Showing posts with label Iceland. Show all posts
Showing posts with label Iceland. Show all posts
Saturday 18 March 2023
Tuesday 24 August 2021
Saturday 21 October 2017
Referendums get a bad press – but to fix Britain, we need more of them
Voting once every five years alienates us from politics. Participatory rather than representative democracy would allow us more say in how we run the country.
George Monbiot in The Guardian
You lost, suck it up: this is how our politics works. If the party you voted for lost the election, you have no meaningful democratic voice for the next five years. You can go through life, in this “representative democracy”, unrepresented in government, while not being permitted to represent yourself.
Even if your party is elected, it washes its hands of you when you leave the polling booth. Governments assert a mandate for any policy they can push through parliament. While elections tend to hinge on one or two issues, parties will use their win to claim support for all the positions in their manifestos, and for anything else they decide to do during their term in office.
If you raise objections to their policies, you’re often told, “If you don’t like it, stand for election.” This response is revealing: it suggests that only 650 people out of 66 million have a valid role in national politics, beyond voting once every five years. Political control under this system is so coarse and diffuse that democracy loses all but its crudest meaning.
It is astonishing that we put up with this. The idea that any government could meet the needs of a complex, modern nation by ruling without constant feedback, and actual rather than notional consent, is preposterous.
Last week I considered some ideas for creating a more participatory economy. This column explores the potential for a more participatory democracy. I’m not proposing we abandon representative democracy, but that we temper it with meaningful deliberation and consent.
I recognise that this is an unpropitious time to call for more referendums. But the Brexit vote was the worst possible model for popular decision-making. The government threw a massive question at an electorate that had almost no experience of direct democracy. Voters were rushed towards judgment day on a ridiculously short timetable, with no preparation except a series of giant lies.
Worse still, an issue of astonishing complexity was reduced to a crude binary choice. Because the only options presented were in or out, everyone knows what the majority voted against; no one knows what kind of Leave it voted for. Why could we not have had a multiple choice, presenting the different ways in which we could have stayed in or left Europe? Without permission to make a nuanced decision, we had no incentive to achieve a nuanced understanding.A lively and intelligent politics demands an active and empowered electorate that can hold its representatives constantly to account. I propose three models that we could draw upon.
The first is the Swiss system. There, the people vote in about 10 or a dozen referendums a year, clustered into three or four polling days, challenging federal laws or proposing constitutional amendments. Referendums are triggered when someone can gather enough signatures. These plebiscites foster a strong sense of political ownership: people perceive that government belongs to them. This might explain why, in its survey of 40 nations, the Organisation for Economic Co-operation and Development discovered the Swiss had the highest levels of trust in government. Far from causing voter fatigue, the process stimulates a rich culture of engagement, debate and persuasion. Across the year, about 80% of the electorate vote in referendums.
When I mention the Swiss system, people tend to react with horror. What if, as they often do in Switzerland, people make conservative choices? Well, they are entitled to their conservatism. A true democracy reveals the character of a nation: in Switzerland it is generally conservative. And if you don’t like it, you have the opportunity, through the debates surrounding these plebiscites, to change people’s minds. (There is, however, an argument for preserving some constitutional norms, to prevent majorities from oppressing minorities).
The second model operates in Reykjavík, the Icelandic capital. Here anyone can propose an idea for improving the city or allocating its infrastructure budget, and anyone can vote for or against it. The most popular ideas are submitted to the city council. The scheme has been remarkably successful: 58% of the city’s people have taken part so far and 200 of their proposals have been adopted by the council. The result is better amenities and a resurgence of civic life.
The third, most radical, model is the Kurdish system. Particularly in Rojava, in northern Syria, but throughout the Kurdish region, the people have sought to introduce a system first proposed by the US ecologist Murray Bookchin and refined and adapted by the imprisoned leader of the banned Kurdish Workers’ Party, Abdullah Ocalan. It’s called democratic confederalism. Here, power is devolved not from the top down but from the bottom up: the primary political unit is a local assembly representing a village or an urban district. These assemblies then elect people to represent their interests in wider confederations, which in turn choose members to provide a voice in the region as a whole (Ocalan rejects the idea of the nation state). The federal government is purely administrative: it does not make policy but implements the proposals passed up to it by the assemblies.
The introduction of this system has been bumpy: perhaps unsurprisingly in a region under constant military attack. But it has been accompanied so far by a great enhancement of the representation of women, the development of a cooperative economy and stronger environmental protection. There’s a danger in this model of photocopy democracy – political control becomes fainter and greyer as decisions are passed upwards – which might permit political capture. There’s also a danger of granting excessive power to civil servants. But already the system, though haltingly, seems to be creating an oasis of democracy and trust in the Middle East’s political desert.
So how do we decide whether and how to reform British politics? Democratically, of course. The first step should be a constitutional convention, composed of citizens chosen by lot, accompanied by a small number of parliamentarians (to encourage parliament to accept the results). Its purpose would be to identify the principles that could govern our politics, then put them to the vote in a multiple-choice referendum. What does democracy mean, if the people are not allowed to choose their political system?
While I voted remain, my aim is to make the most of Brexit. In the chaos that will accompany our departure from Europe lies an opportunity to do everything differently. Taking back control? Yes, I’m all for it.
George Monbiot in The Guardian
You lost, suck it up: this is how our politics works. If the party you voted for lost the election, you have no meaningful democratic voice for the next five years. You can go through life, in this “representative democracy”, unrepresented in government, while not being permitted to represent yourself.
Even if your party is elected, it washes its hands of you when you leave the polling booth. Governments assert a mandate for any policy they can push through parliament. While elections tend to hinge on one or two issues, parties will use their win to claim support for all the positions in their manifestos, and for anything else they decide to do during their term in office.
If you raise objections to their policies, you’re often told, “If you don’t like it, stand for election.” This response is revealing: it suggests that only 650 people out of 66 million have a valid role in national politics, beyond voting once every five years. Political control under this system is so coarse and diffuse that democracy loses all but its crudest meaning.
It is astonishing that we put up with this. The idea that any government could meet the needs of a complex, modern nation by ruling without constant feedback, and actual rather than notional consent, is preposterous.
Last week I considered some ideas for creating a more participatory economy. This column explores the potential for a more participatory democracy. I’m not proposing we abandon representative democracy, but that we temper it with meaningful deliberation and consent.
I recognise that this is an unpropitious time to call for more referendums. But the Brexit vote was the worst possible model for popular decision-making. The government threw a massive question at an electorate that had almost no experience of direct democracy. Voters were rushed towards judgment day on a ridiculously short timetable, with no preparation except a series of giant lies.
Worse still, an issue of astonishing complexity was reduced to a crude binary choice. Because the only options presented were in or out, everyone knows what the majority voted against; no one knows what kind of Leave it voted for. Why could we not have had a multiple choice, presenting the different ways in which we could have stayed in or left Europe? Without permission to make a nuanced decision, we had no incentive to achieve a nuanced understanding.A lively and intelligent politics demands an active and empowered electorate that can hold its representatives constantly to account. I propose three models that we could draw upon.
The first is the Swiss system. There, the people vote in about 10 or a dozen referendums a year, clustered into three or four polling days, challenging federal laws or proposing constitutional amendments. Referendums are triggered when someone can gather enough signatures. These plebiscites foster a strong sense of political ownership: people perceive that government belongs to them. This might explain why, in its survey of 40 nations, the Organisation for Economic Co-operation and Development discovered the Swiss had the highest levels of trust in government. Far from causing voter fatigue, the process stimulates a rich culture of engagement, debate and persuasion. Across the year, about 80% of the electorate vote in referendums.
When I mention the Swiss system, people tend to react with horror. What if, as they often do in Switzerland, people make conservative choices? Well, they are entitled to their conservatism. A true democracy reveals the character of a nation: in Switzerland it is generally conservative. And if you don’t like it, you have the opportunity, through the debates surrounding these plebiscites, to change people’s minds. (There is, however, an argument for preserving some constitutional norms, to prevent majorities from oppressing minorities).
The second model operates in Reykjavík, the Icelandic capital. Here anyone can propose an idea for improving the city or allocating its infrastructure budget, and anyone can vote for or against it. The most popular ideas are submitted to the city council. The scheme has been remarkably successful: 58% of the city’s people have taken part so far and 200 of their proposals have been adopted by the council. The result is better amenities and a resurgence of civic life.
The third, most radical, model is the Kurdish system. Particularly in Rojava, in northern Syria, but throughout the Kurdish region, the people have sought to introduce a system first proposed by the US ecologist Murray Bookchin and refined and adapted by the imprisoned leader of the banned Kurdish Workers’ Party, Abdullah Ocalan. It’s called democratic confederalism. Here, power is devolved not from the top down but from the bottom up: the primary political unit is a local assembly representing a village or an urban district. These assemblies then elect people to represent their interests in wider confederations, which in turn choose members to provide a voice in the region as a whole (Ocalan rejects the idea of the nation state). The federal government is purely administrative: it does not make policy but implements the proposals passed up to it by the assemblies.
The introduction of this system has been bumpy: perhaps unsurprisingly in a region under constant military attack. But it has been accompanied so far by a great enhancement of the representation of women, the development of a cooperative economy and stronger environmental protection. There’s a danger in this model of photocopy democracy – political control becomes fainter and greyer as decisions are passed upwards – which might permit political capture. There’s also a danger of granting excessive power to civil servants. But already the system, though haltingly, seems to be creating an oasis of democracy and trust in the Middle East’s political desert.
So how do we decide whether and how to reform British politics? Democratically, of course. The first step should be a constitutional convention, composed of citizens chosen by lot, accompanied by a small number of parliamentarians (to encourage parliament to accept the results). Its purpose would be to identify the principles that could govern our politics, then put them to the vote in a multiple-choice referendum. What does democracy mean, if the people are not allowed to choose their political system?
While I voted remain, my aim is to make the most of Brexit. In the chaos that will accompany our departure from Europe lies an opportunity to do everything differently. Taking back control? Yes, I’m all for it.
Thursday 21 January 2016
The hidden wealth of nations
G Sampath in The Hindu
The Hindu
Tax havens such as Mauritius thrive parasitically, feeding on substantive economies like India.India’s biggest source of FDI is India itself, money departing on a short holiday to a tax haven and then routed back as FDI. Will the government muster up the political will to clamp down on the tax-allergic business elite?
This could be a bumper year for the ever-lucrative tax avoidance industry. The 2015 final reports of the Organisation for Economic Co-operation and Development (OECD)-led project on Base Erosion and Profit Shifting (BEPS) — which refer to the erosion of a nation’s tax base due to the accounting tricks of Multinational Enterprises (MNEs) and the legal but abusive shifting out of profits to low-tax jurisdictions respectively — lays out 15 action points to curb abusive tax avoidance by MNEs. As a participant of this project, India is expected to implement at least some of these measures. But can it? More pertinently, does it have the political will?
The BEPS project is no doubt a positive development for tax justice. If India’s recent economic history tells us anything, it is that economic growth without public investment in social infrastructure such as health care and education can do very little to better the life conditions of the majority. Which is why curbing tax evasion to boost public finance is part of the United Nations’ Sustainable Development Goals (SDGs).
However, notwithstanding the BEPS project, MNEs and their dedicated army of highly paid accountants are not about to roll over and comply. Again, if past history is any indication, the cat-and-mouse game between accountants and taxmen will continue, with new loopholes being unearthed in new tax rules.
Empowering tax dodgers
The primary cause of concern here is the quality of India’s political leadership, which has consistently betrayed its own taxmen. All it takes — regardless of the party in power — is for the stock market to sneeze, and the Indian state swoons. We’ve seen it happen time and again: the postponement of the enforcement of General Anti-Avoidance Rules (GAAR) to 2017, and more spectacularly, on the issue of participatory notes, or P-notes.
The primary cause of concern here is the quality of India’s political leadership, which has consistently betrayed its own taxmen. All it takes — regardless of the party in power — is for the stock market to sneeze, and the Indian state swoons. We’ve seen it happen time and again: the postponement of the enforcement of General Anti-Avoidance Rules (GAAR) to 2017, and more spectacularly, on the issue of participatory notes, or P-notes.
Last year, the Special Investigation Team (SIT) on black money had recommended mandatory disclosure to the regulator, as per Know Your Customer (KYC) norms, of the identity of the final owner of P-notes. It was a sane suggestion because the bulk of P-note investments in the Indian stock market were from tax havens such as Cayman Islands. But the markets threw a fit, with the Sensex crashing by 500 points in a day. The National Democratic Alliance (NDA) government, which had come to power promising to fight black money, promptly issued a statement assuring investors that it was in no hurry to implement the SIT recommendations. Given such a patchy record, what are the realistic chances of India actually clamping down on tax dodging?
Let’s take, for instance, Action No. 6 of the OECD’s BEPS report: it urges nations to curb treaty abuse by amending their Double Taxation Avoidance Agreements (DTAA) suitably. The obvious litmus test of India’s seriousness on BEPS is its DTAA with Mauritius. By way of background, Mauritius accounted for 34 per cent of India’s FDI equity inflows from 2000 to 2015. It’s been India’s single-largest source of FDI for nearly 15 years. Now, is it possible that there are so many rich businessmen in this tiny island nation with a population of just 1.2 million, all with a touching faith in India as an investment destination? If not, how do we explain an island economy with a GDP less than one-hundredth of India’s GDP supplying more than one-third of India’s FDI?
We all know the answer: Mauritius is a tax haven. While not in the same league as Cayman Islands or Bermuda, Mauritius is a rising star, thanks in no small measure to India’s patriotic but tragically tax-allergic business elite. In Treasure Islands: Tax Havens and the Men Who Stole the World, financial journalist Nicholas Shaxson notes how Mauritius is a popular hub for what is known as “round-tripping”. He writes, “A wealthy Indian, say, will send his money to Mauritius, where it is dressed up in a secrecy structure, then disguised as foreign investment, before being returned to India. The sender of the money can avoid Indian tax on local earnings.”
In other words, it appears that India’s biggest source of FDI is India itself. Indian money departs on a short holiday to Mauritius, before returning home as FDI. Perhaps not all the FDI streaming in from Mauritius is round-tripped capital — maybe a part of it is ‘genuine’ FDI originating in Europe or the U.S. But it still denotes a massive loss of tax revenue, part of the $1.2 trillion stolen from developing countries every year.
What makes this theft of tax revenue not just possible but also legal is India’s DTAA with Mauritius. It’s a textbook example of ‘treaty shopping’ — a government-sponsored loophole for MNEs to avoid tax by channelling investments and profits through an offshore jurisdiction.
For instance, as per this DTAA, capital gains are taxable only in Mauritius, not in India. But here’s the thing: Mauritius does not tax capital gains. India, like any sensible country, does. What would any sensible businessman do? Set up a company in Mauritius, and route all Indian investments through it.
India signed this DTAA with Mauritius in 1983, but apparently ‘woke up’ only in 2000. India has spent much of 2015 ‘trying’ to renegotiate this treaty. But with our Indian-made foreign investors lobbying furiously, the talks have so far yielded nothing. Meanwhile, China, which too had the same problem with Mauritius, has already renegotiated its DTAA, and it can force investors to pay 10 per cent capital gains tax in China.
Changing profile of tax havens
Tax havens such as Mauritius thrive parasitically, feeding on substantive economies like India. Back in 2000, the OECD had identified 41 jurisdictions as tax havens. Today, as it humbly seeks their cooperation to combat tax avoidance, it calls them by a different name, so as not to offend them.
Tax havens such as Mauritius thrive parasitically, feeding on substantive economies like India. Back in 2000, the OECD had identified 41 jurisdictions as tax havens. Today, as it humbly seeks their cooperation to combat tax avoidance, it calls them by a different name, so as not to offend them.
The same list is now called — and this is not a joke — ‘Jurisdictions Committed to Improving Transparency and Establishing Effective Exchange of Information in Tax Matters’. Distinguished members of this club include Cayman Islands, Bermuda, Bahamas, Cyprus, and of course, Mauritius.
Today the function of tax havens in the global economy has evolved way beyond that of offering a low-tax jurisdiction. Mr. Shaxson describes three major elements that make tax havens tick. First, tax havens are not necessarily about geography; they are simply someplace else — a place where a country’s normal tax rules don’t apply. So, for instance, country A can serve as a tax haven for residents of country B, and vice versa. The U.S. is a classic example. It has stringent tax laws, and is energetic in prosecuting tax evasion by its citizens around the world. But it is equally keen to attract tax-evading capital from other countries, and does so through generous sops and helpful pieces of legislation which have effectively turned the U.S. into a tax haven for non-residents.
Second, more than the nominally low taxes, the bigger attraction of tax havens is secrecy. Secrecy is important for two reasons: to be able to avoid tax, you need to hide your real income; and to hide your real income, you need to hide your identity, so that the booty stashed away in a tax haven cannot be traced back to you by the taxmen at home. So, even a country whose taxes are not too low can function as a tax haven by offering a combination of exemptions and iron-clad secrecy — which is the formula adopted by the likes of Luxembourg and the Netherlands.
Third, the extreme combination of low taxes and high secrecy brought about a new mutation of tax havens in the 1960s: they turned themselves into offshore financial centres (OFCs). The economist Ronen Palan defines OFCs as “markets in which financial operators are permitted to raise funds from non-residents and invest or lend the money to other non-residents free from most regulations and taxes”. It is estimated that OFCs are recipients of 30 per cent of the world’s FDI, and are, in turn, the source of a similar quantum of FDI.
Such being the case, all India needs to do to attract FDI is to become an OFC, or create an OFC on its territory — bring offshore onshore, so to speak. That’s precisely what the U.S. did — it set up International Banking Facilities (IBFs), “to offer deposit and loan services to foreign residents and institutions free of… reserve requirements”. Japan set up the Japanese Offshore Market (JOM). Singapore has the Asian Currency Market (ACU), Thailand has the Bangkok International Banking Facility (BIBF), Malaysia has an OFC in Labuan island, and other countries have similar facilities. OFCs, as Ronen Palan puts it, are less tax havens than regulatory havens, which means that financial capital can do here what it cannot do ‘onshore’. So every major hedge fund operates out of an OFC. Given the volume of unregulated financial transactions that OFCs host, it is no surprise that they were at the heart of the 2008 financial crisis.
Apart from accumulating illicit capital (in the tax haven role), channelling this capital back onshore dressed up as FDI (in investment hub role), and deploying it to engage in destructive financial speculation (in OFC role), these strongholds of finance capital also serve a political function: they undermine democracy by enabling financial capture of the political levers of democratic states.
It is well known that political parties in most democracies are amply funded by slush funds that would not have accumulated in the first place had taxes been paid. But today, not least in the Anglophone world, global finance’s capture of the state appears more like the norm.
A lone exception seems to be Iceland, which began the new year on a rousing note — by sentencing 26 corrupt bankers to a combined 74 years in jail. Meanwhile in India, we continue to parrot long discredited clichés about the need for more financial deregulation and a weird logic that mandates a smaller and more limited role for public finance.
Monday 25 March 2013
Cyprus - Treasure Island Trauma
Paul Krugman in The New York Times
A couple of years ago, the journalist Nicholas Shaxson published a fascinating, chilling book titled “Treasure Islands,” which explained how international tax havens — which are also, as the author pointed out, “secrecy jurisdictions” where many rules don’t apply — undermine economies around the world. Not only do they bleed revenues from cash-strapped governments and enable corruption; they distort the flow of capital, helping to feed ever-bigger financial crises.
One question Mr. Shaxson didn’t get into much, however, is what happens when a secrecy jurisdiction itself goes bust. That’s the story of Cyprus right now. And whatever the outcome for Cyprus itself (hint: it’s not likely to be happy), the Cyprus mess shows just how unreformed the world banking system remains, almost five years after the global financial crisis began.
So, about Cyprus: You might wonder why anyone cares about a tiny nation with an economy not much biggerthan that of metropolitan Scranton, Pa. Cyprus is, however, a member of the euro zone, so events there could trigger contagion (for example, bank runs) in larger nations. And there’s something else: While the Cypriot economy may be tiny, it’s a surprisingly large financial player, with a banking sector four or five times as big as you might expect given the size of its economy.
Why are Cypriot banks so big? Because the country is a tax haven where corporations and wealthy foreigners stash their money. Officially, 37 percent of the deposits in Cypriot banks come from nonresidents; the true number, once you take into account wealthy expatriates and people who are only nominally resident in Cyprus, is surely much higher. Basically, Cyprus is a place where people, especially but not only Russians, hide their wealth from both the taxmen and the regulators. Whatever gloss you put on it, it’s basically about money-laundering.
And the truth is that much of the wealth never moved at all; it just became invisible. On paper, for example, Cyprus became a huge investor in Russia — much bigger than Germany, whose economy is hundreds of times larger. In reality, of course, this was just “roundtripping” by Russians using the island as a tax shelter.
Unfortunately for the Cypriots, enough real money came in to finance some seriously bad investments, as their banks bought Greek debt and lent into a vast real estate bubble. Sooner or later, things were bound to go wrong. And now they have.
Now what? There are some strong similarities between Cyprus now and Iceland (a similar-size economy) a few years back. Like Cyprus now, Iceland had a huge banking sector, swollen by foreign deposits, that was simply too big to bail out. Iceland’s response was essentially to let its banks go bust, wiping out those foreign investors, while protecting domestic depositors — and the results weren’t too bad. Indeed, Iceland, with a far lower unemployment rate than most of Europe, has weathered the crisis surprisingly well.
Unfortunately, Cyprus’s response to its crisis has been a hopeless muddle. In part, this reflects the fact that it no longer has its own currency, which makes it dependent on decision makers in Brussels and Berlin — decision makers who haven’t been willing to let banks openly fail.
But it also reflects Cyprus’s own reluctance to accept the end of its money-laundering business; its leaders are still trying to limit losses to foreign depositors in the vain hope that business as usual can resume, and they were so anxious to protect the big money that they tried to limit foreigners’ losses by expropriating small domestic depositors. As it turned out, however, ordinary Cypriots were outraged, the plan was rejected, and, at this point, nobody knows what will happen.
My guess is that, in the end, Cyprus will adopt something like the Icelandic solution, but unless it ends up being forced off the euro in the next few days — a real possibility — it may first waste a lot of time and money on half-measures, trying to avoid facing up to reality while running up huge debts to wealthier nations. We’ll see.
But step back for a minute and consider the incredible fact that tax havens like Cyprus, the Cayman Islands, and many more are still operating pretty much the same way that they did before the global financial crisis. Everyone has seen the damage that runaway bankers can inflict, yet much of the world’s financial business is still routed through jurisdictions that let bankers sidestep even the mild regulations we’ve put in place. Everyone is crying about budget deficits, yet corporations and the wealthy are still freely using tax havens to avoid paying taxes like the little people.
So don’t cry for Cyprus; cry for all of us, living in a world whose leaders seem determined not to learn from disaster.
Monday 2 April 2012
Why do bankers get to decide who pays for the mess Europe is in?
There were summits about how much misery would be imposed on the Greeks – and no trade unions got a say
What you're about to read does, I admit, sound like a conspiracy
theory. It involves powerful people meeting in private offices,
hundreds of billions of euros, and clandestine deals determining the
fates of entire countries. All that's missing is a grassy knoll or a
wandering band of illuminati. There are, however, two crucial
differences: these events are still unfolding – and they're more
worrying than any who-killed-JFK fantasy I've ever heard.
Cast your mind back to the euro crisis talks last year, when the future of Greece was being decided. How much Athens should pay its bailiffs in the banks, on what terms, and the hardship that ordinary Greeks would have to endure as a result.
There were times when the whole of 2011 seemed to be one long European summit, when you heard more about Papandreou and Merkozy than was strictly necessary. Yet you probably didn't catch many references to Charles Dallara and Josef Ackermann.
They're two of the most senior bankers in the world – among the top 1% of the 1%. Dallara served in the Treasury under Ronald Reagan, before moving on to Wall Street, while Ackermann is chief executive of Deutsche Bank. But their role in the euro negotiations, and so in deciding Greece's future, was as representatives of the International Institute for Finance.
The IIF is a lobby group for 450 of the biggest banks in the world, with members including Barclays, RBS and Lloyds. Dallara and Ackermann and their colleagues were present throughout those euro summits, and enjoyed rare and astounding access to European heads of state and other policy-makers. EU and IMF officials consulted the bankers on how much Greece should pay, Europe's commissioner for economic affairs Olli Rehn shared conference calls with them.
You can piece all this together by poring over media reports of the euro summits, although be warned: you'll need a very high tolerance threshold for European TV, and financial newswires. But Dallara and co are also quite happy to toot their own trumpets. After a deal was struck last July, the IIF put out a note bragging about its "catalytic" role and claiming its offer "forms an integral part of a comprehensive package".
By now you'll have guessed the punchline: that July agreement was terrible for the Greeks, and brilliant for the bankers. It was widely panned at the time, for slicing only 21% off the value of Greece's loans, when Angela Merkel and many others agreed that financiers ought to be taking a much bigger hit. As the German government's economic adviser, Wolfgang Franz, later remarked in an interview: "If you look at the 21% and our demand for a 50% participation of private creditors, the financial sector has been very successful." Another way of putting it would be to say that the bankers overpowered even the strongest state in Europe.
None of this was inevitable. Iceland had made it clear that simply defaulting on one's loans didn't immediately lead to economic apocalypse. Across Greece, there were massive, repeated protests about the enormous spending cuts that citizens would suffer by paying off Goldman Sachs and the rest. And there was a growing movement in Greece and Portugal and France, among other countries, questioning the legitimacy of some of these loans.
None of these voters, none of these opinions got even a fraction of the consideration, let alone the face time, that was extended to Dallara and Ackermann. At Corporate Europe Observatory in Brussels, Yiorgos Vassalos has been tracking the negotiations over Greece: by his reckoning only the IIF got to have such personal, close-up access. These were summits settling how much misery would be imposed on the Greek people – and no trade unions or civil society groups got a say in them. "The only key players in those meetings were European governments and the bankers," says Vassalos.
Mindful of appearances, the EU has been less eager to admit to the influence of the bankers' lobby. When European officials were first asked by Corporate Europe Observatory about the extent of IIF access, they responded that it was limited to the Greek government. Only when it was pointed out that the Wall Street Journal and Bloomberg were reporting that Dallara met Merkel and Nicolas Sarkozy at midnight at an October summit to finalise a bigger reduction of the value of Greek debt did the officials back down: the IIF, they agreed, had been negotiating with a range of governments, on a whole host of issues to do with Greece's future.
So the bankers whose excesses helped land Europe in this mess then get to sit round the big EU table, like any other government, and decide who should pay for it. And the answer, unsurprisingly, is: not them. The bigger question is: why finance has been granted such power? In a forthcoming paper entitled Deep Stall, the Centre for Research on Socio-Cultural Change gives one compelling reason: because so many countries across Europe are, through both their public and private sectors, so dependent on financiers in other countries for credit. That includes Britain, which relies on 10 eurozone countries for loans worth over 70% of its annual national income – a higher proportion even than Italy. The tale of the IIF and how it got such a powerful say on the fate of ordinary Greeks is really a chapter in a much bigger story of how governments across the western world got swallowed up by their finance industries.
Cast your mind back to the euro crisis talks last year, when the future of Greece was being decided. How much Athens should pay its bailiffs in the banks, on what terms, and the hardship that ordinary Greeks would have to endure as a result.
There were times when the whole of 2011 seemed to be one long European summit, when you heard more about Papandreou and Merkozy than was strictly necessary. Yet you probably didn't catch many references to Charles Dallara and Josef Ackermann.
They're two of the most senior bankers in the world – among the top 1% of the 1%. Dallara served in the Treasury under Ronald Reagan, before moving on to Wall Street, while Ackermann is chief executive of Deutsche Bank. But their role in the euro negotiations, and so in deciding Greece's future, was as representatives of the International Institute for Finance.
The IIF is a lobby group for 450 of the biggest banks in the world, with members including Barclays, RBS and Lloyds. Dallara and Ackermann and their colleagues were present throughout those euro summits, and enjoyed rare and astounding access to European heads of state and other policy-makers. EU and IMF officials consulted the bankers on how much Greece should pay, Europe's commissioner for economic affairs Olli Rehn shared conference calls with them.
You can piece all this together by poring over media reports of the euro summits, although be warned: you'll need a very high tolerance threshold for European TV, and financial newswires. But Dallara and co are also quite happy to toot their own trumpets. After a deal was struck last July, the IIF put out a note bragging about its "catalytic" role and claiming its offer "forms an integral part of a comprehensive package".
By now you'll have guessed the punchline: that July agreement was terrible for the Greeks, and brilliant for the bankers. It was widely panned at the time, for slicing only 21% off the value of Greece's loans, when Angela Merkel and many others agreed that financiers ought to be taking a much bigger hit. As the German government's economic adviser, Wolfgang Franz, later remarked in an interview: "If you look at the 21% and our demand for a 50% participation of private creditors, the financial sector has been very successful." Another way of putting it would be to say that the bankers overpowered even the strongest state in Europe.
None of this was inevitable. Iceland had made it clear that simply defaulting on one's loans didn't immediately lead to economic apocalypse. Across Greece, there were massive, repeated protests about the enormous spending cuts that citizens would suffer by paying off Goldman Sachs and the rest. And there was a growing movement in Greece and Portugal and France, among other countries, questioning the legitimacy of some of these loans.
None of these voters, none of these opinions got even a fraction of the consideration, let alone the face time, that was extended to Dallara and Ackermann. At Corporate Europe Observatory in Brussels, Yiorgos Vassalos has been tracking the negotiations over Greece: by his reckoning only the IIF got to have such personal, close-up access. These were summits settling how much misery would be imposed on the Greek people – and no trade unions or civil society groups got a say in them. "The only key players in those meetings were European governments and the bankers," says Vassalos.
Mindful of appearances, the EU has been less eager to admit to the influence of the bankers' lobby. When European officials were first asked by Corporate Europe Observatory about the extent of IIF access, they responded that it was limited to the Greek government. Only when it was pointed out that the Wall Street Journal and Bloomberg were reporting that Dallara met Merkel and Nicolas Sarkozy at midnight at an October summit to finalise a bigger reduction of the value of Greek debt did the officials back down: the IIF, they agreed, had been negotiating with a range of governments, on a whole host of issues to do with Greece's future.
So the bankers whose excesses helped land Europe in this mess then get to sit round the big EU table, like any other government, and decide who should pay for it. And the answer, unsurprisingly, is: not them. The bigger question is: why finance has been granted such power? In a forthcoming paper entitled Deep Stall, the Centre for Research on Socio-Cultural Change gives one compelling reason: because so many countries across Europe are, through both their public and private sectors, so dependent on financiers in other countries for credit. That includes Britain, which relies on 10 eurozone countries for loans worth over 70% of its annual national income – a higher proportion even than Italy. The tale of the IIF and how it got such a powerful say on the fate of ordinary Greeks is really a chapter in a much bigger story of how governments across the western world got swallowed up by their finance industries.
Tuesday 6 March 2012
The first politician to face charges over 2008 financial crisis
Former Icelandic prime minister Geir
Haarde (right), and his lawyer Andri Arnason, appear at his trial in
Reykjavik. Photograph: S Olafs/EPA
The former prime minister of Iceland has become the first politician in the world to stand trial over the 2008 financial crisis.
Geir Haarde, who was ousted after Iceland's three biggest banks collapsed and the country's economy went into meltdown, could be jailed for two years if found guilty of gross negligence in failing to prepare for the impending disaster. He denied the charges and claimed that "only in hindsight is it evident that not everything was as it should have been".
Haarde was instrumental in transforming Iceland from a fishing and whaling backwater into an international financial powerhouse before the credit crunch caused the economy to crash almost overnight.
The Icelandic parliament's "truth report" into the causes of the crisis that forced the country to borrow $10bn (£6.3bn) to prop up its economy, accused him of "gross negligence". He is also accused of failing to rein in the country's fast-growing banks, whose paper value before the crash had ballooned to 10 times the gross domestic product of the island state of 320,000 people. And he is alleged to have withheld information that indicated the state was headed for financial disaster.
The country's three biggest banks – Glitnir, Kaupthing and Landsbanki – went bust within weeks of each other after the collapse of Lehman Brothers in the US sparked the credit crunch in 2008.
"None of us realised at the time that there was something fishy within the banking system itself, as now appears to have been the case," Haarde told the court in the capital of Reykjavik on Monday. "I think it's illogical to think that I or anyone else in the government could have reduced the size of the
banks to a greater extent than was done at the time."
He is accused of failing to prevent the contagion from spreading to the UK by not insisting that Icelandic banks ringfence their overseas operations. The crisis sparked a diplomatic row with the UK as the demise of Landsbanki brought down its British internet banking arm, Icesave, leaving British councils, universities and hospitals more than £1bn out of pocket.
Gordon Brown, who was British prime minister at the time of the collapse, accused Haarde of "unacceptable" and illegal" behaviour over its failure to guarantee to reimburse UK customers of the bank. The British government stepped in to protect most savers, at a cost of £3.2bn but it is continuing to demand compensation from Iceland to cover the cost.
The crisis also led to the demise of Baugur, the British retail investor which owned stakes in House of Fraser, Debenhams and Woolworths.
Haarde, who led the right-leaning Independence party and was prime minister from 2006 to 2009, rejected all the charges as "political persecution" from the country's left-leaning government, and said he would be vindicated by the trial. He said Icelanders' interests were his "guiding light" and insisted that his conscience was clear.
The trial is expected to last until mid-March, with the court taking another four to six weeks to deliver its verdict.
Haarde has become the first person to ever stand trial at the country's Landsdómur criminal court, which was created in 1905 to hear charges brought against ministers. He was one of four former Icelandic ministers blamed by the "truth report" for causing the crisis, but parliament voted last year that he should be the only person to stand trial.
The others named in the report were the former finance minister Árni Mathiesen and former minister of commerce Björgvin Sigurdsson, and Davíd Oddsson, a former prime minister who was running the country's central bank at the time.
Geir Haarde, who was ousted after Iceland's three biggest banks collapsed and the country's economy went into meltdown, could be jailed for two years if found guilty of gross negligence in failing to prepare for the impending disaster. He denied the charges and claimed that "only in hindsight is it evident that not everything was as it should have been".
Haarde was instrumental in transforming Iceland from a fishing and whaling backwater into an international financial powerhouse before the credit crunch caused the economy to crash almost overnight.
The Icelandic parliament's "truth report" into the causes of the crisis that forced the country to borrow $10bn (£6.3bn) to prop up its economy, accused him of "gross negligence". He is also accused of failing to rein in the country's fast-growing banks, whose paper value before the crash had ballooned to 10 times the gross domestic product of the island state of 320,000 people. And he is alleged to have withheld information that indicated the state was headed for financial disaster.
The country's three biggest banks – Glitnir, Kaupthing and Landsbanki – went bust within weeks of each other after the collapse of Lehman Brothers in the US sparked the credit crunch in 2008.
"None of us realised at the time that there was something fishy within the banking system itself, as now appears to have been the case," Haarde told the court in the capital of Reykjavik on Monday. "I think it's illogical to think that I or anyone else in the government could have reduced the size of the
banks to a greater extent than was done at the time."
He is accused of failing to prevent the contagion from spreading to the UK by not insisting that Icelandic banks ringfence their overseas operations. The crisis sparked a diplomatic row with the UK as the demise of Landsbanki brought down its British internet banking arm, Icesave, leaving British councils, universities and hospitals more than £1bn out of pocket.
Gordon Brown, who was British prime minister at the time of the collapse, accused Haarde of "unacceptable" and illegal" behaviour over its failure to guarantee to reimburse UK customers of the bank. The British government stepped in to protect most savers, at a cost of £3.2bn but it is continuing to demand compensation from Iceland to cover the cost.
The crisis also led to the demise of Baugur, the British retail investor which owned stakes in House of Fraser, Debenhams and Woolworths.
Haarde, who led the right-leaning Independence party and was prime minister from 2006 to 2009, rejected all the charges as "political persecution" from the country's left-leaning government, and said he would be vindicated by the trial. He said Icelanders' interests were his "guiding light" and insisted that his conscience was clear.
The trial is expected to last until mid-March, with the court taking another four to six weeks to deliver its verdict.
Haarde has become the first person to ever stand trial at the country's Landsdómur criminal court, which was created in 1905 to hear charges brought against ministers. He was one of four former Icelandic ministers blamed by the "truth report" for causing the crisis, but parliament voted last year that he should be the only person to stand trial.
The others named in the report were the former finance minister Árni Mathiesen and former minister of commerce Björgvin Sigurdsson, and Davíd Oddsson, a former prime minister who was running the country's central bank at the time.
Tuesday 10 January 2012
It's time to cancel unpayable old debts
By Aditya Chakrabortty in The Guardian
In the week between Christmas and New Year, those bleary few days when the world has better things to do than catch up on news or check its Twitter account, The Guardian carried a story that bears repeating. It was about Dimitris and Christina Gasparinatos and their kids in the Greek port of Patras. For ever hard up, the parents had been pushed by the economic crisis into outright poverty; and just before Christmas Dimitris and Christina put four of their children into care.
Nor is the Gasparinatos' case an isolated one. Greece must be the most family-centric society in western Europe, yet its media is full of reports of newborns dumped outside clinics, or infants shunted into foster homes.
Such stories almost never come up when politicians and economists debate Europe's meltdown; implicitly, they are categorised as fall-out, for journalists and campaigners to highlight. Yet the abandoned children of Greece are not merely coincidental to those discussions about how to tackle the debt; they are integral to it.
Strip away the technicalities and you are left with two ways to think about the debt crisis. One is as a battle between the past and the future. The vast majority of Greece's debts are historic commitments made to creditors by previous governments, sometimes in very dubious circumstances. Yet Athens has been forced to prioritise repaying these old loans over generating economic growth, or future income. One result of that policy has been to snatch away whatever chance the Gasparinatos kids might have had of decent lives.
Something similar is happening in Britain. David Cameron came to office with the primary goal of paying down debt. Less than two years later, his ministers are now obliged to go on the BBC at regular intervals to explain why more than a million young people are out of work. Study after study shows that a young adult unemployed at the outset of his or her career suffers permanent damage to their prospects, yet this government's economic policy favours the past even though it means ruining the future.
Why? This brings us to the second way to think about any argument over debt: as a fight between creditors and borrowers, or the haves and the have-nots. The creditors have the money and therefore the whip-hand over the borrowers. They also have the political influence: the boss of Deutsche Bank would, one suspects, get more face time with Greece's prime minister or any other eurozone leader than the Gasparinatos family and a whole coachload of their neighbours. His demands are also more likely to get preferential treatment, which is a major reason why Angela Merkel and Nicolas Sarkozy has gone through such contortions over Athens' loans.
Before last summer, eurozone policy-makers swore blind that they would never countenance Greece failing to pay all of its debts in full. After finally accepting that that was impossible, they then asked if bankers would be good enough to knock 21% off the country's loans, rising over time to 40% and then 50%, or even a little more. Meanwhile, economists at the IMF estimate that Greece should actually have 75% wiped off its debt burden – and market prices indicate that figure should really be over 90%. But economic reality has been no match for the stranglehold bankers have on European politicians – who, by the way, swore last month that no other country would fail to pay its loans in full.
And yet economic history is full of examples of successful debt default. When American Airlines declared recently that it was bankrupt and couldn't carry on repaying its loans, it was applauded by Wall Street analysts as "very smart". The whole point of company insolvencies is to work out the value and viability of the underlying enterprise; if it can carry on, banks and other creditors get squared off at vastly reduced sums and the productive part of the firm is back in business.
The same goes for countries. Regimes sunk by revolutions don't repay their debts; nor do countries that lose wars. (When they are made to, as with Germany after the first world war, terrible things can result.) Over the past couple of decades, campaigners have successfully won debt relief for poor countries in Africa and Asia. Other nations, such as Ecuador or Argentina or Iceland, have simply declared they cannot repay all that they owe.
Ultimately, a loan is a social arrangement and, like any other contract, it can be renegotiated. A few decades ago, archaeologists discovered the first ever legal contract in Lagash in modern-day Iraq. Dated back 4,400 years and carved into the bricks of a Mesopotamian temple, it was for the cancellation of debt. It's claimed that countries that don't repay their loans will be frozen out by lenders. Yet, as I wrote here last year, IMF economists have recently argued that "the economic costs are generally significant but short-lived . . . we almost never can detect effects beyond one or two years."
In his recent, brilliant history Debt: the First 5,000 Years, the anthropologist David Graeber calls for a modern-day debt jubilee, a cancellation of all debts, just as they had in Mesopotamia. His suggestion is provocative, but it should be taken seriously. Because the longer we keep protecting the haves over the have-nots and honouring the past while destroying the future, the worse this debt crisis will get.
In the week between Christmas and New Year, those bleary few days when the world has better things to do than catch up on news or check its Twitter account, The Guardian carried a story that bears repeating. It was about Dimitris and Christina Gasparinatos and their kids in the Greek port of Patras. For ever hard up, the parents had been pushed by the economic crisis into outright poverty; and just before Christmas Dimitris and Christina put four of their children into care.
Nor is the Gasparinatos' case an isolated one. Greece must be the most family-centric society in western Europe, yet its media is full of reports of newborns dumped outside clinics, or infants shunted into foster homes.
Such stories almost never come up when politicians and economists debate Europe's meltdown; implicitly, they are categorised as fall-out, for journalists and campaigners to highlight. Yet the abandoned children of Greece are not merely coincidental to those discussions about how to tackle the debt; they are integral to it.
Strip away the technicalities and you are left with two ways to think about the debt crisis. One is as a battle between the past and the future. The vast majority of Greece's debts are historic commitments made to creditors by previous governments, sometimes in very dubious circumstances. Yet Athens has been forced to prioritise repaying these old loans over generating economic growth, or future income. One result of that policy has been to snatch away whatever chance the Gasparinatos kids might have had of decent lives.
Something similar is happening in Britain. David Cameron came to office with the primary goal of paying down debt. Less than two years later, his ministers are now obliged to go on the BBC at regular intervals to explain why more than a million young people are out of work. Study after study shows that a young adult unemployed at the outset of his or her career suffers permanent damage to their prospects, yet this government's economic policy favours the past even though it means ruining the future.
Why? This brings us to the second way to think about any argument over debt: as a fight between creditors and borrowers, or the haves and the have-nots. The creditors have the money and therefore the whip-hand over the borrowers. They also have the political influence: the boss of Deutsche Bank would, one suspects, get more face time with Greece's prime minister or any other eurozone leader than the Gasparinatos family and a whole coachload of their neighbours. His demands are also more likely to get preferential treatment, which is a major reason why Angela Merkel and Nicolas Sarkozy has gone through such contortions over Athens' loans.
Before last summer, eurozone policy-makers swore blind that they would never countenance Greece failing to pay all of its debts in full. After finally accepting that that was impossible, they then asked if bankers would be good enough to knock 21% off the country's loans, rising over time to 40% and then 50%, or even a little more. Meanwhile, economists at the IMF estimate that Greece should actually have 75% wiped off its debt burden – and market prices indicate that figure should really be over 90%. But economic reality has been no match for the stranglehold bankers have on European politicians – who, by the way, swore last month that no other country would fail to pay its loans in full.
And yet economic history is full of examples of successful debt default. When American Airlines declared recently that it was bankrupt and couldn't carry on repaying its loans, it was applauded by Wall Street analysts as "very smart". The whole point of company insolvencies is to work out the value and viability of the underlying enterprise; if it can carry on, banks and other creditors get squared off at vastly reduced sums and the productive part of the firm is back in business.
The same goes for countries. Regimes sunk by revolutions don't repay their debts; nor do countries that lose wars. (When they are made to, as with Germany after the first world war, terrible things can result.) Over the past couple of decades, campaigners have successfully won debt relief for poor countries in Africa and Asia. Other nations, such as Ecuador or Argentina or Iceland, have simply declared they cannot repay all that they owe.
Ultimately, a loan is a social arrangement and, like any other contract, it can be renegotiated. A few decades ago, archaeologists discovered the first ever legal contract in Lagash in modern-day Iraq. Dated back 4,400 years and carved into the bricks of a Mesopotamian temple, it was for the cancellation of debt. It's claimed that countries that don't repay their loans will be frozen out by lenders. Yet, as I wrote here last year, IMF economists have recently argued that "the economic costs are generally significant but short-lived . . . we almost never can detect effects beyond one or two years."
In his recent, brilliant history Debt: the First 5,000 Years, the anthropologist David Graeber calls for a modern-day debt jubilee, a cancellation of all debts, just as they had in Mesopotamia. His suggestion is provocative, but it should be taken seriously. Because the longer we keep protecting the haves over the have-nots and honouring the past while destroying the future, the worse this debt crisis will get.
Thursday 14 April 2011
Iceland broke the rules and got away with it
Now Ireland and Portugal wish they too had got tough with the markets
* Aditya Chakrabortty
o The Guardian, Tuesday 12 April 2011
Remember Iceland? In the autumn of 2008, it became the first national casualty of the financial meltdown; the first rich country in more than three decades to take an IMF bailout. Commentators declared it the Icarus economy, which had finally come crashing back down to earth. It became both parable and laughing stock. What's the difference between Iceland and Ireland, joked traders – one letter and a few months.
You don't hear much about the insolvent island any more – apart from occasions such as this weekend, when Icelandic voters were asked to repay the £3.5bn owing on collapsed bank Icesave, and replied with a firm "Nei".
Unnoticed it may be, but Reykjavik now serves as a very different kind of parable, of how to minimise the misery of financial collapse by ignoring economic orthodoxy. And in those other broke European economies – from Dublin to Athens to Lisbon – politicians and voters are starting to pay attention. After its three biggest banks – 85% of the country's financial system – failed in the same week, Iceland did two remarkable things. First, it let the banks go under: foreign financiers who had lent to Reykjavik institutions at their own risk didn't get a single krona back. Second, officials imposed capital controls, making it harder for hot-money merchants to pull their cash out of the country.
These policies were not just controversial; they represented a two-fingered salute to the polite society of academics and policy-makers who normally lay down the laws on economic disaster management.
Compare Iceland's policies with those followed by another tiny country in the North Atlantic, which also has a banking industry much bigger than its national economy. When the credit crunch came to Dublin, the government decided to underwrite the entire banking industry – including tens of billions of euros of loans made by foreign investors. That landed the country with a debt worth something like €80,000 for every household – a debt that effectively bankrupted the country.
"A reverse Robin Hood – taking money from the poor and giving to the rich," is how Anne Sibert, a member of the Central Bank of Iceland's monetary policy committee, describes the Irish policy. But Dublin was merely following the old free-market tradition that rules governments should never break faith with financiers.
Yet looking at the two countries now, it's hard to say that Ireland has prospered out of being orthodox, or that Iceland has suffered an especially terrible punishment for not sticking to the Way of the Markets.
Indeed, the evidence seems to point the opposite way: Iceland has come through in better condition than anyone in 2008 dared hope. The worst of its recession is over, even though it's still too early to talk about sustained growth, and the unemployment rate (7.5%) is just over half that of Ireland (13.6%). Remarkably, after the krona lost more than half its face value, inflation is also coming down quite sharply. And without having to pay back foreign creditors, the government's finances are also in better shape. In Ireland, on the other hand, the government has just injected more money into its banking sector – the fifth time it has had to do so.
Now, this is a picture that needs more qualifications than a brain surgeon. For a start, you wouldn't wish Iceland's fate on any economy. Huge spending cuts are still to kick in, and a lot more pain is in store. Thor Gylfason, an economist at the University of Iceland, reckons it will take another seven to 10 years before his country recovers from one of the worst economic disasters in recent history. This will be a long, slow haul.
But landed with an almost unbearable burden, Iceland has made the load easier on itself – and it has done so by getting tough with foreign speculators who lent money to the country at their own risk. In Dublin, on the other hand, as Irish MP Stephen Donnelly puts it, "the entire Irish people were made collateral for the banking system" – and its economic performance has not been remarkably better. More than that, there is a basic point about fairness: in Ireland, keeping the markets on side was deemed to be more important than keeping people in jobs – in Iceland, the priorities have been reversed.
Donnelly says that the Icelandic example is beginning to attract interest in the Dáil and in the media. An Icelandic politician was recently interviewed by Vincent Browne, the Irish equivalent of Jeremy Paxman. In the bust countries of southern Europe they're also starting to take notice. Last week, on the day that Portugal finally admitted it would need a bailout from Brussels, I was talking to Joana Gorjão Henriques, a journalist from Lisbon. She told me that her contacts were pasting stories about Iceland on Facebook, and that newspaper columnists were using Iceland's case as an example that Portugal, Greece and Ireland should follow – make an allegiance and say to the EU that they won't pay the debt.
There are echoes here of the Asian financial crisis of the late 90s. Then Malaysia's prime minister Mahathir Mohamad brought in capital controls to shore up a battered financial system – and he was pilloried from Washington to Wall Street. Nobel laureates in economics predicted imminent catastrophe for Malaysia; the International Monetary Fund effectively told Mohamad off. But the year after, Malaysia began a strong economic recovery, and now the IMF issues papers on the usefulness of capital controls.
Iceland was a country wrecked by implementing free-market dogma crudely and quickly; it may yet became another such lesson of how an economy can ignore free-market dogma – and come out far better than its critics predicted.
* Aditya Chakrabortty
o The Guardian, Tuesday 12 April 2011
Remember Iceland? In the autumn of 2008, it became the first national casualty of the financial meltdown; the first rich country in more than three decades to take an IMF bailout. Commentators declared it the Icarus economy, which had finally come crashing back down to earth. It became both parable and laughing stock. What's the difference between Iceland and Ireland, joked traders – one letter and a few months.
You don't hear much about the insolvent island any more – apart from occasions such as this weekend, when Icelandic voters were asked to repay the £3.5bn owing on collapsed bank Icesave, and replied with a firm "Nei".
Unnoticed it may be, but Reykjavik now serves as a very different kind of parable, of how to minimise the misery of financial collapse by ignoring economic orthodoxy. And in those other broke European economies – from Dublin to Athens to Lisbon – politicians and voters are starting to pay attention. After its three biggest banks – 85% of the country's financial system – failed in the same week, Iceland did two remarkable things. First, it let the banks go under: foreign financiers who had lent to Reykjavik institutions at their own risk didn't get a single krona back. Second, officials imposed capital controls, making it harder for hot-money merchants to pull their cash out of the country.
These policies were not just controversial; they represented a two-fingered salute to the polite society of academics and policy-makers who normally lay down the laws on economic disaster management.
Compare Iceland's policies with those followed by another tiny country in the North Atlantic, which also has a banking industry much bigger than its national economy. When the credit crunch came to Dublin, the government decided to underwrite the entire banking industry – including tens of billions of euros of loans made by foreign investors. That landed the country with a debt worth something like €80,000 for every household – a debt that effectively bankrupted the country.
"A reverse Robin Hood – taking money from the poor and giving to the rich," is how Anne Sibert, a member of the Central Bank of Iceland's monetary policy committee, describes the Irish policy. But Dublin was merely following the old free-market tradition that rules governments should never break faith with financiers.
Yet looking at the two countries now, it's hard to say that Ireland has prospered out of being orthodox, or that Iceland has suffered an especially terrible punishment for not sticking to the Way of the Markets.
Indeed, the evidence seems to point the opposite way: Iceland has come through in better condition than anyone in 2008 dared hope. The worst of its recession is over, even though it's still too early to talk about sustained growth, and the unemployment rate (7.5%) is just over half that of Ireland (13.6%). Remarkably, after the krona lost more than half its face value, inflation is also coming down quite sharply. And without having to pay back foreign creditors, the government's finances are also in better shape. In Ireland, on the other hand, the government has just injected more money into its banking sector – the fifth time it has had to do so.
Now, this is a picture that needs more qualifications than a brain surgeon. For a start, you wouldn't wish Iceland's fate on any economy. Huge spending cuts are still to kick in, and a lot more pain is in store. Thor Gylfason, an economist at the University of Iceland, reckons it will take another seven to 10 years before his country recovers from one of the worst economic disasters in recent history. This will be a long, slow haul.
But landed with an almost unbearable burden, Iceland has made the load easier on itself – and it has done so by getting tough with foreign speculators who lent money to the country at their own risk. In Dublin, on the other hand, as Irish MP Stephen Donnelly puts it, "the entire Irish people were made collateral for the banking system" – and its economic performance has not been remarkably better. More than that, there is a basic point about fairness: in Ireland, keeping the markets on side was deemed to be more important than keeping people in jobs – in Iceland, the priorities have been reversed.
Donnelly says that the Icelandic example is beginning to attract interest in the Dáil and in the media. An Icelandic politician was recently interviewed by Vincent Browne, the Irish equivalent of Jeremy Paxman. In the bust countries of southern Europe they're also starting to take notice. Last week, on the day that Portugal finally admitted it would need a bailout from Brussels, I was talking to Joana Gorjão Henriques, a journalist from Lisbon. She told me that her contacts were pasting stories about Iceland on Facebook, and that newspaper columnists were using Iceland's case as an example that Portugal, Greece and Ireland should follow – make an allegiance and say to the EU that they won't pay the debt.
There are echoes here of the Asian financial crisis of the late 90s. Then Malaysia's prime minister Mahathir Mohamad brought in capital controls to shore up a battered financial system – and he was pilloried from Washington to Wall Street. Nobel laureates in economics predicted imminent catastrophe for Malaysia; the International Monetary Fund effectively told Mohamad off. But the year after, Malaysia began a strong economic recovery, and now the IMF issues papers on the usefulness of capital controls.
Iceland was a country wrecked by implementing free-market dogma crudely and quickly; it may yet became another such lesson of how an economy can ignore free-market dogma – and come out far better than its critics predicted.
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