The decision of the President of Iceland to refuse to sign a Bill providing for compensation for UK and Dutch depositors of the failed online unit of one of his country's banks, has won both plaudits and criticism overseas. However, despite the central role of banks in the misery inflicted on millions by the global recession, beware of populist bandwagon jumpers offering slogans such as "people before profits" and "people before banks." In the 1970s, the Marxist offshoot of the Official IRA, the Workers' Party, had the slogan "people before profits," which had some potency during the first major recession since the end of World War II. On Wednesday, in the Irish Independent, economist David McWilliams, lauded the Icelandic move, which in effect was saying that a State guarantee of depositors of foreign branches of its banks, should not be a guarantee. Iceland agreed last October with the British and Dutch governments to repay almost €4 billion lost in a failed Icelandic bank, by 2024. 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.
President Ólafur Ragnar Grímsson ratified a Bill in August, which is still in force and proposes that repayments can cease if the money is not paid back by 2024. Britain objected to the Bill as it gives Iceland a "get-out clause."
The most recent Bill passed by the Althing last month, provided for a firm commitment within the agreed timescale.
Davíð Oddsson was Icelandic prime minister from 1991-2004 and then he became governor of the central bank, Bank of Iceland. After being ousted by the government in 2009, he became editor of Morgunbladid, the country's most influential and widely bought newspaper.
It makes Irish cronyism look like mild, in comparison!
The current debacleis of course a terrible calamity for the 320,000 people of Iceland as the fallout for monumental misgovernance continues to be in Ireland, Spain and Greece.
However, sovereign states have to be careful that they have friends when needed.
Iceland's near neighbor Norway has a wealth fund that was worth $455 billion last September. Why doesn't it give away its taxpayers' money?
Hugo Chávez's Venezuela charged its "friend" Argentina punitive double-digit rates for a loan and the latter is now desperately seeking to get access to international markets.
This week in addition to trying to seek agreement on debt outstanding from the 2001 crisis, the Argentine president is seeking the ouster of the central bank governor who fears that the government wants to plunder the country's reserves.
The Irish banking system would have collapsed but for European Central Bank lending, which peaked at €130 billion in June 2009.
When the Irish Government issued a banking guarantee in September 2008, it guaranteed all liabilities as well as deposits.
The guarantee to bondholders has restricted options in dealing with the Irish banking crisis.
In contrast, the Obama administration forced bondholders of the bailed-out General Motors to surrender most of its debt for a small stake in the restructured GM.
The bondholders did not of course have a sovereign guarantee.
David McWilliams claimed that he was in effect the architect of the Irish bank guarantee in a briefing to journalist Sam Smyth at the time, and recently in the revelation, in his book that a desperate Minister for Finance, Brian Lenihan, had sought his advice late one night, following the collapse of US investment bank Lehman Brothers.
While McWilliams supports Iceland's move to call a referendum on its banking guarantee, he wrote in early October 2008:"Over the course of the next few days, we are likely to see capital inflows into the Irish banking system as investors elsewhere seek the sanctity of a government bank guarantee as opposed to the uncertainty of a bank deposit, when it is clear that the banks are operating on the hoof.. . Longer term, we can expect foreign banks to move here, setting up offices in Ireland and creating a banking industry which will thrive. We have set the template. The upside greatly outweighs any possible downside. The system is the most important thing at this stage. A threat can now, with the right accompanying policies, be turned into an opportunity.
In time, Brian Linehan's move yesterday will be seen as a masterstroke and a practical blueprint for the new financial architecture which will emerge from this global crisis."
The Irish guarantee was not a "masterstroke" and what happened the "sanctity of a government bank guarantee"?
"My guess is that Iceland's credit rating will rise on this news, not fall," McWilliams wrote in the Irish Independenton Wednesday.
Fitch, the credit ratings agency, on Wednesday downgraded Iceland's main sovereign rating to “junk” status in response to the president's veto and Standard & Poor's said it could follow suit.
Icelandic lawmakers are to meet for an emergency session on Friday to consider legislation setting up a referendum on the deal, with the government tentatively proposing February 20th for the vote.
The latest opinion polls, quoted by the Reuters news agency, suggest a lessening of hostility. Some 51%-58% are against, down from around 70% formerly.
David McWilliams also wrote on Wednesday: "The petitioners went on to argue that foreign depositors (mainly Dutch and British) took out deposits in Icelandic banks because the banks were offering interest rates that were much higher than in the UK or Holland. In economics the iron rule is, the higher the return offered, the higher the risk offered.
The Icelanders are simply saying that your investments have nothing to do with us and, therefore, the solution to the depositors' dilemma is not the immediate concern of the average cod fisherman from the West man Island or any other part of Iceland for that matter."
The economist has done some work over the past year for online bank RaboDirect in Dublin, which is regulated by the Dutch Central Bank and its Irish depositors are subject to the Netherlands guarantee.
"We are still paying nearly twice as much as Germany to borrow money," he said on Wednesday.
German Bund 10 year yields this week are 3.38% while the Irish 10 year bond is at 4.81%.
One of the positive aspects of the global recession is that in contrast with the Depression, there hasn't been a significant rise in protectionism and "beggar my neighbour" reactions. But David McWilliams' prescriptions for a small economy is to damn the rules and hope for the best. The UK imposes a special tax on bank bonuses and it is a "golden opportunity" to welcome the bankers to Dublin. Exit the euro and well, we are not really sure what would happen.
Did not the Irish "damn the rules" attitude bring us to the current sorry pass?
A year ago this month, the UK's Daily Telegraph was aching for a collapse of the euro system and it quoted McWilliams:
"This is war: countries have to defend themselves," said David McWilliams, a former official at the Irish central bank.
"It is essential that we go to Europe and say we have a serious problem. We say, either we default or we pull out of Europe," he told RTE radio.
"If we have a single currency there are obligations and responsibilities on both sides. The idea that Germany and France can just hang us out to dry, as has been the talk in the last couple of days should not be taken lying down," he said.
"The only way we can win this war is by becoming, once again, an export country. We can do what we are doing now, which is to reduce our wages, throw more people on the dole and suffer a long contraction. The other model is what the British are doing. Britain is letting sterling fall so that the problem becomes someone else's. But we, of course, have ruled this out by our euro membership.
"We are paying twice for the euro: once on the exchange rate and once more on the interest rate," he said.
Three of the 16 members of the Eurozone, messed up their economies bigtime.
Irish taxpayers should not be asked to bail-out developers and bankers such as former Bank of Ireland chief executive, Brian Goggin, who is on a pension of €13,000 per week while improving his golf handicap.
Apart from the massive support from the ECB, why should German and French taxpayers be asked to bailout Ireland, Spain and Greece?
Remember the ministerial arrogance of Mary Harney that Ireland was closer to "Boston than Berlin."?
Thanks for past monies received but we invented the free lunch ourselves!
Each country had an independent fiscal policy in the Eurozone and Ireland in particular rightly opposed tax harmonisation.
As for "becoming, once again, an export country," without the foreign companies, we certainlywouldn't be one. The majority of their trade is intra-company and they are not pushing for abandonment of the world's second reserve currency for a confetti currency.
David McWilliams wrote in May 2009 that "reputations are earned, not bequeathed."
In contrast with an academic economist, he has the luxury of making bold or outlandish proposals and present himself as an outsider when he is an insider but he doesn't have to consider the pros and cons and the process of implementation of what he proposes.
He now straddles economics and entertainment but as regards the former, if he continues on the current track, he will end up with an audience of just pub-stool economists.
However, "people before banks," could be a good slogan for an aspiring politician seeking to harness public anger!
SEE: Finfacts article, Nov 2009: Ireland exiting the euro and the risk of setting the Irish economy on fire