Wednesday, January 06, 2010

Iceland's revolt

Iceland has suffered more than most countries in Europe from the recent recession, not least because it became the host for a series of financial institutions that have since failed. The most notable one is Icesave, which borrowed heavily to establish itself as an institution engaged extensively in providing credit for property and offering high interest bearing bank accounts.

Like other banks that have failed in this part of the world, none of those in the sector drew any attention to the nature of the operation, and the UK regulator - the Financial Services Authority (FSA) - happily rubber stamped it all. In other words, what it did was officially approved as being robust. With Icesave, among others, very highly leveraged, the financial crisis saw it unable to rollover its debt facilities, so it all came to a tumbling end. Hundreds of thousands of depositors in the UK, Netherlands and Germany found their accounts frozen, all assuming that with state "endorsement", their money would be "safe". So the UK government decided that other UK taxpayers should bail out the depositors. Not for a moment did Gordon Brown argue that depositors should have thought more carefully, not for a moment did he seek to fire the FSA for being effectively useless, not for a moment did he think about taxpayers over investors.

So having done this, the UK looked to recover some of this from Iceland, effectively demanding Icelandic taxpayers pay the UK for its policies. Quite what Icelandic taxpayers have to do with a private Icelandic company is beyond me, after all it was a policy choice by Gordon "borrow" Brown to bail out depositors. The Icelandic government agreed to cover a portion of the deposit costs, under significant pressure, but Iceland's taxpayers have turned on their government.

The total cost of this foolish promise is £3.6 billion, for a country with the population of greater Wellington. Allister Heath in City AM points out the scale of this, which explains why nearly a third of Iceland's adult population has signed a petition demanding the President veto legislation authorising the deal:

the proposal will now be put to a referendum and crushed. The sums involved are huge: 40-60 per cent of Iceland’s national income, taking the national debt to 200 per cent of GDP. Each of Iceland’s 304,000 citizen would have to pay £11,700 without getting shares or any assets in return. The money would be gone for good. Imagine if UK taxpayers were asked to pay £700bn to overseas governments because one of our banks had messed up. We too would be up in arms.

Yes, the bank was irresponsible, but it was a private entity.
Yes Iceland's government shouldn't have agreed to help pay part of the bailout to the UK and Dutch governments, but then given the UK economy is 144x the size of Iceland's how could the UK expect much from it?
A better response from Iceland's government would be to state that its banks operate in a free market are not government guaranteed so creditors beware.

So Iceland's taxpayers, who didn't own the failed bank, didn't invest in it and never promised to bail it out and saying "enough". Good for them. Whilst some noise was made about Iceland voting in a new leftwing government, which has supported the deal, the protests have clearly rattled both it, and its belief that taxpayers are there to be fleeced for "their own good".

Big bully Brown is threatening to veto a forthcoming Icelandic application for EU membership. Iceland ought not to be too concerned, since all such membership will do is mean Iceland, as (still) a relatively wealthy European country will probably be a net payer to the socialist subsidy schemes of the EU, and Iceland's ample fisheries would be plundered by the parasitical subsidised fishing fleets of France, Spain, Portugal and the UK.

As Allister Heath continues: "The bankers were incompetent, as were the Icelandic authorities, the UK authorities, the EU and the depositors who didn’t do their research. Egged on by price comparison websites and personal finance pages, the public assumed regulators would ensure every newfangled online bank was safe and forgot that high returns often mean high risk. Instead of acknowledging this, Brown is pursuing a vendetta against Iceland, trying to recoup all of the cash from its government."

Iceland's voters will no doubt say no in a forthcoming referendum, not wanting to put themselves and their children under enormous state enforced debt. If it means pariah status from the IMF and the EU, Icelanders are likely to prefer that to being under servitude to bail out policies from other governments.

As the Daily Telegraph points out, this marks a new low in relations with the UK since the Cod Wars. The UK government classified the Icelandic Central Bank alongside Al Qaeda, under anti-terrorism laws, just so it could seize its assets. Iceland is a member of NATO.

So Iceland has served as a warning, that taxpayers will only take so much from governments claiming to speak on their behalf. Sadly, the UK is too big, and British taxpayers too inert to revolt against state kleptomania.

1 comment:

Bertie Fox said...

I had no idea that Brown was demanding 5.5% interest on the debt! Not until I read that the presenter Sally Magnusson is being disciplined just for pointing out the hardship this is causing to Iceland.
In the end, what the bankers in the UK did was equally irresponsible; BUT they have a huge economy to bail them out through taking taxpayers' money.
I agree completely that Iceland needs to be treated with sympathy and understanding.