Tuesday, March 9, 2010

Iceland: Three Cheers for Democracy!

On 6 March Iceland’s voters resoundingly rejected, with 93.5% “no” and only 1.8% “yes” (the rest being null or void) – a veritable plebiscite – in a referendum with an overall turnout of 62.7%, the legislation that would have reimbursed about €3.9 billion to the UK and the Netherlands for the compensation of their depositors’ losses in Icesave, an on-line branch of the failed Icelandic bank Landsbanki. (See our earlier post Forza Iceland!). The repayment plan had been blocked by Iceland’s President, Olafur Ragnar Grimsson, whose decision last January triggered the referendum. Mr Grimsson, whose popularity has soared since January, commented: “[The referendum] demonstrates to the British and Dutch governments that there is a democratic limit to how far you can pressure ordinary people to shoulder through their taxes the financial failures of bankers. ”

The vote has been promptly and grossly misrepresented, as a case of debtors opportunistically mis-using democracy to reject their own outstanding liabilities, if not a straight case of sovereign default, which is how it was construed by the British and the Dutch. "Sympathisers would hail it [a "No" vote] as an admirable display of people power against economic injustice. To critics, it would be a shameful ­dereliction of international obligations" (FT 26 February).

First, this is not the failure to repay a foreign loan that had reached maturity. Nor is it the rejection, by Iceland, of other outstanding certified liabilities, but simply the refusal to sign a deal – not yet finalized – proposed/imposed by the British and the Dutch governments. That deal was particularly onerous both in terms of the amount claimed – total deposits rashly and unwisely and over-generously reimbursed by those governments to their depositors instead of the statutory maximum cover – and in terms of the interest charged (5.5%) in these days of near zero interest. That those terms were described as “extremely generous” by UK and Dutch negotiators must have made it worse. The amount actually owed will have to be either negotiated and agreed by all parties, or tested in a court of law. In its more enlightened approach, even the FT recognises that "The broader damage of the grotesque mishandling of this affair will be felt elsewhere. The political effects are both chronic and acute. The focus on Iceland’s responsibility deflects attention from the fact that European cross-border banking rules are powerless to deal with any large-scale bank collapse. The priority is to fix the system so that we can let banks fail without having to bail them out again" (26 February).

Second, there is the question of the considerable damage inflicted by Gordon Brown on Landsbanki and other Icelandic institutions, by freezing their assets held in the UK through the pretext, and the dishonest use, of anti-terrorist (sic!) UK legislation. Gordon Brown is notorious for bullying and ill-mannered behaviour. “It is not good enough to be a statesman on the global scene and be a bully to Iceland” Mr Grimsson firmly told him. But this is a case not so much of bullying but of outdated, colonial, gunship “diplomacy” over the top. The general attitude of the British press is typified by an uncharacteristically bullying and contemptous article in the FT-Lex (26 February), equating the Icesave dispute to a “game of chicken” between two cars on a collision course refusing to give way, except Iceland is portrayed not as a car but a bicycle.

Third, there has been the attempted blackmail, on the part of the British and the Dutch, that failure to accept the onerous terms imposed by them would unravel a support package by the IMF and Northern countries. The socialdemocratic/green Premier Ms Sigurdardóttir accused Britain and the Netherlands of holding Iceland to ransom by pressurising lenders to withhold funds. “This is something we find very unfair and unforgivable and cannot accept,” she said, although only after her government's acceptance of the onerous terms was so massively defeated by the people who she pretended to represent. Dominique Strauss-Kahn, managing director of the International Monetary Fund, stated that loans to Iceland were not conditional on the resolution of the Icesave dispute (Bloomberg). But "Moody’s, the credit ratings agency, gave warning on Friday that the collapse of talks had darkened Iceland’s credit outlook. It said a No vote in the referendum would deepen the political uncertainty facing Iceland and threaten its nascent economic recovery" (FT, 26 February). Steingrimur Sigfusson, Iceland’s finance minister, expressed a worry that the forthcoming British elections might complicate the issue but he should rest assured that any new British government, whether hung or Conservative, will behave better than Brown's “globalist progressive” socialdemocratic government so unwilling to release its grip on the UK one minute sooner than it absolutely must.

Fourth, “Maxime Verhagen, Dutch foreign minister, said Icesave would be “part of our considerations” of whether to back Reykjavik’s bid to join the EU”. In mid-February the European Commission gave the go-ahead to negotiations with Iceland on their socialdemocratic government's application to join (made on 17 June 2009; the EC opinion mentions Icesave only to say that in 2009 its liabilities had contributed one third of Iceland's 130% government debt/GDP ratio; the Analytical report attached to the opinion tells the whole story in great detail). Stefan Fuele, European commissioner for enlargement, declared that the Icesave issue was a purely bilateral matter for Britain and the Netherlands (FT 24 February). But one vote short of unanimity is sufficient to block a candidate member from accession and the current dispute has greatly undermined Icelandic enthusiasm for joining the European Union. Traditionally very much against joining, Iceland was softened up by the 2008-2009 crisis, and especially by the mirage of EMU membership; its Parliament voted narrowly in favour of the entry application. Brussels had placed it on a preferential path to joining even, perhaps in 2012, before earlier applicants. Iceland is a mature democracy and an advanced market economy that has already converged with EU rules and regulations as a senior member of the European Economic Area, despite the thorny issue of fisheries, where Iceland is probably unwilling to accept the EU common fisheries policy. But now opinion polls indicate that support for joining is back to below 50%, while the business community is 60% against. A referendum result in favour of entry cannot be taken for granted.

Two final reflections on this Icelandic saga. First, three years ago Iceland was still classed as the “happiest country on earth”, enjoying an economic boom, social homogeneity, gender equality, social justice, all on its own; isolation might allow the recovery of this Paradise lost. Second – come to think of it – it might not have been at all a bad idea to put to a referendum the amount of resources and the terms and conditions on which these resources have been made available, say, to bail-out Northern Rock and all the other bankrupt financial institutions in the recent crisis.


chilosi said...

"it might not have been at all a bad idea to put to a referendum the amount of resources and the terms and conditions on which these resources have been made available, say, to bail-out Northern Rock and all the other bankrupt financial institutions"

The only justifiable reason for bailing out Northern Rock was to avoid queues of depositors willing to withdraw their deposits forming outside the other banks, as it happened after the 1929 Wall Street collapse, engineering a wholesale bank crisis. Under those circumstances to announce a referendum on the issue rather than to proceed straight on with the bail-out would have certainly not helped. The same applies to the other cases. One may discuss the modalities and extent of the rescue of the other financial institutions but certainly a referendum on the issue would not have been appropriate, both because of the timing and because of the technicalities involved. What would have happened if Bush, instead of proceeding with the bail-outs after the failure of Lehman were to have simply announced a referendum to be held on the issue? Not always direct democracy is the best solution. In the case of Iceland's referendum the alternatives were rather simple and quite understandable, and nothing was unduly pressing. Moreover Iceland is a small country and a referendum is not too difficult to organize. As to Iceland's bank issue, I am not competent, but prima facie if depositors were given what they were entitled to under Island's deposit insurance regulations, they would simply have been given all what they were entitled to under the circumstances. If the British and the Dutch felt obliged to wholesale pay the whole deposits in order to avoid a run on their banks, it was their choice and it was their business. After the banks went bankrupt the most they could claim could be to enter as creditors, instead of the original depositors, and together with other creditors, in the bankruptcy proceedings. This on the legal side. On the political side they could rightly complain that the supervision on Iceland's banks by Iceland's regulator authorities was disastrous. But elsewhere too bank supervision was not impeccable.

D. Mario Nuti said...

Of course a referendum was not feasible with depositors' queues outside Norther Rock's subsidiaries. But before it got to that point there could have been beforehand and there still could be a referendum on what the government can or cannot do in case of banks' default. Bail-outs went far beyond central bank duties as lender of last resort. Bailing out of last resort must be regulated beforehand - preferably by a referendum rather than by government decree - and not improvised in a crisis. The same applies, a fortiori, to sovereign default bail-outs.

On the eccessive protection of British and Dutch depositors in Icelandic banks by their own governments, this is precisely the point: Icelandic voters have every right to refuse to shoulder the extra cost of higher-than-statutory protection, even though their own government had been more accommodating.

chilosi said...

"Bailing out of last resort must be regulated beforehand - preferably by a referendum"

Why to have a referendum on this specific kind of relatively complicated technical matter and not on all the other pieces of legislation, some of which are much more easily understandable by the common voter? Are you really proposing to shift from a system of representative to one of direct democracy as in the Swiss cantons? How many referenda should you have every year or every month? Would the result be better? How many people will in the end vote and with what kind of information?

D. Mario Nuti said...

Should taxpayers cover the cost of 100% deposit insurance? both for national and foreign depositors? Should all bank creditors be protected by a government guarantee? Should bank shareholders? Should managerial bonuses in bailed-out banks be subject to strict ceilings? These questions are not too technical to be understood by the common voters.

How many referenda, or referendums (recommended by the Oxford English Dictionary)? As many as the rules allow; if the system became unmanageable you could always raise the number of signatories required to have one.

At the very least, let all parties outline their policies before the elections rather than afterwards.