|British financial journalist Roger Boyes tells the story of the bankrupting of Iceland and says the bust left the 320,000 Icelanders with a combined public and private debt that amounts to more than $403,000 per capita, or some $1.6 million for each family of four.|
A book review in The Scotsman said: "30 people (many of them living in faraway London) may have vandalised their country's future. But tens of thousands of other Icelanders, by not questioning, by not actively insisting on their ideals, by being apathetic about politics, let them get away with it. They know that now, and know too that they need to regain control of their destiny, to deal with capitalism and shape their society on their own terms. When we look at how, in the 21st century, nation states should accommodate themselves to the blistering forces of globalisation, the world's oldest democracy, small as it is, has lessons for all of us." It does indeed.
Iceland agreed on Sunday with the British and Dutch governments to repay almost €4bn lost in a failed Icelandic bank, by 2024, paving the way for more IMF (International Monetary Fund) aid as it struggles to restructure its economy after the dramatic economic crash in 2008.
Iceland was required by EU rules to maintain deposit insurance for its banks and when Landsbanki Islands bank collapsed last year, billions of dollars in deposits were lost in its Internet unit named Icesave by British and Dutch depositors.
The deposits were attracted by the highest interest rates in the UK and the Netherlands.
The British and the Dutch governments refunded the deposits and Gordon Brown's government used the UK Prevention of Terrorism Act to freeze the transfer of funds from the UK.
The repayment of €4bn is a stunning blow to the population of over 300,000.
UK local authorities alone had deposited £900 million in Icelandic banks
The UK will lend Iceland £2.35 billion and the Netherlands will lend €1.2 billion, Prime Minister Jóhanna Sigurðardóttir said in Reykjavik yesterday. The first seven years will be interest-only, then repayments will be tied to Iceland’s economic growth.
Sigurðardóttir said Iceland would pay 5.5% interest on the loans, adding that during the term of the loans, the government will try to sell the assets of Landsbanki Islands.
Sigurðardóttir said last August that her government plans a 30% cut in public spending over the next 3 years, with extensive contractions in infrastructure spending and wages. The amount to be shouldered by Iceland for the Icesave adventure is huge - - about 50% of Iceland's gross domestic product. She said assets against this debt will substantially lower the net amount, but there is much uncertainty about the valuations and forecasts underpinning such calculations.
Iceland is dependent on a $4.6 billion IMF-led bailout to avert bankruptcy.
In the 1990's Icelandic Prime Minister David Oddsson, said to have been an admirer of former British pruime minister Baroness Thatcher and the late US adocate of free markets, economist Milton Friedman, privatised the banks which then funded big overseas acquisitions by a small number of people.
The Icelandic banks made use of the so-called “carry trade”: borrow funds at very low rates in Japan and lend high in Iceland, where rates were high to control inflation.
Anyone who believes that Ireland outside the euro, with a similar weak regulatory and central bank system and its governing party closely linked with the construction industry, would have escaped a similar fate, is a fantasist.
SEE Finfacts article Sept 07, 2009: Irish Central Bank declared its impotence before launch of the euro; Why Spain's biggest banks survived huge housing boom
David Oddsson was prime minister for 13 years and was ousted as central bank governor earlier this year after thousands protested on the streets of Reyjavik.
Last month, he was appointed editor of the troubled country's only broadsheet newspaper.