We are just like Iceland - apart from where it matters

 

BUSINESS OPINION:Unlike our island neighbours we seem to have lost our sense of outrage, writes JOHN McMANUS

IT’S A simple question: if the people of Iceland can apparently refuse to be made pick up the tab for the incompetence and greed of their banks and people who did business with them, why do we have to?

The answer is more complex. Iceland has done several things over the last 18 months that the Irish Government considers to be beyond countenance. Rather than prop up its broken banks, it let them fall; wiping out shareholders and forcing lenders to the banks – the ubiquitous bond holders – to accept the losses associated with their investment.

Small deposit holders in Britain and Holland who were lured into putting their money on deposit with Icelandic banks by high interest rates have been compensated by their own governments.

But the people of Iceland are now baulking at repaying the €4 billion paid out by Britain and Holland.

Iceland has done all these things and not disappeared under the North Atlantic. Life goes on there, albeit in somewhat more straightened circumstances than previously.

But you could say the same of Ireland: wages and welfare payments have been cut; unemployment is heading for 13 per cent, and so on.

Indeed, you could argue that things would be a good deal better than they are here if we did not have to stick €20-€25 billion of borrowed cash into the banks to keep them afloat.

The big difference between us and our island neighbours to the northwest – we are told – is that Iceland as a country is unable to borrow and we still can. Ireland will need to borrow €20 billion this year to keep the show on the road according to the National Treasury Management Agency and, all else being equal, we will be able to raise this money from international lenders. The reason being that we are still seen as a relatively good credit. The reason for that being partly the Government’s decision to stand by the banks and partly the measures undertaken to stabilise the exchequer.

This was only possible with the assistance of our fellow euro zone members via the European Central Bank. They had little choice, given the damage that would be done to the euro and the wider European project if Ireland collapsed.

The extent to which they dictated the bank rescue and the last two budgets is an open question. But something along the same lines is now under way in Greece.

Iceland by contrast is facing great difficulties in borrowing the money it needs to see it through the downturn.

The international markets will not lend to it and it has had to organise funds via the International Monetary Fund, the global lender of last resort. The IMF has organised loans from the other Nordic states who are willing to help Iceland out. This line of funding is now in doubt as a result of the Icelandic president’s refusal to sign the law which would have seen Britain and Holland compensated by the people of Iceland. However, the growing view is that regardless of the outcome of the referendum some sort of compromise will be reached and the IMF support will continue.

So in effect Ireland and Iceland are the same. Both are being propped up by external entities and having economic policy dictated to them as consequence. In the case of Ireland it is the ECB and the main euro zone players, Germany and France. In the case of Iceland it is the IMF and the other Nordic States.

We however, by dint of rescuing our banking system and the various people who lend money to the Irish banks, have retained a greater semblance of sovereignty. Doing so has cost us something in the region of €80 billion in gross terms when you take the debt issued by the National Asset Management Agency together with the equity injections into the banks. The net costs will hopefully be significantly less.

Iceland by contrast is somewhat less out of pocket but a good deal more more embarrassed by virtue of the IMF involvement. But assuming the Icesave issue can be resolved its rehabilitation in the eyes of the global debt markets will be swift enough. (It’s worth noting that it has not defaulted on any of its debt to date.)

In fact, the only real difference seems to be that the people of Iceland are genuinely angry about what has been done to them and have at least challenged the presumption that they should pay for the stupidity and greed of others. What good its does them remains to be seen.

We on the other hand have rather meekly accepted this premise and compounded it by demanding little in return by way of reform of the structure and culture of Irish banking.

As a result of our lack of outrage the scene is being set for the next Irish taxpayer bailout. The big global banks are already casting around for the next source of supernormal profits and bonuses.

The Irish banks will limp out of Nama just in time to participate in the second or third iteration of whatever the next bubble turns out to be.

But as latecomers they will no doubt end up holding the parcel when the music stops and stop it will.

And then we will have to rescue the banks once again. And maybe then we will get angry.