Whenever a crisis of confidence threatens a culture’s dominance, the people are quick to call for a scapegoat. Who must be blamed and who should pay the price? The case of Iceland’s ex-PM, Mr. Geir Haarde, being put on trial begs the question of whether politicians should be responsible for systemic faults whilst they are at the helm.
The background story of Iceland can be told through statistics. Following the crash of its banks, Landsbanki and Kaupthing being two of the most famous, this high-income country’s GNI per capita at purchasing power parity dropped from $35,330 in 2007 to $27,680 in 2010. For the same years, its real GDP growth went from 6% to -3.5%.
A the same time, the Icelandic government’s deficit, went from 5.4% to -7.8% of GDP in the same 2007-2010 bracket . For the same period, its government’s debt leapt from 53.3% to 120.2% of GDP. What happened for these huge drops in wealth and increase in debt?
This small island nation had until the end of the nineties financed itself through the joys of fishing and through what financial journalist, Michael Lewis, has called a “collective madness”. In the era of cheap credit and highly complex financial instruments, Iceland partook in the ‘celebrations’ and decided to focus its economy in banking instead.
With the ideal location of being situated between the US and Europe, Iceland specialised in high-yield finance such as hedge funds, being capable of operating overnight trading between the closing of Wall Street and the opening of the City. The New Central Bank Act of 2001 confirmed the path of deregulation and enabled the privatisation of banks.
With Landsbanki, whose name means ‘national bank’ in Icelandic, going into administration in 2008 and Kaupthing shortly after, ripples tore through Icelandic finances revealing the flaws in regulation or the lack thereof.
With the Icelandic taxpayer taking over these banks through the Financial Supervisory Authority, the people were implicitly guaranteeing the loans these nationalised banks had made, as in many other Western economies.
The difference with Iceland being that the country had its eyes bigger than its stomach and current estimates place these loans at between 2.5 and 3 times the country’s GDP. The economy is now in recession, the rate of unemployment is increasing and citizens are facing a major inflation (exchange rates having doubled in 3 years). And yet, still this not may be the worst.
In July 2009, Iceland applied to become a member of the EU, something which it had hitherto obstinately opposed. Presumably the logic behind it was the stern reminder that if things go pear-shaped, a small island forgotten in the North Atlantic is probably better in a system of solidarity than fending for itself.
Now questions surround its joining the Euro. This will surely be opposed by the governments of the UK, the Netherlands, Belgium and Luxembourg who all had to foot the bill to guarantee Icelandic banks’ customer deposits and ensure its citizens did not starve. In Belgium, depositors in Kaupthing Belgium spent the Christmas of 2008 without access to their money and being forced to borrow money off relatives and friends.
Iceland’s new Prime Minister, Johanna Sigurdardottir, has implemented many reforms to the financial system since coming to power in 2009. Yet people’s anger has turned to trying the ex-PM, Geir Haarde over charges of negligence. They want someone to pay.
As cathartic as the trial may be for Icelanders, the trial is due to the size of the country where people all have a feeling of community and inherent trust in their leaders. To point the finger at one politician makes him a scapegoat, avoiding the necessary introspection a crisis such as this should engender.
Though responsible for the country under their watch, politicians are not the only culprits. Rare are the politicians who dare to ‘spoil a party’ and get their citizens to see the voice of reason. If Mr Haarde’s trial were to be duplicated, every single head of state, minister of finance, central banker and bank executive in the West would be put on trial. Something which hopefully will never happen but which makes citizens question how they will vote in the future.