Question: There is a widespread opinion that there was a media blockage during the Iceland 'peaceful revolution'. There were some changes in Iceland for sure; would you say that a 'revolution' happened?
I am not sure if there was a media blockage or how that blockage would have taken place. There were quite some news for example at BBC and other international news sources. But I am not sure why this "revolution" did not get more coverage. I think Iceland was not that famous at the time. After the financial crisis, and after the large eruption in 2010, Iceland has been a lot more in the media abroad.
This was a revolution in the sense that the government resigned and parliamentary elections were held. The parties who had been in power for the past twenty years leading up to the crisis lost very much support and the parties who got elected were a left party and a center party.
The revolution was mostly peaceful, some police officers got hurt but were few people were seriously injured. People gathered before the parliament and protested for many days until elections were held.
The coalition government that was formed has now been in office for four years, and there are parliamentary elections next April. What is most strange is that the party who had been in government for twenty years before the crisis, considered to be a right wing party, they have regained their support and now have around 35% - 40% support. This is quite strange because many specialists have said that the current coalition government did well in the recovery after the crisis.
Question: Your president said, in an interview for Deutsche Welle, that the Iceland recovered because you let the banks go bankrupt and that he cannot understand why would they enjoy a special status in the society. Would you agree with him? Why yes or why not?
The thing is that the banks were not saved, because they could not be saved. Their balance sheet was ten times the GDP of Iceland. Most of their assets were in foreign currency and Iceland had very limited foreign exchange reserves. The government at the time considered to save them but realized that it was impossible. So it was not a decision not to save the banks, it was inevitable. Also the government tried to save many smaller banks, that perhaps could be saved, so this statement from the president is a bit flawed in my opinion.
But it was definitely a good thing that the three largest banks were not saved. The banks' creditors lost a lot of money and if the Icelandic government had lent to those banks, that money would have been lost and the government might even have defaulted. The government has already lost a lot of money on trying to save smaller banks.
At the start of the financial crisis in Iceland, emergency laws were put in effect. They put depositors in Icelandic banks, in Iceland, at the top of the claims on the banks. This saved the deposits but creditors took the fall. The emergency law has been challenged before Icelandic courts but survived, and even before the EFTA court. So this emergency law has been a success for Iceland.
The government decided to keep one of the three large banks, and still owns it. That bank is called Landsbankinn, the one with the Icesave accounts. The government intends to keep a majority of the shares in that bank. But the other two banks are largely owned by foreign creditors. The banks have acquired many firms that have defaulted so foreign creditors own two large banks directly and many firms indirectly, which is a downside to all of this some might say. But as the banks sell firms, the Icelandic pensions funds are buying them (since they are locked behind capital controls).
So this has turned out nicely for Iceland in the end, at least it was not as bad as it looked in the beginning.
Question: How would you comment the fact that your secretary of home affairs didn't allow FBI agents to conduct their own investigation on the Iceland territory?
Here is a short article about the FBI matter: click here
The FBI agents showed up unexpected. They never asked the Minister of the Interior for authorization to question an Icelandic citizen. The Ministry was not happy about this and told them to leave. They did so also because the interrogations took place at hotels around the capital, without authorization. The Ministry was trying to protect this Icelandic citizen, who is very young (around 20), and they thought that he did not realize the consequences of his actions.
The Minister of foreign affairs has said that what the FBI was doing was illegal. So telling them to leave was probably the right thing to do. The Ministries want to be informed and kept in the loop, and not surprised like this.
Question: Would you say, in general, that Iceland found a way to exist in the international community without having to comply to bank(er)s and 'big players' in the international community, such as EU or USA?
No I cannot say that. The government that was in power for around 20 years before the crisis was on the right wing of politics. They deregulated the banking sector, decreased supervision, privatized banks and kept taxes on banks low. Some might say that is the reason for the Boom Bust that we saw.
Iceland joined the European Economic Area (EEA) in 1994, and still is part the area. During this time Iceland adopted very much of the regulation from the European Union (EU). I think that Iceland as adopted 75% of the EU regulation, what is missing is mostly laws regarding agriculture and fisheries. The main purpose of the EEA agreement was to insure free flow of capital, labor, services and goods. Iceland has complied to that until 2008, when the capital controls were put in place.
The EEA agreement has ensured that Iceland participates quite much in the international community, and Iceland tries to have its policies and laws comparable to the US and the EU. But Iceland had deregulated the banks so much before the crisis, and the Financial Supervisory Authority in Iceland was so underfunded, that matters were considered to be much worse here than in the US and in the EU.
As an example of this, Iceland has close to a world record for the largest personal default (at least bigger than any personal default in Britain). That is, default of a person not a company. One person in Iceland defaulted for over 500 million EUR, because he had lent himself so much money from his own bank. He never went to jail because of this, not even to court.
Question: Would you say that Iceland can be a positive example on how to deal with corrupt or incapable politicians, banks and, to put it this way, giving the power to the people?
I am not entirely sure about that. For example, in 2001 a member of parliament was sentenced to two years in jail for stealing public money. When he got out of jail he was voted back into parliament and he still is there today. His name is Arni Johnsen.
The largest party in Iceland is the Independence Party, according to recent polls they have around 35% - 40% support. They were in government for around twenty years before the crisis. We have parliamentary elections next April and they will likely form the next government. The Chairman of that party was involved in a huge default after the financial crisis and has been accused of forging documents, see for example here
He will likely be the next Prime Minister of Iceland. So Icelanders seem to have a short memory. Also, it seems to me that no matter how big mistakes the members of parliament make, they never are forced to resign. And if they donâ€™t resign the support of their party does not seem to decrease. That is my impression at least. However, after the financial crisis a special prosecutor
took office to investigate and prosecute financially related crimes:
The following is from the special prosecutor's website:
On 1 February 2009 the Special Prosecutor took office. According to Act No. 135/2008 the Special Prosecutor is responsible to direct the office of public investigation and prosecution. The Special Prosecutor will investigate suspicions of criminal actions in the period preceding, in connection with or in the wake of the collapse of the Icelandic banks, whether this is connected to activities of financial undertakings, other legal entities or individuals, and, as the case may be, follow up on these investigations by bringing charges in court against those concerned.
The authorisations granted to the office to investigate and lay charges cover economic violations, gainful offences and taxation infringements, including offences which have been investigated by the Directorate of Tax Investigations in Iceland, the Icelandic Competition Authority and the Icelandic Financial Supervisory Authority where criminal charges have been laid.
Some bankers have been sentenced to jail but not many. I think that the problem is that it had been so much deregulation before the crisis, that many bankers got away with things that would have been illegal in many other countries, but not in Iceland at the time. Also, it just takes a very long time to investigate these crimes. That investigation in still ongoing.
There is also almost no direct democracy in Iceland (if one can phrase it like that). The president has the authority to veto laws, and then the laws go for a referendum, as we saw in the Icesave case. But this veto has only been used two or three times. Iceland is however trying to change the constitution so that there will be more direct democracy, but we will have to see how that goes.
So I cannot say that Iceland is a great example in this respect but Iceland has been improving for the past four years.
Question: Do you think that Iceland's recipe for recovering from crisis could be implemented in, for example, Croatia? What would we have to do to recover? (I suppose you're not familiar with a situation in Croatia, just try to answer on general basis)
In that respect I would like to point out that The Economist recently wrote an article about the Nordic Supermodel. An economic model used by Finland, Denmark, Norway and Sweden. They praise this economic model I personally think it is a good model, see here
and also here
The basic idea is to have a powerful welfare state driven by a powerful market economy. The public sector in these countries is usually quite big, the income of the government around 40% - 50% of GDP. The public sector balances out the private sector and economic swings become much milder. Low income groups are also better protected.
A key thing to make this work is not to have corrupt politicians of course. Voters must make sure of that.
The market has a lot of freedom, but the government makes sure everybody plays by the rules and that the rules and policies benefit the country as a whole, instead of small interest groups.
Participating in the international community is of course very important. But the key thing in this model is education. Technology is the driver of economic growth. Providing education for everybody is therefore very important. Students in these countries get a lot of support from the government. This drives economic growth and keeps unemployment low. For example around 50% of young Spanish people are unemployed, if they lived in one of these four Nordic countries they would go to school and get money for it. Then they would go on the job market and promote economic growth as more skilled workers.
Denmark is a small country with maybe not so much of natural resources (per capita). Technology and education is the foundation of their economy and they are doing remarkably well.
Denmark, Finland and Sweden are in the EU, Norway and Iceland are part of the EEA. Participating in the international community is important.
Countries with a relatively large public sector are always in a better position to recover from an economic crisis. To recover quickly from a crisis you need to get unemployment down. This you do by supporting innovation and by getting people so school.
Debt overhangs are also very bad, as we have seen in Japan. Some companies should be allowed to default and their debt written off, and the government should not try to save insolvent companies. But the government needs to be aware of systemic risk of course. For example the Swedish government did not try to prevent that Saab defaulted. And they allowed Chinese investors to buy Volvo.
Regarding the Icelandic recovery. The largest banks defaulted and their debt largely written off. Many other companies also defaulted and debt was written off. Many people went to school to get educated or to re-educate themselves. Innovation was and is supported. Unemployment is now down to under 5%.
The government had very low debt before the crisis, and was therefore well equipped to handle the crisis, unlike for example Greece.
The Icelandic currency, ISK, depreciated around 50% before the capital controls were put in place. This supported exports tremendously, fisheries and tourism have been flourishing for example.
Question: What is the state of media in Iceland today? Is there censorship in the mainstream media?
In 2011 new laws regarding the media took effect. The laws take on media ownership and give the authorities more power regarding regulating and supervising the media. Many reporters and others have said that they disapprove of the law. However, the authorities how not intervened much and there is little to no censorship in the Icelandic media as far as I know.
But the largest media corporations in Iceland are privately owned. The largest media corporation in Iceland is mostly owned by Ingibjorg Palmadottir, wife to Jon Asgeir Johannesson. Mr. Johannesson was a very large player on the financial scene during the boom years before the crisis. He owned a large share in the company Baugur, which defaulted in the aftermath of the crisis.
Also a very large media company in Iceland, called Morgunbladid, is largely owned by a woman who owns a very large fisheries corporation in Iceland. She hired David Oddsson, ex prime minister (for the Independence Party) and ex governor of the central bank, to be the main editor of the newspaper. So that newspaper is considered by many to be biased. The bias for example involves being against changes to the fishing quota system and against joining the EU.
The public media does not issue a newspaper but has a TV station and a news website.
The privately owned media corporations typically do not have a very distributed ownership and that might be a problem.
But I donâ€™t think there any censorship being done by the government. Also the online media is very popular, and they all have commenting systems and blogs and so forth, where everybody expresses their opinion.
Question: How do you see the future of Iceland? Do you believe you'll stay out of EU?
I think that Iceland will stay out of the EU, at least for eight years. Recent polls show that Icelanders are against joining the EU, I think it will stay that way some quite some time. Some say that the EU will have to change its fisheries policy before Norway and Iceland will ever join.
The future of Iceland could be quite bright, the country has big potential. Fisheries are going very well and tourism is booming. There are discussions regarding building a large submarine-cable to mainland-Europe that would connect Iceland to the power grid in Europe. A cost benefit analysis is underway.
The software industry is also doing very well and I think that industry will grow and become very important in Iceland. Iceland does not have a future as a financial center though, and probably thatâ€™s a good thing. The shipping route from the North, through the Arctic Ocean is now becoming a reality. Iceland might benefit largely from that shipping route and become some sort of shipping center. Search for oil is also underway in Icelandic jurisdiction but it is very uncertain if oil will ever be pumped there.
Iceland will hopefully move more towards the Nordic Supermodel and work more with the other Nordic countries.
Currently the largest problem that Iceland faces is currency issues. There are strict capital controls in place that are damaging the economy. The IMF has said that it might take three more years to remove them. There is very little foreign investment in Iceland because of the capital controls, and because of currency risk related to the Icelandic krona (ISK). Also pension funds and others are locked with their money in the economy and cannot easily invest abroad. The Icelandic krona comes with high inflation, large currency risk, high real interest rates, price indexation of mortgages and boom bust episodes. At least two or three large political parties say that Iceland needs a new currency.
Many people want to join the EU and the EMU and start using the Euro but that is unlikely to happen in the near future. Some want to start using the Canadian dollar or the US dollar but many specialists have said that might be difficult, specially because of capital controls and large amounts of money locked in the economy. The governor of the central bank says that using another currency unilaterally is not feasible. It is therefore likely that Iceland will use the ISK for many years to come which hinders growth and limits the possibilities of Iceland. Hopefully Icelanders will find a solution to their currency issues sooner than later.