Ann Pettifor

Iceland – a country of proud, indebted people

Ann Pettifor – 12th May 2009

Have just returned from a flying visit to Iceland, where I was mightily impressed by the warmth and strength of the Icelandic character. Also struck by the pride Icelanders have in the way the financial crisis deepened and strengthened their democracy – leading to the ousting of a corrupt government, and the election of a progressive coalition.

Like many other visitors no doubt, I was bowled over by the austerity of the landscape. These people live on a volcanic island close to the Arctic Circle, and go about their business while mighty tectonic plates regularly shift beneath their feet. Sure those shifts generate massive doses of geo-thermal energy, making this country one of the world’s most sustainable, in energy terms. Nevertheless those plates regularly cause the earth to move, while Arctic gales whistle down glaciers and chill one to the bone, and volcanic rocks litter a treeless landscape. Icelanders – descended from Vikings and Celts –  are an extraordinary and resilient people!

Which is why it was sad to see proud, independent and innocent sheep farmers, fishermen and workers lose their independence to creditors. One complained that Icelanders could handle the severity of financial losses. However, what is unbearable to the Icelandic ‘soul’ is the damage inflicted on their nation’s reputation by a small group of bankers – cheered on by internationally-renowned, neo-liberal economists.

I learned a lot. The one fact that angered me most is that Icelanders that took out loans with domestic banks have had those loans ‘indexed’ to inflation –  by law it appears. Clearly, Iceland was another bank-owned-state, governed in the interests of creditors. If their new government is to represent the interests of the Icelandic people, and not just those of creditors, then legally-binding indexing must be repealed.

Here is more of what I learned:

  • Ordinary protesting Icelanders, using and amplifying their voices with pots and pans, drove a government from office. This has given Iceland’s people renewed confidence that they can, and should, remove governments that prioritise the interests of the finance sector over the interests of the people.
  • 43% of the new Parliament is made up of women MPs.
  • The new Prime Minister, Johanna Sigurdardottir (daughter of Sigurdar) is a woman and openly gay. She is the Minister of Economic Policy, as well as Prime Minister.
  • Prominent neo-liberal economists, including Fred Mishkin, a high-profile advocate of ‘inflation targeting’ and Bush nominee to the Federal Reserve, (until he unexpectedly resigned in May, 2008) and Tryggvi Þór Herbertsson, were paid,  I have been reliably informed, considerable sums by the Icelandic Chamber of Commerce to produce a report on Financial Stability in Iceland in September, 2006. The purpose of this report was to keep the banking party going after the near-disastrous ‘mini crisis’ of March, 2006.  The report was the centrepiece of a ‘road show’ promoting Iceland as a haven of financial stability that autumn. (See this speech made in New York by Mrs. Valgerður Sverrisdóttir, Minister for Foreign Affairs of Iceland at the time, and a proud farmer.)
  • We know that Fred Mishkin (now of Columbia University) was not the only academic economist to act as cheerleader for Iceland’s reckless bankers. Prof. Richard Portes, President of Britain’s Royal Economic Society, played a similar role. (For more about Professor Portes’s role in the Icelandic saga, go here.)
  • A year after the Mishkin Report, in November, 2007,  Prof. Portes produced another report for the Icelandic Chamber of Commerce which concluded that Iceland’s banks were ‘successful and resilient’ and that ‘the banks have been highly entrepreneurial without taking unsupportable risks; good supervision and regulation have contributed to that, using EU legislation.”
  • The privatisation of Iceland’s banks began as late as 1998, and was not complete until 2002. See the excellent chart below, courtesy of Stefán Ólafsoon of the University of Iceland.  The banks lost no time in piling  up debts.
  • By 2008 – when Prof. Portes wrote his report – private bank liabilities made up 10 – 12 x Iceland’s GDP, according to a reliable source.

  • Ratings firms, I was told, maintained the AAA status of Icelandic banks until two days after the collapse of these banks. Have not been able to check this.
  • The debt burden falls disproportionately on low income groups. In other words, it was the poor and other low-income groups that were encouraged to borrow and finance the bankers’ party. (See another of Stefán Ólafsoon’s charts below.)

  • As a result of the financial collapse, unemployment is expected to rise to 10% in 2009 – particularly difficult for a ‘work society’ Stefán Ólafsoon argues.
  • In a new take on ‘inflation targeting’ Icelanders have the principal on their loans to domestic banks indexed to inflation. In other words, if inflation rises, the value of their debts rise too! Inflation is currently at 11.9%.
  • Creditors are protected from inflation – by contract law, it seems.
  • After the crisis  broke on the 6th October, 2008, 95% of Iceland’s stock market was wiped out.
  • The $2.1 billion loan to Iceland is one of the biggest ever made by the IMF.
  • Iceland introduced currency and capital controls in December, 2008, and operates these effectively, according to an adviser to the Prime Minister. Effectiveness is maintained by revising the regulations every two weeks to fix loopholes.
  • The IMF supported the introduction of capital controls ‘forcefully’.
  • As a result of capital controls, interest rates had fallen from 18% at the height of the crisis in September, 2008, to 13% last Thursday. Rates for corporate borrowing remain in the region of 17%.
  • The UK has loaned to Iceland the money needed to compensate UK depositors. Revenues from the sale of Iceland banks will be used to pay interest on this loan.
  • GDP is expected to drop 10-12% this year.
  • Consumption has declined by 25%.
  • Real wages have fallen by 10%
  • Real incomes are falling by 12-15%.
  • 20% of families are in negative equity. The comparable figure for the US is 28%.
  • Icelanders have made substantial losses on their savings
  • In a bid to lower employer costs, people have had 2 working hours cut each week.
  • Iceland’s fish exports, thanks to currency devaluation, now have an edge over those of Norway.
  • For the last 30 years, Iceland has imported coffins. Because of the decline in the value of the Icelandic Krona, two companies have started making coffins – and are now exporting these to Canada.

I am waiting to hear of the new Prime Minister’s cabinet appointments this weekend. Sincerely hope that, in tackling this crisis, she calls on a wider range of economic advisers – and advice – than her predecessors. Or indeed than that offered by IMF staff.

There is surely a case for inviting economists who share the new Parliament’s values and are not the ‘hired guns’ of bankers –to visit Reykjavik to offer independent advice. Only after considering a range of such independent advice, can all those good women parliamentarians make sound judgements and begin the long process of ending the debt bondage of Iceland’s low-income earners.

To make Icelanders once again proud “independent people” in the words of Halldor Laxness, the country’s great Nobel-prize-winning novelist.


15 thoughts on “Iceland – a country of proud, indebted people”

  1. Erlendur Jónsson

    A couple of corrections, Jóhanna is the daughter of Sigurður (Icelandic is an inflected language) not Sigurðar, which is the

    genitive case. (Sorry for nitpicking)

    Creditors aren’t generally protected from inflation. The exception is that the indexed loans

    (verðtryggð lán in Icelandic) which are supposed to protect from the effect of inflation and deflation by binding the principal to the Icelandic

    consumer price index.

    The indexation of a loan is an option which people have, i.e., either take the non-indexed loan which will a very high

    interest rate (10%+ at least) or an indexed loan with 4-6% interest. I have a small loan I took a few years back, its current interest rate is

    13.35%. This option is only available if your loan is for at least five years.

    Interestingly, the banks used to try to get people to get the

    so-called currency basket loans (myntkörfulán), which have a principal indexed to the exchange rate of Icelandic króna to one or more currency. The

    Japanese yen was the most popular currency for this purpose because of the low interest rate. This meant that the Icelandic banks could do a

    massive amount of carry trade, borrowing Japanese yen and loaning the money out to Icelandic consumers.

  2. A citizen in perill.

    Just to add a note on indexed loans.

    Long term savings are in general also linked to the same index. The rationale

    dates back to years of inflation where savings were lost to inflation and long term loans and property mortgages lost all value.


    results were that a portion of the population lost most their savings and another portion did not pay for their property.

    This had, and

    still has an effect on the general saving rate. It also has something to do with the mentality of boom and bust so prevalent in our culture.

    Money saved is money spent. In the last few months this message has been hammered in, once again.

    The fact is that if we keep the

    Icelandic krona (the smallest independent currency in the world ?)and our import/export driven economy the level of risk to lenders and borrowers

    will be much higher than the usual interest rate systems can handle Inflation is a system risk to great for anyone to put a fixed long term value

    on it. Risk like this has a price tag and indexing is a way to measure and price this risk in a predefined way. If not, normal lending at fixed or

    contract variable long term interest rates will become unavailable for most if not all.

    Finally the inflation indexing system affects pay

    agreements in the market. The two tend to walk hand in hand although short term issues can arise.

    In my mind the main problem is not

    indexing as such. Most home mortages here are annuity loans with interest plus indexed inflation. When you add these two parts to one agreement

    you end up in a strange and very expensive place.

    Ann – thank you for the good work. We do need outside help and advice to sort this mess


  3. ‘The UK has loaned to Iceland the money needed to compensate UK depositors.’

    They have not loaned the money to compensate the

    Kaupthing Singer and Friedlander 10,000 depositers who were with the Isle of Man branch. They still haven’t received a thing. Have a look at the

    depositers website and be assured the argument isn’t with Iceland but with the UK Treasury and the Isle of Man government.

    Excellent article.

  4. Pingback: Tax Research UK » Iceland – a country of proud, indebted people

  5. Erlendur,

    Thank you very much for these corrections. But surely the genitive – the daughter of – would

    be appropriate here? Or is just not used, with the inflexion preferred?

    On the point about indexed loans….Does this means that when

    deflation occurs, the principal owed to the creditor is cut, in line with the rate of deflation?

  6. Erlendur Jónsson

    I agree that the genitive is appropriate, but I for one prefer the nominative when writing Icelandic names in other

    languages, prevents spelling based misunderstandings since four different spellings of the same name can confuse people a lot. So it just comes

    down to taste 🙂

    But concerning the indexing, if deflation occurs, such as in March of this year, the principal is cut, as was done in this

    case, by 0.6%. So if Iceland would a long period of deflation, these loans could be cut a considerable amount.

    Alex, the rationale behind

    the indexing of the loans (and long term deposits, min. 3 yr binding) was to reduce uncertainity of the value of money, i.e. the Icelandic króna.

    Iceland has historically had very high inflation, so this was done to counteract the effects of the inflation.

  7. “Ratings firms, I was told, maintained the AAA status of Icelandic banks until two days after the collapse of these banks. Have not been able to

    check this.”

    Wrong, for example Kaupthing had a Aa3 rating from Moodys.

    “In a bid to lower employer costs, people have had 2 working

    hours cut each week.”

    Wrong, there has been no general agreement to cut work time.

    Stefan Olafsson, who is a professor of Sociology,

    not economics is a controversial pundet in Iceland, so using him as a main source for you artical is questionable.

  8. To my knowledge non-indexed loans have not been an option for families finansing their homes in Iceland.

    The loans are indexed to

    inflation or a foreign currency. This is far more complex than it looks. The model used for the indexing does not reflect the inflation correctly

    and the conpounding effect of this is enormous for the deptors.

    The use of this indexing model has been eating up families’ properties

    leaving 20 to 40% of them with negative equities

  9. Thank

    you for this very good article.
    I have one point to add to the comments of Erlendur here above. He is absolutely correct, but the fact was that

    (at least for “average Joe” customers) there were only two options for loans on residential property.
    Option a) being the index-linked loans,

    option b) being the foreign currency-linked loans. The forex-linked loans were particularly pushed for residential property and car loans and re-

    financing of such loans.

    The option of an Icelandic currency loan without index-linking was simply not available for residential property (I

    hunted high and low for such loans all over a couple of years back) but often available for other loans.

    The option for someone trying to

    avoid index-linking was therefore only to link to currency instead.

    As a final point, yes the deflation would lower the principal, (creating

    an odd pressure into a risky state) good in small doses of course. However apparently it can never (anymore – I am told this was different in older

    loans) go lower than initial principal sum. Creating of course the obvious balance towards the benefit of the creditor, who can only ever win.

  10. >Effectiveness is maintained by revising the regulations every two weeks to fix loopholes.

    Hmmmm. Wonder if we’ll do that

    when (and if) we introduce regulations? Somehow it seems just too much like common sense and wanting to do something to protect ourselves from


  11. To my knowledge non-indexed loans have not been an option for families financing their homes in Iceland.

    The loans are indexed to

    inflation or a foreign currency. This is far more complex than it looks. The model used for the indexing does not reflect the inflation correctly

    and the compounding effect of this is enormous for the debtors.

    The use of this indexing model has been eating up families’ properties

    leaving 20 to 40% of them with negative equities.

  12. subrosa,the icelandic state does not have to compensate Kaupthing Singer and Friedlander depositors as it has nothing to do with the matter. It´s

    a british bank, not an icelandic one.

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