What is actually going on in Iceland

Because I’m tired of you people spreading untruths

Since people continue to spread the factually dubious statement that Iceland “told creditors & IMF to go jump, nationalised banks, arrested the fraudsters, gave debt relief and is now growing very strongly, thanks” I find I have to write this here thing.

(This specific example comes from twitter but is almost identical, word for word, to the standard ‘Iceland is an economic utopia’ mantra that is being repeated ad nauseam.)

Because, for some reason, people won’t believe Icelanders when they say that the above is not quite the reality as most Icelanders experience it.

1. Iceland told IMF to go jump, go away, left the IMF program etc.

No it didn’t. Just look at the IMF’s country overview page for Iceland and read the reports.

https://www.imf.org/external/country/ISL/

(Too much to read? Well, boohoo. Don’t claim to know what Iceland’s and IMF’s relationship is until you have.)

Even a cursory look should tell you that Iceland didn’t throw the IMF out of the country and that the IMF’s praise for Iceland and our government is effusive and that Iceland followed the IMF’s advice to a tee. There are other details there, if you read through the archives, that are interesting, such as the fact that in several cases, especially when it came to the banks, Iceland actually went further along the libertarian axis than the IMF recommended.

2. Iceland told the creditors to go jump.

Yes and no. Iceland didn’t bail out the collapsed banks, but that wasn’t for the want of trying. If you read through the Report of the Special Investigation Commission you’d find out that the Icelandic government tried everything it could to save the banks, including asking for insane loans to pay off the banks’ debts.

The report: http://sic.althingi.is/

Most of it, and most of the really juicy stuff IMO, is only available in Icelandic, unfortunately. You can find the Icelandic version here: http://rna.althingi.is/

So the true story is that Iceland tried and tried and tried and tried as hard as we could to save the creditors. The only reason why we didn’t is that the Icelandic government, then and now, is completely incompetent.

Dumb things Icelandic officials did while trying to garner international support (mentioned in the report) :

  • Spin that a noncommittal but positive reply from the Russians was a loan agreement, pissing off the Americans and the Russians resulting in no loans from either.
  • Not answering Alistair Darling’s phone call (he was the UK’s Chancellor of the Exchequer or finance minister at the time). They literally put him on hold, then told him to call later and hung up.
  • Announcing on live TV that we were not going to help creditors, including those who had deposits, while they were in the middle of negotiations for funding to save said banks. Then having to backtrack to get any sort of help from the EU.
  • Lying to the governor of the Bank of England and the president of the European Central Bank about the state of the banks.

And plenty more. All in the special report. Read it if you care about what happened in Iceland. The short version is that they tried to save the banks, save the creditors and screwed up completely.

Other tidbits from the report: Icelandic MP’s received a lot of no-strings-attached free money from the banks and the key players in the banking bubble and ensuing collapse are not the same as the people who are being convicted for fraud or insider trading.

Except for two:

A ministry department head (also my namesake) who sold all of his stock soon after he attended a meeting on the state of the banks was convicted for insider trading. Baldur sakfelldur. The only reason why he was convicted is because he was too stupid to even try to cover his tracks.

And Lárus Welding, who some consider a key player and is mentioned several times in the report, was convicted yesterday and will be jailed for six months, plus three months probation. He gets to keep all the money he made and he’s going to appeal. Given the libertarian slant of the high court, his conviction is still not a certainty. The jail time he has just got in the lower courts is much much less than the prosecutor was hoping for, which does not bode well for later cases.

(A newish story on his conviction. It should work fine in google translate and you can nod along to the video, pretending to understand.)

The prime minister was found guilty of negligence in his job but was completely unpunished. No jail time, no fine, no nothing. I’d call him a scapegoat if he hadn’t actually gotten away scot-free.

Guardian: Iceland ex-PM Geir Haarde cleared of bank negligence. The Guardian piece was originally titled ‘Iceland ex-PM Geir Haarde found guilty of banking crash failure’ which is the headline that got distributed on twitter, of course, being the absolute opposite of the truth.

Icenews: Former Icelandic Prime Minister Geir H. Haarde found not guilty

Everybody else who has been convicted to date are to the Icelandic banking bubble what Bernie Madoff is to Goldman Sachs: fraudsters who took advantage of the climate but weren’t key players in the bubble or the collapse.

It’s a bit like arresting a Nazi lieutenant when Hitler and Goebbels are still running around. What am I supposed to say to that? Well done? He’s small fry but I guess he’s a start? Pat them on the head and say better luck next time?

Bah, humbug.

(I guess the above also addresses 3. Iceland arrested the fraudsters, showing that it’s patently not true. Iceland arrested some fraudsters: the pawns, small fry, and the lackeys.)

4. Iceland nationalised the banks.

This much is true. Iceland then privatised them again in record time. Two out of the three collapsed major banks in Iceland are now owned by the creditors. (“But I thought Iceland shafted the creditors?” Hah! Yeah, funny that.) The third bank, Landsbanki, is still nationalised but that’s solely because of the ongoing court cases involving Icesave (more on that later).

Most of the creditors actually sold their stakes to foreign hedge and vulture funds and the like. Again, google translate it if you actually care about the facts.

So, not only did Iceland re-privatise the banking system, we sold it out of the country.


ETA: Some more detail on the nationalisation question

As pointed out, the government technically never nationalised the banks, just took over them after they went bankrupt using emergency legislation. While it seems reasonable to call government control and management of a bank nationalisation, and even though it’s colloquially referred to as nationalisation, strictly speaking the term does not apply here. Which just makes the ‘Iceland nationalised its banks’ mantra even more of a lie.

The government handed control over the banks to the creditors around fifteen months later.

Or, technically, they handed control over the banks to the receivers managing the old banking companies who in turn are managing them for the creditors, several of whom remain unidentified.

Establishing the identity of the creditors and their nationality has taken a long time and is still relatively unclear.

The nationality of the creditors is important because the banks have taken over several companies whose ownership is regulated by law in Iceland. Fisheries companies must only be owned by Icelanders or companies in Icelandic ownership, for example. There are also limitations on the nationality of ownership of companies in the energy industries and other regulated industries.

So, the receivers haven’t yet handed direct control over the banks to the creditors. There’s a good chance they won’t do that until the banks have divested themselves of ownership over companies where the nationality of ownership is regulated.

Some of the bankrupt banks only remained in government control for a few weeks. SPRON, for example, was merged into Arion Bank which in turn was given to its creditors a few weeks later. SPRON customers, like me, were essentially a free gift to Kaupthing’s foreign creditors.

Why is this record time?

Because the banking bubble and the crash was an incredibly complicated affair. We still don’t know exactly what happened, where the money went, who owned what, and who was actually making the decisions. The Icelandic banks used complex ownership and corporate structures to hide and obfuscate details. Those structures were so complicated and intricate that they make Enron’s schemes look about as complex as a Fisher-Price toy. Sorting through the rubble and making sure that the government actually knows what the banks were, rebuilding a banking system, reforming the regulatory bodies, and such, takes more than fifteen months and as soon as the government gave up control they made it next to impossible to enact the reforms they needed to enact.

(Many of the reforms that would solve the household debt crisis in Iceland, for example, are only possible with the cooperation of the banks.)

Also, the banks are under ongoing investigation for fraud, tax evasion, market manipulation, and insider trading. As soon as the creditors took over the banks, the banks themselves (especially the overseas but wholly owned subsidiaries) became much less cooperative and began to shield themselves again behind banking secrecy laws.

It’s my opinion that by giving the banks back so soon, the government destroyed what little chance Iceland had for banking reform and sabotaged ongoing criminal investigations.


5. Iceland gave debt relief.

The answer to this one is yes, but not really. The key to understanding what happened is to try your hardest to not be a numerically illiterate idiot who refuses to read original sources. I know. It’s hard. Still, you should try. It’d make your mother happy.

There has been plenty of debt relief here. The the top 1% has had almost all of their debt written off, for example. Wasn’t that nice of the banks?

For the rest of us, the picture is a lot more complicated.

Household debt in Iceland comes in two forms.

A. Loans linked to a currency index.

B. Loans linked to the consumer price index.

Loans of the type A more than doubled during the collapse. Those that owed a million ended up owing two million, etc.. There has been a modicum of debt relief for the currency loans because they were blatantly illegal.

The routine has devolved into the following idiocy:

An almost bankrupt Icelander takes the bank to court because the loan was illegal. (2011) (2012)

The court forces the bank to write the loan down.

The government maintains that the court’s decision does not set a precedence and sets a law that limits the extent of the debt relief. Example

An almost bankrupt Icelander takes the bank to the court because the loan was illegal, and the ensuing legislation by the government was illegal, winning the case. E.g..

This goes round and round and round. The Icelandic government has fought debt relief tooth an nail, with every resource and tool available. They have in every way possible been the banking system’s crony.

The type B loans are a bit more complicated and require more explanation.

Normally, when loans are linked to the consumer price index (a rare thing in and of itself in other countries) the payments increase in line with inflation.

The Icelandic system is different. If you borrow 100 000 kroner and a year passes with 10% inflation (not unusual in the post crash era, inflation has ranged from 4% to 20%) then at the end of the year you will own 110 000 kroner, even if you have been paying interest. This means that if your mortgage is of this type B, you will never manage to pay it off, because Iceland has never in the history of having its own currency managed to have low inflation.

The Icelandic kroner was introduced in 1922 at parity with the Danish krona and has since then lost 95.95% of its value. Inflation is endemic and permanent in Iceland.

Most loans in Iceland are of the type B, price index-linked loans.

There was a debt relief program called the 110% rule that lowered any mortgage that was over 110% of the property’s value down to 110% of the property’s value. Those underwater remained underwater and it did little to help them because a few months later they are back where they were.

All in all, debt relief for Icelandic households amounts to 196.3 billion ISK while indexed loans have grown by 360 billion ISK since September 2008 due to index-linking. Source.

Basically, households are worse off now than they were, not better off, and the debt relief programs were little more insubstantial political manoeuvring to gain votes, not proper debt amnesty like that campaigned by the Occupy movement.

More on indexation Icelandic loans: 1 2

The kicker with the loan system in Iceland is that only idiots took loans that were indexed-linked to a foreign currency. Anybody who is numerate and sat down with the numbers could see that the foreign currency loans were an incredibly stupid risk to take so all of the sensible people, the people who have received little to no debt relief, took the price index-linked loans. The idiots and those irresponsible took the foreign currency linked loans and have now been rewarded with a disproportionate share of what little debt relief there has been.

Again and again, the sensible and the fiscally sound are punished in Iceland.

6. Iceland is now growing very strongly

Unless you’re the kind of person who looks at a child with leukaemia and says ‘look at little bald Charlie, how strongly he’s growing’ then I’d have to say no to that one. Surviving is not growing strongly.

Inflation for 2012 is around 4%, for 2011 it was around 5%.

Growth is estimated to be 2.7% in 2012 and was 2.6% in 2011. (Sources: http://www.hagstofa.is/ the estimate.)

For the innumerate among you, the above numbers show that the Icelandic economy is running to stay in place. This isn’t strong or healthy growth. This is ambling about, not dying, barely. Especially when you look at the numbers from http://www.hagstofa.is/ and http://www.sedlabanki.is/ which show that most of that growth comes from a growing real estate and property bubble in Iceland. Companies aren’t recovering.

Pre-tax wages in Iceland. The new housing bubble in Iceland.

Also, bear in mind that growth is measured in Icelandic kroner which are worth around 20–50% of what the were worth in 2008, which in turn means that these tiny growth numbers are little more than rounding errors in Iceland’s collapse in foreign currency terms.


ETA: More on the growth issue

I don’t think people got the point I was trying to make with the GDP section. That’s my fault. I should have explained it. Which I didn’t and that was dumb of me.

Income has dropped for Icelandic households. Their debt is index-linked. The growth is largely due to a resurgence of the property bubble and return to bank growth due to index-linked loans surging upwards, i.e. households don’t benefit from it much, if at all. They can’t tap into the booming property market because they are already over-leveraged, Icelandic bankruptcy laws prevent people from walking away from their mortgages (you can’t even die away from them, if you die, your children have to pay) and the property market is largely dominated by captured money, foreign capital that can’t escape due to the currency restrictions.

That’s why I mentioned the inflation figure. When your mortgage is index-linked and your pay is static or decreasing, high inflation completely destroys whatever economic benefit your household might get from the economic growth. The prevalence of index-linked loans means that inflation has a disproportionate negative effect on households, especially compared to other countries where you can get non-index-linked loans.

The higher the inflation, no matter how much higher growth is, chances are the end result will be devastation for Icelandic households. So even if Iceland manages a miraculous 5% growth, if the underlying inflation is 10% then the result would be national economic devastation due to the fact that the majority of Icelandic loans and mortgages are bound by Iceland’s warped and eccentric variation of consumer price index-linking.

And for the same reason, if Iceland had managed 2.6% growth over 2% inflation (instead of 4%), the economic effects on household debt burden would have been different and we wouldn’t be facing as imminent a crisis as we’re facing as we head into 2013.

Inflation matters in Iceland.

I’ll acknowledge I didn’t get that point across properly. I just assumed that people would understand the point I was trying to make after reading the section on index-linked loans in Iceland. As I said, inflation directly increases household debt burden in Iceland while pay has remained static (actually gone down quite a bit if you go by the latest numbers). That’s why you can’t talk about growth in Iceland without bringing in the inflation number for context. In normal economies, 4% inflation underlying 2.6% growth doesn’t result in everybody’s loan principal increasing 4% over the year. But that’s exactly what happens in Iceland. So you have to bring inflation into every discussion on growth in Iceland.

I had assumed that after discussing the index-linking, just mentioning the inflation in the context of growth would be enough for people to get what I meant. Which was clearly dumb because there was no way of doing that without them being mind-readers.


7. Icesave

This is the root of all of this nonsense. The short version of the story is that Landsbanki, run by the convicted fraudster Björgólfur Guðmundsson (which in and of itself should have been a warning to you people), started a dodgy savings account scheme that promised unrealistic returns in the UK, Netherlands, and elsewhere, collected money from a bunch of greedy idiots, went bankrupt and the money disappeared to god knows where.

You can find a somewhat reasonable overview over the Icesave dispute on wikipedia: https://en.wikipedia.org/wiki/Icesave_dispute

Björgúlfur and his son, nota bene, have not been prosecuted for anything, despite being key players in the banking bubble and its subsequent collapse.

The UK and other governments promptly paid out all of the deposits in full, not limiting themselves to the amount that is guaranteed by law, then turned around and demanded that Iceland paid them back the money, with exorbitant interest rates.

Iceland said yes. The Icelandic government said yes, but added a few reasonable clauses involving payment rates and the such and sent it back to the Brits and the rest.

The British said no. Pay us everything, with loan shark interest rates, or else.

So, Iceland said yes again. The government and parliament accepted the insane terms over massive protests by Icelandic citizens. The president refused to sign it, forcing a referendum on the legislation. Icelanders overwhelmingly rejected the loan agreement.

This went back and forth a couple of times, Icelandic voters refusing to pay each time. In the end the Brits and the rest gave up and are now suing the Icelandic government in various courts to try and get the interest rates they want.

A few things to note here:

  • The Icelandic governments have always accepted the terms of the Dutch and the British. They agree with them that we should pay.
  • The voters disagree and only get a say because the president is keen on making everybody forget that he is a bankster collaborator who was in the pocket of the banks right up to the crash.
  • Icesave is being paid, no matter what Icelandic voters say. The dispute is solely about how high the interest rates are. (Bretar fá greitt.) Iceland has not refused to pay Icesave, the majority of it is paid already and the government plans to pay the rest. The dispute and the referendums have been entirely about whether we should pay loan-shark level interest rates or not.

There’s more

I could go on about how servicing household debt takes a bigger and bigger share of every Icelander’s budget, how income levels have collapsed, how the government cutbacks have resulted in massive drops in service quality, both in the health service and in the education system. I could talk about how the Icelandic government has bought wholesale into the austerity myth. I could talk about how Iceland’s nordic-style welfare system is being dismantled. I could talk about how the elderly are being starved to death or how the poor are being refused help. I could talk about the brain drain as specialists flee the country. I could talk about how product selection in grocery stores has collapsed. I could talk about the political crisis where none of the political parties dare to take a stand against the banks. I could talk about how the banks are again expanding and playing the exact same game they did in the bubble. I could go on and on but if you haven’t been listening so far, nothing else I have to say will convince you.

Of course, that means that you are an idiot who refuses to acknowledge facts, but, thankfully, being a moron is your burden to bear, not mine.

Finally, what the hell is going on?

Why are these myths being spread about Iceland? Why do people think that Iceland is a progressive paradise when in actual fact its a Thatcherite’s wet dream? Why is Iceland being paraded by the occupy movement as an example of how things should be done?

I don’t know. My theory, born out by the names of those who seem to be the sources of the biggest myths, is that there is a group of Icelanders who are blatantly lying to foreigners.

Possibly they are doing this to balm their wounded nationalistic pride, have convinced themselves that it’s true and that Iceland really is great and unique. Possibly its because they see profit in lying to gullible foreigners. The latter was a national sport during the banking bubble and has been a standard Icelandic tactic throughout the ages, but I can’t rule out the role of idiotic nationalism in this nonsense.

I don’t know. The only thing I know is that you are being lied to and that Icelanders are very good at lying to themselves. If they weren’t, we wouldn’t be in this mess.


ETA: This isn’t a blog post on economics. Pointing people at the public record, what legislation was actually enacted and what wasn’t, what court cases were won and lost, who was prosecuted and not, what actions the government took and not, is not economics and not open to interpretation. You can debate about the long-term effects of the legislation that was enacted (and there’s a debate to be had there) but you cannot debate the basic facts of what was actually done and what wasn’t.

The only thing debatable in this blog post is whether you think the growth numbers are positive or not. (If you do think the growth numbers are promising, that only tells me you don’t understand the pension system crisis in Iceland, the imminent collapse of the national housing fund, or the burgeoning housing bubble, but I’ll acknowledge that you can debate these things. The rest, no, they are not up for debate. There are things that the Icelandic government did and there are things it didn’t do. Its actions are on the record.)


ETA 2: I added the following in the comments, deserves mention here.

Another thing to mention is that even if Lárus Welding loses his appeal and the six months jail + three months parole sentence is upheld, that doesn’t mean that he’ll actually be in jail for six months.

The way incarceration works in Iceland, he’s likely to be out in a halfway house with a GPS tracker on his ankle in two months, and completely free in three, serving the remaining six as parole.

And he gets to keep all of the money he made. Which was lots.

Baldur Guðlaugsson, the other major conviction mentioned, only served six months out of 24 in prison.


ETA, 29 March 2013: I’ve written a blog post about our failed attempt in Iceland at changing our constitution: “Iceland’s crowd-sourced constitution is dead: the true history of Iceland’s ‘innovative’ constitutional reform.”