their anger and despair, drove their incompetent government from power through the action of a spontaneous protest movement, characerized by the pots and pans of angry housewives. They turned their kitchen gear into the drums of protest. This way, the majority of the people may have saved their self-respect, at least partially. But will it suffice to save their jobs and livelihood? - Ten months after the crash, the question remains unanswered.

But what about the “international community”? Do others bear at least a part of the blame for the Icelandic nation´s distress? Madame Joly answers that question in her Le Monde- article in the following way:

“The irresponsible attitude of some member states of the European Union and the International Monetary Fund (IMF) towards the crash of the Icelandic economy, shows that they are unable to learn any lessons from the collapse of the type of society, for which Iceland had become a showcase. A society ruled by unfettered market forces, especially unregulated financial markets, which were promulgated and promoted by these same powers.”

Privatization “á la Rus”

Perhaps Madame Joly has a case there. Despite its name the International Monetary Fund, is de facto a branch from the US treasury. The international financial crisis traces its origin to the failure of the neoliberal ideology, which has dominated Anglo-American economic policies since the Thatcher-Reagan era. This is the policy of market fundamentalism.

This type of society is characterized by uncritical belief in the power of market forces to solve all problems and by disbelief in the power of the democratic state to formulate policy and intervene into the play of market forces, in the name of the public interest. In practical terms this policy leads to excessive privatization and dismantling of regulation and surveillance of financial markets. It leads to excessive risk seeking and the expansion of the financial sector over and above the real economy. Tax concessions to the owners of capital, especially to the superrich, are part and parcel of this policy. It has lead to increasing inequality and social injustice, whereever this policy has been dominant.

The IMF has been the flagship of this ideology in the international arena for decades. In the developing world it has left behind a scourged earth. The fund´s interference into the domestic affairs of many countries during the Asian crisis 1997-98, as well as the fund´s overlordship over the affairs of Latin-American countries, generally speaking made a bad situation worse. Admittedly, the IMF has apologized for its past misdeeds. But there is scant evidence that it has learned anything from its mistakes.

Madame Joly is right when she maintains, in her article, that for the last decade, Iceland became a sort of showcase for the neoliberal economic model of the type just described. This era began by the privatization of the Icelandic banks in 2000-2002. As a matter of fact, the banks were delivered to hand-picked groups who were known to be the cronies of the ruling parties, the conservatives and their partners. This was privatization á la Yeltsin´s Russia.

Not surprisingly, one of those plutocratic cliques had established itself in the beer & alcohol business in St. Petersburg, after the fall of the Soviet Union, under the guidance of the city apparatchic for foreign economic relations, one Vladimir Putin. Ever since, persistent rumours have maintained, that some of the Icelandic business tycoons have developed close ties with the Russian mafia and that some of the Icelandic banks have actually been utilized for money laundering. These romours are presumably a part of the police investigation now being undertaken on the causes of the ruin of the Icelandic economy.

A societal experiment in the spirit of neoliberalism

In approximately six years the new owners of the Icelandic commercial banks turned them into international investment banks or, more accurately, into risk seeking hedge funds. In merely six years those hedge funds outstripped the Icelandic economy and its weak surveillance institutions to the tune of tenfold Iceland´s GDP. Up to 85% of the activity of those banks was outside of Iceland. In early 2008, half a year before the crash, the Dutch-British financial expert, Willem Buiter, was commisioned to give an analytical report on the prospcts of the Icelandic bank system. His conclusion was that the business model itself, unrestricted leveraging in foreign currency for the purpose of pursuing risky investments abroad – with nothing to back it up but the weak Icelandic Central Bank as a lender of last resort and the Icelandic tax base as the ultimate guarantor - was by its very nature a house of cards, headed for a fall. The question was not if, but only when.

Dr. Buiter recommended immediate emergency action, such as changing the bank´s branches into subsidiaries, under the surveillance and savings – insurance of the host country; or to relocate the banks´ headquarters to a larger currency area, under the jurisdiction and the surveillance of the host countries. The Icelandic government, the Central Bank and the tiny Financial Surveillance Authority did not heed this advice. On October 6th, as prophicied, all hell broke loose. Within a week all three banks filed for bankruptcy and were promptly nationalized.

Why had the government failed to act in advance, in order to avert the cirisis? Ultimately the only sensible explanation is that the conservative leadership was blinded by their simplistic, political ideology, namely that the state´s interference into the play-out of market forces could only be for the worse; and that the market could be trusted itself to correct any temporary imbalances. A classical case of Greenspan´s put, if ever there was one.

Let us not forget that it was the declared policy of the dominant conservative party to turn Iceland into an international financial center. The party´s chief ideologue, Professor H.H. Gissurarson, regularly published in the Wall Street Journal laudatory articles about Iceland having become a neoliberal paradise, under the guidance of the conservative leader - and later self-appointed Central Bank director – David Oddsson. Professor Gissurarson was a frequent guest at the neocon missionary think-tanks in Washington D.C., such as Cato and the Heritage foundation.

The Icelandic Chamber of Commerce, which traditionally has maintained close ties to the Conservative party´s leadership, published an action-plan, in the spirit of neoliberalism, and took special pride in having had 90% of their proposals implemented as government policy. At the same time, the Chamber of Commerce warned sternly against Iceland looking to the other Nordic welfare states as an example. This would be wrong, they said, because “Iceland was way ahead of the other Nordics in most respects.”

The plutocratic cliques that steered Iceland into economic ruin in sex years time operated within the policy framework inspired by this kind of market fundamentalism. By hindsight, it seems, they operated according to the formula “that the best way to rob a bank is to own a bank.” Now it seems that those banks were an imitation of a classical Ponzi scheme. The owners of the banks seemed to have adopted all the conjuring tricks that characterized the rise and fall of Enron, which, during its hayday, was the seventh biggest company in the US. Amazingly enough, Enron´s bankruptcy can not measure up to the scale of the fall of the Icelandic bank system, although the US economy is more than 1000 times bigger than the Icelandic one.

The banks´ owners misused their market position by handing out exorbitant loans, with dubious or no collaterals at all, to their own companies and those of their cronies. Cross-ownership ties were the rule of the game. The domestic market for shares and bonds was de facto an artificial one, since it was easily dominated by three major actors, who through insider trading and market manipulation aspired to keep up inflated share prices by creative accounting and artificial trading.

The banks, not the least their branches in Luxembourg, were used to create holding companies, on behalf of their owners and their cronies, that were then registered in tax havens beyond the short arm of the law. The so called surveillance institutions, such as the Central Bank and the Financial Surveillance Authority, seem to have been completely oblivious to what was going on all around them. The same applies to the government, in as much as the politicians were not captivated by the oligarchs, or acting as their cohorts.

Whose responsibilty?

In her article, Madame Joly asks how “40 individuals, all in all (the staff overseeing the banks´ activity in Reykjavík), could possibly have effectively looked after the activity of those banks abroad and especially in the heart of the City of London.” Good question.
They didn´t even know what was happening in down-town Reykjavík.It is remarkable, that the Icelandic oligarchs have it in common with their Russian counterparts, that they seem to thrive in the atmosphere of the City of London, or in the environment created for the latterday “robber barons” of this world, by Messieurs Blair and Brown, the true inheritors of the ideological bagage of the Iron Lady.

The owners of he Icelandic banks even went so far in imitating their Russian colleagues that they were hardly considered up to it, unless they had bought their own football teams. Mr. Brown mustered his courage to apply the recently adopted terrorist law to the Icelandic banks in London, and even went so far as to register the Icelandic state (a NATO ally), as well as the Central Bank of Iceland, on the official list of terrorist organizations, alongside al Qaeda. Does anyone believe that he would have dared doing the same with Putin´s oligarchs, or the oilsheiks from the Middle-East, who enjoy the company of kindred souls in the priveleged environmet of the City of London.? No surprise that Madame Joly is asking if the British authorities can be said to bear some responsibility for Iceland´s ruin , by pampering the oligarchs who were Iceland´s undoing.

Perhaps the British authorities could try to make amends by assisting the Icelandic government in freezing the properties, registered in London and elsewhere under British jurisdiction, until the courts have come to a conclusion on whether confiscation is justifiable, under the law. That could ease the heavy burden of Icelandic taxpayers a little bit. And isn´t it high time, that the British government take action, in cooperation with the international community, to bring the long arm of the law into the recesses of the many off-shore tax havens that are thriving in the British Isles and in other parts of the world, under British jurisdiction or protection?

Now, ten months after the crash, noone – not even the owners of the banks, nor their closest associates – have been charged with any misdemeanour, nor has anyone been taken into custody, to prevent the destruction of evidence. In the meantime, the oligarchs have had plenty of time to hide their wealth and cover their footsteps. In Iceland, the state prosecutor has declared himself to be unfit to conduct the investigation into the causes of the crash, since it turns out his son is the highest financial officer of one of the major bank groups. Instead, the state has appointed an ad hoc prosecutor, without any experience in dealing with international, financial fraud.

This being hopelessly inadequate, Madame Joly of Elf-case fame, has been engaged as councel to the special prosecutor. Three new special prosecutors have been appointed, one for each bank. In addition Althing – the oldest national parliament in the world – has appointed an investigating commission, presumably examining, who bears political responsibility for the disaster. Nothing has been heard from this commission for months.


All of this confirms the pitiful impotence of the Icelandic administrative system to deal, meaningfully, with problems on this scale. This is quite understandable after all. Those problems are of course out of all proportion to the size - or rather to the miniscule capacity - of the system itself. Also, the tradition to appoint high officials rather on the basis of party loyalty than professional competence, does not help. Finally, the inbread nepotism and political cronyism of a small society, inevitably discourages impartial and objective meting out of justice. A typical example is that some of the directors of the fallen banks and the chief of the Financial Surveillance Authority, in their student days, were all officials of the conservative youth organization, within the law department of the University of Iceland. In other words: The system is meant to investigate itself. No wonder there has opened up a deep schism of suspicion and mistrust between the population at large and the political elite. The social contract is gradually disintergrating.

This is the reason why this small island community now desperately needs help from the outside. I am not only talking about lenience vis a vis the debt burden. We need expert help, specialists with real life experience in dealing with the complex issues of international financial fraud. And we need economic and legal experts, who are untainted by any connections with special interest groups. This is where the European Union and the governments of neighbouring countries, not the least the Nordic countries and the UK, could genuinely be of help. But for help to be on the way, the Icelandic government must first candidly acknowledge its weakness. The Icelandic government must take the initiative in seeking help. The parliamentary opposition, the inheritors of the corrupt political cliques, who are responsible for the demise of Icelandic society, should try to make amends by refraining from whipping up extreme nationalism and antipathy towards foreigners - through their despicable populism.


Are there any solutions? I take the liberty to put forward the following proposals which I respectfully present to the Swedish government, currently acting in its capacity as the presidency of the European Union.
  1. The European Union should appoint a group of experts, with a mandate from the commission and/or the council, to conduct an investigation into the causes of the systemic crash of the Icelandic economy and its institutions; and the causal relationship with the international financial crisis.The investigation should concentrate on the question of reform of the EU laws and regulations concerning the savings – insurance guarantee system and the structure and implementation of surveillance of financial institutions. Specially, the experts should be asked to examine, what changes it is necessary to introduce into the system of EU regulations, in order to secure the future national interest of small states, within the EU, where financial institutions operate in international markets. Finally, the experts should be asked to examine, if there are material reasons for the EU to offer special assistance to the Icelandic government, to enable it to stand by their legal obligations towards EU states´ savings depositors, without endangering the solvency of the Icelandic state or placing demands on Icelandic taxpayers, beyond their ability to pay.

  2. The EU should assist the Icelandic authorities in securing information on illegitimate bank accounts, in the name of Icelandic citizens, with financial institutions in the Duchy of Luxembourg, the UK, the Netherlands, on Cypress and in the so called tax havens in the British Isles or, under British jurisdiction elsewhere in the world.

  3. In parallel with membership negotiations, bilateral discussions should be established between the government of Iceland and the Commission of the EU, on the Icelandic debt burden, following the crash of the domestic financial system, seeking measures that can be undertaken to avoid Iceland´s default; and to prevent that debt service, beyond Iceland´s ability to pay, shall prevent the recovery of the Icelandic economy. Special measures should be taken to make sure that Iceland will have normal access to financial markets during the period of rebuilding the economy. If these discussions will lead to positive results, it will be crucial for rebuilding the confidence of the Icelandic people in their ability to recover from the disaster, within a reasonable period of time.

In an earlier article on the same topic I asked, if the European Union, or individual member states, had any interest in the future developement of the North Atlantic and Arctic area, that would justify, that the European Union exerted some effort and incurred some expence, for the purpose of helping to restore Iceland to economic health and well being. I came to the same conclusion as Madame Joly, that there is indeed a conjecture of mutual interest.

More importantly, it would be highly beneficial, if the people of Iceland, which now has formally become an application country, should have it confirmed by their own experience, that the leadership of the European Union and individual member countries is not only preoccupied by taking care of the interests of the high flyers in the international financial markets, but also, that they are genuinely interested in the fate of the general public in their member states.

Jón Baldvin Hannibalsson

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