From Iceland — A Look In The Rearview Mirror

A Look In The Rearview Mirror

Published September 27, 2013

A Look In The  Rearview Mirror
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The Social Democratic Alliance and the Left Green Party formed a government for the first time on February 1, 2009, as Iceland was struggling with the hardest economic conditions that have occurred in the republic’s history. The circumstances were without precedent. The nation faced bankruptcy.

What happened was: a banking collapse, a debt crisis, a crisis of state finance and an international crisis. This was followed by societal dissolution; bonfires were lit and full social revolt seemed inevitable—in the aftermath of the collapse, our community burned with conflict and rage.

Corruption, greed and mismanagement

Iceland’s economic collapse was not least the result of the crony-capitalistic privatisation of the nation’s banking system and the bubble economy, both of which occurred during the reign of the Independence and Progressive parties; a period that was characterised by continuous economic mismanagement, corruption, greed and a growing income gap. Low-interest loans from abroad were used to inflate worthless stock in the banking system, which had in the end, at the time of the collapse, blown up to being ten times the size of Iceland’s GNP. The entire banking system was slowly transformed to a structure fuelled entirely by greed, for instance through the use of incentives for big business and corporations under the auspices of the newly privatised banks—which were used to inflate the profits of corporate executives, which in turn lead to a gross increase in the nation’s income gap and general social inequality. Every single word of warning and urge of caution from foreign specialists was ceremoniously ignored, and the nation’s regulatory agencies and supervisory authorities slept at their guard posts. Supervision over the financial system was therefore very weak.

In the end, all of this came together in a perfect storm that lead to a massive collapse in the króna’s exchange rate, a slump in the real estate market and the nation’s stock market collapsing like the house of cards it turned out to be. Everything changed. Nine-tenths of the stock market dried up, inflation rose to nearly 19%. Short-term interest rates skyrocketed to 18% at the beginning of 2009, the króna’s value plunged by 50%. Specialists projected a 10-15% downturn in the economy, which pushed unemployment numbers above 10%, with an accompanying drop in public spending power and nearly 20,000 people losing their jobs. It is furthermore apparent that the collapse also brought the downfall of the neoliberal ideology, as it among other things exposed the unprecedented purchase of political influence by banks and business elites by way of enormous grants to the ruling Independence Party.

There is reason to add to this the contents of a statement Carsten Valgreen, former Chief Economist of Danske Bank, made in Fréttablaðið on January 10, 2009, in which he claims that the government’s appointing a former Prime Minister as Head of the Central Bank of Iceland’s Executive Board had disastrous consequences—that it had resulted in the bank being managed in an astoundingly poor manner. Indeed, one of the first acts of the new post-collapse government, in February of 2009, was to instate a new executive board—at that time it was clear that the state treasury’s cost of the Central Bank’s impending bankruptcy would be one of the bigger expenditures of the collapse. In the end, the Central Bank’s bankruptcy cost the state close to 270 billion krónur.

First post-collapse government results

The emergency procedures and recourses that the first post-collapse government was forced to resort to were manifold and cannot be recounted in full in this venue. Hopes of staving off national bankruptcy and loss of financial independence were dependent on the trust other nations placed on us. The Social Democratic Alliance and Left Green coalition accomplished restoring the economy, deflating the inflation from 19% to 3.5%, lowering interest rates from 18% to 6% and cutting unemployment numbers in half. Icelanders’ spending powers had at the end of last year increased by nearly 8% from the low-point of the depression—and even more as they related to the lowest income brackets and lowest paid pensioners.

During the last two years of the government’s term, we managed to instigate greater economic growth than what most of the nations we compare ourselves to experienced over the same period of time. Household and business debt decreased to the count of two times the GNP in three years, which is a great turnaround by any standard. Since the collapse, the debts of households and businesses have gone down almost 50% compared to the GNP. Out of the 120 largest businesses, 80% underwent restructuring measures during the last term, along with 500 small and average sized businesses. Over 200 billion krónur have been written off or discounted from household loans, and mortgage debts now amount to the same percentage of GNP as they did at the start of the real estate bubble in 2004.

State interest subsidies to households were also more than doubled. Throughout the four year term, the government diverted more than 100 billion krónur towards household interest relief and child benefits, which is more than any other government has done.

What’s most important is that the inequality in our society’s income distribution has been completely turned around. Iceland is now one of the European nations that can boast of the greatest equality. Furthermore, international surveys reveal that Iceland was the world’s most gender equal nation four years in a row.

We certainly set off with great ambitions, but our plan of action was always intended to be a realistic and reasonable one. We did, however, fail to anticipate the weight and fury with which certain interest groups organized themselves in active opposition to our government and its goals of restoration, equality and transparency. The Constitutional Committee was stifled and road blocked by Iceland’s Supreme Court amongst others. Fishery owners and fishing quota magnates fought fishing fees and changes in the quota system tooth and nail. Capital controls and a ruined króna created a growing problem that has now started running companies out of the country. A few members of the government caved under the immense weight of the relentless propaganda, which caused us further problems. We were accused of neglecting the problem of household debt, despite the decisive actions recounted above. Household debt amounted to 135% of Iceland’s GNP when it was highest in 2009, but at the end of the last term this spring it was down to 108%—the same as it was fifteen months prior to the banking collapse.

The numbers are there, and they speak for themselves.

Danish analyst Lars Christiansen was one of the few experts who predicted the economic collapse of 2008. During a visit to Iceland in late 2012, he remarked that Icelanders’ greatest accomplishment was having tackled the consequences of the collapse while keeping at bay the mass riots, strikes and strife that plagued other, similarly troubled nations. I should also note that Iceland’s credit default swap greatly improved over the last term, as did the state’s credit rating with foreign analysts.
Again: the above facts and numbers speak for themselves, and bear witness to the great results accomplished by Iceland’s first purely leftist government.

The wheels of greed are spinning

I recently met an old Progressive Party MP and asked what he thought might happen if his party failed to meet its campaign promises to instate the largest debt correction in the world for Iceland’s households. “Then, we’ll be dead,” the former MP replied. These bloated campaign promises made by the Progressive Party are the main explanation for the former governing parties—especially the Social Democratic Alliance—poor results in this spring’s parliamentary elections. There was no way to trump these unreal promises, save for directly and intentionally deceiving voters. Furthermore, the social rift caused by the application to join the EU, disappointment with the state of the constitution and many households’ seemingly insurmountable debts eventually came together in a great wave of dissatisfaction. The growing flames of discontent were fanned enthusiastically and nonobjectively by those who stood to lose their privilege and power as Iceland slowly become a more just and egalitarian society.

Now that the new coalition government of the Independence and Progressive parties has been in power for five months, it is apparent that those in power are both perplexed and overwhelmed by the tasks at hand. The main emphasis seems to be relieving 20 billion krónur worth of taxes from fishery owners and the wealthiest of our community. The current government’s priorities could not be more different from the ones honoured by the last one. Inequality is once again rearing its ugly head, and the sharp knife of austerity has been turned towards the welfare system—all to benefit society’s wealthiest and best-off.
Once more, the wheels of greed are spinning.

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