“Up to half of all Icelandic families are bankrupt”
Iceland’s economy is growing again after the deep recession that struck in 2008. The country’s former Prime Minister is on trial for his role in the crisis. But the economic and political crisis is far from over.
During one week in October 2008, the country’s three major banks collapsed and the stock exchange index fell from 9000 to 14. GDP fell by over 10% and the unemployment rate increased sevenfold. None of the 320,000 inhabitants could escape the blast.
The author, Haukur Ingvarsson, told the Danish newspaper, Information, about his grandfather: “First, he lost all his savings. Then he lost faith in the society he had so proudly been a part of building. And finally he lost his mind… Four or five months later he was dead.”
Today, when economic growth seems to be coming back, the after-effects of the crisis remain: “Up to half of all Icelandic families are bankrupt, many have stopped paying their bills and even people with good education and permanent jobs are under severe pressure,” summarizes Information.
How can the economic recovery and the calm that seems to have replaced the big protests of 2008-09 be explained?
The main reason for growth is a gigantic devaluation. At most, the Icelandic krona fell by 77% and it is now at about 50% below its previous value. This has increased tourism and fish exports.
The krona’s value reduction also increased the foreign debt. But the Icelandic government guaranteed only lenders in the country. “Much of the cost of debt restructuring was borne indirectly by foreign creditors, who took significant losses when the banks collapsed,” says the International Monetary Fund (IMF) in its latest forecast (World Economic Outlook, April 2012).
In response to the many angry demonstrations and to avoid a total collapse, the Icelandic government decided on several temporary measures: an end to foreclosures, suspension of debt payments for housing, a rule that no one should have housing debt of more than 110% of the household’s annual income, etc. Costs for these measures and the state bank takeover was financed with loans from the IMF of $10 billion – up to 20,000 euros per Icelander.
Negotiations of individual housing loans have subsequently led to reductions of debt and temporarily reduced interest rates. But still these kind of negotiations have been completed for only 35% of all households.
Several of the measures have only been possible because Iceland has so few inhabitants. But it remains yet to be seen the degree to which Iceland managed to put households back on their feet, the IMF report concludes. “Significant problems remain,” the Financial Times concluded in a recent analysis. The average household has lost 30% of its purchasing power since 2008. Household debt is still above 200 percent of disposable income.
Still, one quarter of the re-organised bank debt is “bad loans”. One reason for the debts continuing to be so high is that they are pegged to inflation, currently 6% annually, while wages have remained constant or decreased.
The political crisis is at least as great as the economic one. “The crisis is in our heads. There is a crisis of democracy. A basic trust crisis,” says the author Haukur Ingvarsson to Information.
The Social Democrats and the Green Left formed a government when the old right-wing government was thrown out in elections in 2009. But today, both parties have halved their support compared to two years ago. The Social Democrats have fallen from 29 to 14% and the Green Left from 21 to 8%. Hopes that the two parties stood for a different policy were dashed quickly. Instead, the new government turned to the EU, in the rest of Europe associated with the relentless cuts in pensions, public sector and wages. This has opened up the way for the Independence Party, who sat in the previous government and now clearly leading in the polls.
Public opinion wants something new. “Almost half of respondents could not indicate how they would vote in elections to parliament today. Of those responding, a fifth sympathised with a party that currently had no representation in Parliament,” reports islandsbloggen.com. A new party, Unity, formed by Lily Mósesdóttir who left Green Left, critical for example, of the fact that household debts are not written down more, got above 21% in its first poll, but has since dropped to 6%.
The search for something new has led to a comedian being elected mayor of Reykjavik. A host of television shows leads the polls for the presidential election in June. The outgoing President, Ólafur Ragnar Grímsson, is widely discrediterad since giving support to the banks. The bankers, many of which have kept their private jets and fortunes, are still hated. “People in Range Rovers and black suits went in record time from being role models to be symbols of corruption and greed”, noted the article in the Information.
Three lawsuits are also catching interest. Few believe that former Prime Minister, Geir H. Haarde, will be sentenced for his role in the crisis. During the trial, both Haarde and the witnesses only affirmed that they did everything they could to stop the crisis. But in reality, the state pumped money into the banks until the day of bankruptcy, as the Iceland blog pointed out.
The EFTA court is suing the Icelandic government for claims by British and Dutch governments for British and Dutch losses in the Icelandic Icesave bank. EFTA is the European organisation Iceland today belongs to, but also the EU has set itself against Iceland in this process.
The third trial started recently, with bankers and their role in the crisis on the stand. Maybe it can provide additional information about the course of the crisis.
Shortly after the Icelandic crisis, the crisis erupted in a number of European countries and Iceland partially went into the shade. But the crisis is not over. The need for socialist and genuinely internationalist answers are as great today as in 2008. Policies conducted within the framework of capitalism put the costs of crisis onro workers and ordinary people.
Postscript: Since this article was written, the court case against Former Prime Minister Geir Haarde has been completed. As most Icelanders expected, he will face neither fines nor jail. He was only found guilty OF failing to inform other Ministers of his government. He was cleared on all charges of responsbility for the crisis.