Aðstoðarritstjóri La Repubblica , sem er eitt helsta dagblað Ítalíu (vinstra megin), Sr. Stagliano, beindi til mín spurningum um hina meintu “íslensku leið” út úr kreppunni, en hann var að undirbúa fréttaskýringu um þetta efni í blað sitt. Svör mín við spurningum ritstjórans fara hér á eftir á ensku.

The deputy editor of La Repubblica in Rome, Mr. Stagliano, asked me a few questions about the so called “Icelandic way” out of the crisis – but he was preparing a report on this issue in his paper and came to Iceland for that purpose on May 25th. Specifically, he wanted to know if the crisis-stricken euro-zone countries (Greece, Italy, Spain, Portugal and Ireland) could learn some lessons from the Icelandic experience. What follows are my answers to Mr. Stagliano´s questions.

May 25

Dear Mr. Stagliano.
Thank you very much for your e-mail. I am more than willing to help in any way I can to cover this story.
Unfortunately I am abroad and will not be available for an interview during the time you plan to be in Iceland. I can therefore only be of help if you submit your questions to me by e-mail. You are most welcome to submit your questions. You could also consult my homepage: www.jbh.is – where you will find some stuff in English, highly relevant for your topic.

There is a tendency in the foreign press to speak about “the Icelandic way” out of the crisis. What was the Icelandic way?
(1) That tax-payers refused by referendum to pay the debts accumulated by the banks.
(2) That the government devalued the króna (the national currency), thus strengthening competitive position of Icelandic exports (inducive for economic growth).

But those are merely half-truths and highly misleading.
(1) The whole financial system went bankrupt. There was no way the Icelandic government could do anything to bail it out. The Central Bank´s foreign currency reserves were empty. Access to financial markets was closed. Icelandic government bonds were rated as junk. The bank system´s foreign currency debt was roughly tenfold Iceland´s GDP. Foreign creditors (mainly German banks) wrote off two-thirds of the debt and sold it to hedge-funds at fire-sale prices. Those financial predators are now the owners of two of the major banks, trying to cash in on their claims. (2) Devaluation of the national currency (ca. 70% ) – although helpful for exports – doubled foreign currency denominated debt. Ca 60-70% of companies were technically bankrupt and at least a quarter of homeowners could no longer service their mutated debt.

The foreign news tale that the Icelandic public simply refused by referendum to take upon themselves the bankers´ debt is unfortunately not true. Indeed, a majority by referendum rejected a negotiated settlement with the Brits and the Dutch on how to cover the minimum deposit guarantee (by EU regulation) for the branches of Icelandic banks in those countries.
But the debt did not disappear. By rejecting the negotiated settlement, the matter is now before the courts. The ESA has concluded that Iceland is in breech of the EEA agreement.
The matter is now before the EEA Court. IF Iceland loses, it will mean litigation by all those who have a case against the branches of the Icelandic banks in UK and Holland. If they win, Iceland will be forced to pay a lot more than the negotiated settlement was all about. The main point is: The Icelandic referendum only rejected a negotiated settlement (which was in fact very positive) and referred the conflict to the judiciary.
In my view this was a mistake. The ultimate proof will only be presented by the courts in due course. Fortunately, the fallen banks´ assets seem to be able to cover the minimum deposit guarantee. That´s what the settlement was about. It would therefore not have cost the Icelandic taxpayers a penny. No one knows what future litigation will lead to. The evidence looks like ending up being much more expensive for the Icelandic taxpayers than the negotiated settlement that was rejected by referendum.

So, the story is not simple, but nonetheless, there is a lot of truth in the story that the way Iceland handled the crisis has several lessons for others: The bail outs of Ireland and Greece were not for those countries. They were for their creditors (predominantly Germans banks). Neither Greece nor Ireland will be able to pay those debts. The euro-area is by now a total fiasco.
It is a matter of fundamental economics that you cannot run a monetary union without (1) a common central bank which is a lender of last resort for all member states and (2) the issuing of state bonds to be the responsibility of a central authority. (3) You must coordinate both fiscal and monetary policy.
To be in denial of those basic truths – as Mrs. Merkel and the Germans certainly are – means that the euro project will fail. President Hollande is absolutely right in his proposals for the ECB´s right to print money (quantitative easing), solidarity for common euro bonds and fiscal and monetary coordination.

Who has profited most from the euro project? Answer: The Germans. Who stands to lose most, if the project disintegrates? Answer: The Germans.
It is miserable to observe the absence of real political leadership in Germany these days. Chancellor Kohl´s Mädchen has not lived up to it. Ten years ago Germany was the sick man of Europe. It was Chancellor Schröder who sacrificed his political future by implementing agenda 10: The restructuring of the fiscal and the labor market in Germany which engineered their competitive strength. Mrs. Merkel inherited this boom. She has not pioneered anything. She has no authority to lecture others on anything. President Hollande is absolutely right in insisting on a growth pact. I hope your Mario Monti, who has an excellent record as an EU commissioner will support president Hollande in pushing through a new strategy for growth.

Sincerely yours,
Jón Baldvin Hannibalsson