Iceland still finds itself on slippery ground

All sides await with bated breath the result of the referendum on debt repayment, writes Ben Quinnin Reykjavik

AFTER MONTHS of lying in darkness on a quiet Reykjavik street, the lights have come on again at an innocuous-looking building infamously associated with Iceland’s financial meltdown.

At the old headquarters of the Baugur group, one-time poster boy for the over-leveraged Icelandic boom and former owner of large swathes of Britain’s high street, the new tenants are a group of young investors preparing for the first tentative stirrings of economic recovery.

While few expect such a turnaround any time soon – the nation remains bankrupt and buried beneath a mountain of debt following the collapse of its three main banks – some deep thinking is under way about how innovation could deliver future prosperity.

“We are rebooting the complete financial and political system of an entire western European country, so we have some unique opportunities,” says Guojón Már Guojónsson, a young entrepreneur who lived in Ireland between 2003 and 2006 where he was involved in founding the telecommunications firm Magnet Networks.

Now back home and living across the street from the Baugur building, which friends are renting, he has founded the Ministry of Ideas, an open access think-tank designed to incubate new visions of Iceland’s future. The nationwide debate about the future, he adds, was boosted recently by the decision of Iceland’s president to spark a referendum rather than signing a Bill paving the way for the repayment to Britain and the Netherlands of major liabilities from the collapsed Icesave online bank.

The rebellion over the so-called “iceslave” deal, which would see Iceland paying £3.1 billion (€3.9m) to the British and Dutch governments for reimbursing the bank’s customers in their jurisdictions, has been contrasted by some in Ireland with the supposedly meek way in which the liabilities of Irish banks have been accepted.

Depending on whom you speak to in Iceland, though, President Ólafur Ragnar Grímsson’s decision to veto the Bill put before him by the government heralds either a morale-boosting reassertion of national sovereignty or a potential economic catastrophe likely to deepen the kreppa (recession).

The economic consequences of a No vote, and the resulting danger that an IMF funding bailout would be severed if the deal is not renegotiated, scare economists like Thórólfur Matthíasson at the University of Iceland. “It has the potential of putting Iceland’s recovery off course for the next 10 to 20 years,” he says.

In the run-up to the March 6th referendum, polls routinely show the public will reject the terms of the repayment deal. The amount owed to Britain and the Netherlands has been equated to £40,000 for each Icelandic family.

Inside his office, Iceland’s minister for finance Steingrímur J Sigfússon wearily considers the position in which the one-year-old left-of centre coalition government now finds itself, but strikes a defiant note.

“I would be hopeful, provided that the debate is balanced, subjective and rational, that we would have a chance to win this. We succeeded in a lot in 2009 and the outlook for 2010 was even better than we had expected, but the president’s decision has put a question mark over what will happen.”

Lined up against the government are non-party groups like InDefence, set up in 2008 to protest against Gordon Brown’s use of anti-terrorist laws to freeze Icelandic bank assets in Britain, and the main conservative opposition party ousted by popular protests a year ago.

An irony not lost on many is the way in which the Icesave issue has been an albatross for figures like Sigfússon, widely respected for having been a voice of warning long before Iceland’s economic collapse, while opposition to the deal is said to be aiding an attempted comeback by the Independence Party, which oversaw an era of light-touch regulation and privatisation during the boom years.

“The global financial crisis was a spark that ignited a barrelful of dry powder,” says its new leader Bjarni Benediktsson, deflecting the responsibility for Iceland’s financial catastrophe away from the party, which had been in power for 18 years until January last year. “It came at a very inconvenient time for our banking sector, which could have used the months ahead of October 2008 to sell off and downsize their balance sheets. I am of the opinion that that could have saved them.”

Other impediments to securing a Yes vote include the stubborn resistance of the British and Dutch to renegotiating the deal, as well the fact that bullish comments by politicians in London and Amsterdam are immediately picked up on and discussed in Iceland.

Shades of the two Irish referendums on the Lisbon Treaty are unmistakable, along with much of the background to the economic crises now facing both countries, each relatively young nations on Europe’s Atlantic peripheries who achieved independence only in the 20th century.

While both enjoyed near runaway economic growth in recent decades, huge levels of personal debt were being racked up, encouraged by a philosophy vocalised by Charlie McCreevy in the Irish context as: “If you have it, spend it”.

In both cases, the governments that unleashed the low-tax economic strategy were dominated by catch-all nationalist parties whose acolytes enjoyed the satisfaction of some one-upmanship against the old colonial power, while dismissing domestic opponents urging caution as Cassandras.

When the flood came, Ireland’s membership of the euro zone and the existence of the European Central Bank as lender of last resort provided at least some stability for its haemorrhaging banking system. Iceland’s went completely under, its banks’ losses from reckless expansions abroad dwarfing its government’s capacity to bail them out. Icelandic opponents of joining the EU still cite Ireland’s troubles as proof that euro zone membership would not have been enough to stave off disaster.

Could there now be lessons for Ireland from its far Nordic neighbour? Perhaps the first one to consider is the manner in which it is shining a light on the dark heart of its recent past.

A truth commission, although maligned by some, is expected to report at the end of February while a separate criminal investigation into the activities of Iceland’s discredited financial oligarchs is under way. That is widely expected to deliver heads, mainly because so many Icelanders, who have lost faith in their own politicians, implicitly trust the assistance it is receiving from the tenacious French-Norwegian MEP, magistrate and anti-corruption campaigner, Eva Joly.

Last week saw raids carried out by Britain’s Serious Fraud Office at the request of Icelandic prosecutors. “Given the enormity of this situation and what happened and what is already visible about the behaviour of some, one would guess that is a very likely outcome that some people will be severely penalised or put to prison,” predicts Sigfússon.

Guojón believes both Iceland’s small size and the current status of its economy can be turned to its advantage.

“Over the last few years Iceland was a laboratory for a lot of the mistakes of capitalism. We can continue to be a laboratory, but now we can formalise that in a much better way, meaning Iceland is a perfect market for prototyping more sustainable solutions ... Because of our size, the feedback loop is also much faster than you have in markets like the UK, so we are able to deploy, test and improve systems before they are implemented in larger nations.

Elsewhere, however, a word of warning is sounded against placing too much faith in ambitious “big ideas” for the future, like energy-intensive industry.

“I like the smaller ideas,” says Katrín Ólafsdóttir, an economist at Reykjavik University, who adds that Iceland’s modest prospects lie with its human capital.

“If you look at the GDP figures for 2006 and 2007, 7.5 per cent a year was just ridiculous. We should change our mindset and say: ‘Okay, 3-4 per cent a year is great’. Anything above that is not great and we should just step on the breaks and be happy with just slow sure growth. I think we have learned our lesson. We wanted to conquer the world through their banking sector, and we know how that went.”