Icelandic President sets the tone for the Irish People
“A referendum in Ireland on the EU/IMF deal seems to be a must – not only to express the will of the people, but to strengthen the hand of the Irish government in getting the best possible deal for the people of Ireland.”
Plenty of others have had a lot to say about Iceland and Ireland and their relative economic crises. Remember the old joke about the difference between the two…”one letter and six months”…referring to the time lapse between their economic collapses. Six months under-called the gap between IMF missions to the two countries but Iceland still offers somewhat of a signpost for the Irish situation.
Let’s begin by being very clear about the differences between the two situations. Iceland and Ireland share a lot of similarities as Atlantic islands, with relatively small populations and a fierce independent streak. But the Icelandic economy is much much smaller – about 20 times smaller than Irish GDP with a population 15 times smaller of just over 300,000. Iceland also has its own currency – although they are trying to join the EU (more on that later). The Irish are already in the EU and the Euro and have much less domestic control over economic levers – they can’t unilaterally print money, introduce currency-low restrictions or alter interest rates.
Iceland’s banking system and their professional elite went on a spree not dissimilar to that of the Irish – however one major difference is that Icelandic banks opened themselves up to massive deposit bases in the UK and the Netherlands in particular. When the three major Icelandic banks collapsed completely and it was discovered that their deposit-guarantee funds were inadequate, the UK and Dutch governments decided to fully reimburse their local depositors. They then went after the Icelandic government (and therefore its people) for the money, about $5.6bn in total.
Two things worth noting at this point. First of all in the hierarchy of people that are looked after when a bank is insolvent, the depositors are usually top of the pile – well ahead of the bondholders that we have become so familiar with in Ireland. Secondly, all the choices made by the Dutch, the British and the Icelandic governments at each step of this process have been moral and political – they are not “obligations” in a legal or treaty sense of the word.
The British and Dutch made a political judgement to pay deposits back in full to people who had clearly been told that the banks they were saving with (and getting fantastic interest rates from) were governed by Icelandic, not Anglo-Dutch standards. They could have decided that the rules of “caveat emptor” apply. Of course by most people’s moral sensibilities this would not be the right thing to do. Hundreds of thousands of ordinary people would have lost life savings.
However, is it right that three hundred thousand ordinary Icelandic folk are on the hook for the $5.6bn of repayments – that is $20,000 or thereabouts for each person in Iceland?
Iceland’s government made a political decision in late 2009 that repaying the money was important as a step in helping Iceland join the EU. This was a political, not moral decision. However the deal was put to a referendum in March 2010 and rejected by over 90% of the electorate.
Negotiations between the Icelandic, Dutch and UK governments continued and a new deal was hammered out, and supported by 44 of the 63 Icelandic MPs last week. The deal would see Iceland pay the monies back at a 3.3% interest rate between 2016 and 2046, rather than 5.5% interest rate between 2016 and 2024.
That new deal will go to the Icelandic people at the insistence of the Iceland President (only the third time since WW II that the Presidential office has used this power) and will likely be defeated. The Icelandic people have decided that the political upsides for Iceland do not outweigh the financial consequences for them as citizens and taxpayers.
(The Icelandic government, in fairness, says that selling Landsbanki assets would mean the whole deal costs Iceland about $500m net and that this is the best deal they can get, but the Icelandic people would claim that those assets should first be used to recompense the Icelandic people for their hardship, and that the UK and Dutch goverments can whistle Dixie. And $500m in a country of 300,000 people represents a lot of money that could be left in citizens hands or used to fund services).
See what happened? The will of the people of Iceland is prevailing, for good or bad. But more interestingly for Ireland, the referendum rejection of the initial deal changed the bargaining power of the Icelandic government.
By next week the new Irish Government will be heading to Brussels to renegotiate the Irish deal. Disappointingly they will likely only tinker with the current EU arrangements, meaning there will be an Irish Soveriegn default, or some other “extend and pretend” deal for us in 2013 or 2014. In the meantime the average Irish citizen will continue to pay the gambling losses of bankers.
A referendum in Ireland on the EU/IMF deal seems to be a must – not only to express the will of the people, but to strengthen the hand of the Irish government in getting the best possible deal for the people of Ireland.
POSTSCRIPT: In case you are wondering about Iceland is doing in general, here is the latest courtesy of Reuters
“Iceland’s financial meltdown caused the crown currency to collapse and sent the economy into a tailspin. The country had to be bailed out by the International Monetary Fund and others.
Strict capital controls were slapped in place to prevent an outflow of funds, keeping Iceland cut off from international capital markets and stunting its recovery.
Things have slowly been returning to normal. Interest rates have dropped from around 18 percent to 4.25 percent currently and inflation is under control. The country has taken steps to recapitalize its banking system and the central bank has been mulling its first international debt issue since the crisis.
The economy should grow this year for the first time since 2008.”
Ganley, McWilliams and others argued hard for Ireland to proactively embrace the Icelandic approach to the crisis. I think time is proving them right and despite the Icesave issue, Icelend will likely emerge from a deeper crisis a full decade before Ireland will.