An Alternative View Of ‘Iceland’s Recovery’

Yesterday’s conference on the global economy “Iceland´s Recovery—Lessons and Challenges” offered three thematic sessions on the international and domestic policies implemented to address the financial crisis, such as the use of capital controls and the handling of the banking sector, as well as Iceland’s maintenance its social welfare system while dealing with fiscal adjustments and IMF assistance, which ended in August. The Movement offered their own perspective.
The event included words by Jóhanna Sigurðardóttir, Prime Minister of Iceland, the Minister of Economy, the Governor of the Central Bank of Iceland, former IMF director Joseph Stiglitz via video, represenatives of Citicorp, academics from Reykjavik University, the London School Of Economics and the University of Iceland, MIT, union leaders from the Confederation of Icelandic Employers and the Confederation of Trade unions, Paul Krugman of Princeton University, members of the Chamber of Commerce and members of the IMF.
Speakers advanced the agendas of their respective organisations, but also dealt with criminal investigations for members of the banking community, reconstructing the financial sector, and insuring social justice for the public.
In a litany of talking points and PowerPoint slides, voiced was the opinion of the agents of the international financial system. Occasionally offered were us vs. them sympathies to the moral hazard of privatised gains and public losses by the banking system.
In response to a percieved deficit of rhetoric aimed towards the public, Icelandic political party The Movement offered a contrarian view on the cheerful outlook that the Harpa speakers largely described within the restricted global institutional framework of banks, governments and multinational corporations.
The Movement political party offered a press release to counteract the assertions of the IMF and public speakers from the global financial community. Titled,  “Report on the economic situation in Iceland three years after the collapse of the financial sector” and signed by Birgitta Jónsdóttir, Margrét Tryggvadóttir and Thor Saari,an economist, the Members of Parliament for The Movement attempted to offer the public “information and facts about the economic situation in Iceland that we are not sure you will be provided with prior to, or at the conference.”
The Movement asserted “the conference itself is at the core of a massive public relations effort by the government of Iceland and is part of a setup in order to convey to the world the achievements of the Icelandic government.” In addition, it is described how the participants in the conference are embarking on “vast program of misleading information, half-truths and deception about the health of Iceland’s financial sector.”
Relating to the crash, they asserted that “lending practices were encouraged by the banks and the government all the way through to October 2008, even though they knew this was unsustainable”. They claimed that “the government knew exactly what would happen but continued to praise the banking system” and that ”the banking system and banks were taking large positions against the króna via an array of derivative contracts while at the same time encouraging foreign exchange-loans to Icelandic homeowners.”
Regarding household debt and lending practices, they rebuked the IMFs’ statements on regarding loan portfolios, saying that loan “write-downs were not passed on to households (as recommended by the IMF) but instead the new banks got a free hand in trying to collect the previous full book value of the loans.”
The Movement then details how the Government’s policies to combat the housing crisis have not worked. “One of (the policies) is a write-down of mortgages to 110% of the estimated value of the home.  Because of underlying inflation and the consumer price -indexing of mortgages, says Movement MP and economist Thor Saari, these mortgages very quickly increased again to 120% and then to 130% of the estimated home value, requiring repeated attempts to reach the 110% level.  The conference addressed this claim, offering up a suggested 70% figure instead of 110%. They then discussed the solvency of households.
“The results are that some 26.000 individuals are registered in serious default. If each of these individuals represents a household, this means that approximately 35% of all households in Iceland are still in a serious default position with their debts, even after being able to tap in to their pension funds in order to stay solvent.”
Also attacked were foreign exchange loan solutions, as the “problem has also been a disaster as via government legislation the foreign exchange-linked loans were converted to ISK loans starting at the initial borrowing date and then re-valued using the Central Bank policy rate for the period of the loan. However, the CB policy rate was at times over a three year period” around  20%.  They continued. “Needless to say people would never have borrowed money at these rates in the first place, but they are now forced to pay up and shut up.” This has lead to stagnation in private consumption, possibly the only area where economic growth can occur considering the current situation of no investment and decreasing global prices for Iceland’s exports.”
On monetary policy, the financial sector and the currency, The Movement suggested that the dynamics around making “this facade of economic recovery as the economy is basically being rebuilt on the same hollow ground and with the same rotten wood that led to the crash”. They also included that “the architect of the previous monetary policy that worked so disastrously is now the Governor of the Central Bank and is advocating a return to the old policy with a slight twist of some bells and whistles that look dubious at the best.  His assistant, the Deputy Governor was the Central Bank’s chief economist in the years prior to and during the Crash, never uttering a word publicly about the disastrous policy or upcoming problems.  Most of the same staff as before is still at the CB, which by the way became insolvent during the crash.”
In their concluding remarks, they suggested that “very little of the necessary restructuring has taken place and that neither political nor personal responsibility for the crash has been accepted by anyone.  So far after almost three years of investigation, only three people have been charged by the Special Prosecutor, two of them found not guilty and one found guilty.” In finale, they stated, “it is our worry that Iceland is heading straight on into another economic crash and political turmoil that will be far worse than the last one. Raising a critical voice might make a difference and is the purpose of this letter.”
During the first, second and third sessions of the conference, many of the points made by the Movement were addressed by the conference speakers. Criminal procedures, altered monetary policies and the possibility of an IMF financial transaction tax were discussed by Simon Johnson of MIT. Jon Danielsson of the London School Of Economics discussed the of the unsustainability of public finances, the unfavourable orthodoxy of monetary policy, and continuing foreign exchange volatility. IMF spokesperson Franek Rozwadowski also detailed three key challenges identified at outset, the first of which being the preventing of further depreciation of the krona. His colleague, Julie Kozack, detailed how lifting capital controls would aid in this process.
As the views of the speakers inside and outside of the conference appeared contentious, just the same, a looking glass view of the power of the purse becomes evident, particularly the politics and vested interest behind decision making. One need only ask qui bono, or who benefits, from which policies are enacted.