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COLUMNISTS

Iceland: Revolution Under Bankers Guidance

Valentin KATASONOV | 21.10.2013 | 00:00
 

 On and off media reports appear saying the so-called revolution in Iceland is an example of successful fight against the world financial oligarchy. In concrete terms it is all about the debts that Iceland owes to deposit account holders. The small freedom loving nation has boldly challenged the financial oligarchy. Rapturous supporters of “Iceland’s revolution” have started to say the world media outlets purposefully conceal the events taking place on the “Vikings’ Island” so that “the contagion of revolution”   would not spread around globally. Indeed, media is reluctant to report on what is happening there.
        
It all started about a dozen of years ago, the nation stepped on the way of comprehensive economic liberalization. All Icelandic banks were privatized, the transborder capital flows became absolutely free, foreign investors were granted tax preferences. The country was even called a big “hedge fund”. The banks quickly became the nucleus of the country’s economy. They became involved in world financial market speculations and started to expand activities   from local account holders to attracting the money coming from abroad (predominantly individuals), the countries like Great Britain, the Netherlands and Germany.  Lucrative interest rates were used for the purpose. A constantly growing debt pyramid started to grow creating the effect of “economic miracle” on the island.  In 2003 the banking sector accounted for 200 percent of the Gross Domestic Product (GDP), and then it increased to 900 percent in 2007. The “crumbs from the rich man’s table” fallen to the innumerous population of the Iceland (320 million) were in fact hefty sums.  Before the financial crisis Iceland had been hyped as an extremely prosperous Western country. In 2007 the United Nations called it the nation with the first quality of life in the world. The university professors read lectures about the Iceland’s “economic miracle”…  
 
 As the world economic crisis started to loom at the horizon, the miracle vanished in the hays. The debt pyramid grew no more, the country’s bank writedowns led to an $85 billion default in 2008. They owed a lot to foreign account holders. The Iceland’s government acted in accordance with the prescriptions by   the adepts of economic liberalism: a) the government took over the obligations to repay the depositors of failed banks; b) sovereign default was declared; c) the government went to the International Monetary Fund for bailout package; d) the state agreed to comply with the conditions dictated by the International Monetary Fund and other possible “rescuers”.  Upon the initiative of Reykjavik, by the end of 2009 the parliament even prepared a bill aimed at repaying the losses of foreign depositors, the talks were held with Great Britain and the Netherlands on debt refinancing. Then Iceland took some extraordinary steps. Formally the measures were dictated by the “good citizens” who all of a sudden “woke up”, went to the streets and demanded Iceland simply refuse to pay the banks' debts. The people also wanted bankers to be put behind bars. In March 2010 a referendum was held, 93 percent of islanders voted against the government paying off the money lenders debts. The government took the following actions: a) refusal to pay off the debts of national banks to foreign depositors; b) nationalization of banks; c) refusal to act on sovereign default.
 
What really happened? True, the government refused to repay the $5, 3 billion debt to 340 thousand depositors from Great Britain and the Netherlands.  The insurance system that had existed before the bankruptcy covered only residents, or the citizens of the Iceland. It should be noted that the banks of Iceland acted in many ways like the banks of offshore zones which normally don’t have any insurance for foreign depositors. The initial attempts of the government to put the burden of bailout on the taxpayers’ shoulders was illegal.  If it had happened, it would have greatly increased the sovereign (state) debt of Iceland making the government unable to even pay out the interest rates. Then a sovereign default would have become unavoidable, something the financial oligarchy firmly   opposed.  It would have been the repetition of “Spanish precedent” that could have made Europe fall to pieces like a house of cards by the end of the past decade. The bankers chose the lesser evil.

 There was no “blockade” of the island by International Monetary Fund and other world economic and financial bodies. On October 24, 2008 Iceland asked the International Monetary Fund for a bailout package. On November 17, 2008 the country received $5, 1 billion (30 percent of national GDP) to refund the budget deficit.  In exchange it took over the obligation to cut the deficit and restore normal functioning of financial sector. In July 2009 the government of Iceland announced the recapitalization plan for three new banks created out of the remnants of the old ones aimed at getting $2,1 billion (12 percent of national Gross Domestic Product) by issues state bonds. The so called “banks nationalization” has been tried in the times of crisis in the United States, Great Britain and some countries of Europe. The process is purely technical, the banks are rescued at the expense of state budget. After that, the state gradually reduces its presence in the banks capitals making them become private entities. By the way, the foreign depositors never suffered any damage receiving adequate compensations from their respective governments.

Besides, it’s absolutely indisputable that the government of Iceland did have state debt obligations. The debt was large enough, but not record breaking. In 2007 it was equal to 29, 1 percent of GDP, increasing to 70.3 percent on 2008 and 88.2 percent in 2009. These figures are comparable with the ones for Ireland and Greece at the time. The government of Iceland never declared a sovereign default. But all of a sudden world media outlets started to report (revealing a great secret) that there is some “Iceland precedent” and the powers that be declared the state default. I say it once more, no such thing happened. True, there was an unpleasant moment in the relations between Iceland and the International Monetary Fund in 2009. The “Vikings” suggested they would not repay the IMF debt, not because they did not want to, but because they had no money to do it.  Then the Fund dropped a hint it was a “privileged” creditor and the depositors of Icelandic banks could wait.
   
In this case, what was the reason for inventing the fairy tale about the Iceland’s default?  Perhaps it was done to push Greece, Spain, Portugal and other member-states of the European Union in the same direction. As far back as January 2012 Russian expert Sergey Golubitsky published the article called Why There is no Revolution in Iceland. The Icelandic Hoax Concocted by US Bankers? There he proved that: a) There was no revolution in Iceland; b) the events, that are erroneously described as a “revolution”, were staged by Wall Street for its own purposes. All the emotions were sparked by the Wall Street and the London City banks (Goldman Sachs, J.P. Morgan, Morgan Stanley, Barclays) that issued a huge number of financial instruments called credit default swaps (CDS). The swaps are kind of insurance from all kinds of defaults declared by banks, companies, states in debt. Creditor banks and debt bonds holders paid hundreds of billions for default swaps, including Spain’s state CDS. The banks were afraid that as a weak link of the European economy, Iceland may create a precedent of sovereign default with all the ensuing consequences for the Wall Street sharks. If the government of Iceland had taken over the unbearable burden of paying off foreign clients of Icelandic banks, then nothing would have rescued it from real default. Another group of banks and companies, that have bought scores of toys called credit default swaps, has a dream that sovereign defaults do take place. The article by  Sergey Golubitsky about Iceland ends with the following, “There are hundreds of billions euros spent to acquire credit default swaps, any hokum will do to create a default situation – even  if it is such a profanation as a revolution made by the small, but proud island nation”.

At present Iceland is no different from other states of Europe. Like its European neighbors, it is gradually plunging into the quagmire of debt crisis. Here are the dynamics of total sovereign debt growth in the Eurozone (percent, GDP): 2007 -66, 2011 – 88. 2012 – 93. According to European Commission., this year the figure is going to exceed 93. We have already mentioned that in 2009 the state debt of Iceland was 88, 2 percent going up to 118, and 9 percent in 2012. There is no standoff (as sometimes some media outlets report) between Iceland and the International Monetary Fund.  

It’s difficult to say goodbye to illusions. Iceland is just another example of the way world bankers manage to guide the energy of public protest into the direction they desire. It’s even hard to imagine what the West would do if the people of Iceland really decided to stand up and oppose the interests of Financial International. In reality there are many examples of genuine precedents of such actions taking place in the contemporary world when the all-powerful financial oligarchy is really confronted.  Only these events are hushed up by world media.  
 

 
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Valentin KATASONOV

D.Sc. (Economics), Economist and the chairman of the S.F. Sharapov Russian Economic Society


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