We can learn from Iceland's crash – and their recovery

Iceland's PM isn't the only one guilty of ignoring the evidence that a crisis was coming.

Let’s confess, it felt good to see a Prime Minister criminally charged for the financial mismanagement of his country, as happened to Iceland’s Geir Haarde. But it also seems fair that he was convicted only of negligence.

After all, he and his government had full policy cover from mainstream economists like Richard Portes (ex-President of the Royal Economic Society) in the bubbly lead-up to the banking collapse in October 2008. Professors Portes and Baldursson co-authored a November 2007 report for the Icelandic Chamber of Commerce, in which they concluded that:

. . . the Icelandic economy and financial sector are highly resilient. . . With regard to both the macroeconomic situation and the characteristics and performance of the banks, we consider that the current market premium on Icelandic banks is excessive relative to their risk exposure and in comparison with their Nordic peers. . . Overall, the internationalisation of the Icelandic financial sector is a remarkable success story that the markets should better acknowledge.

The authors made similar points in a letter to the Financial Times in July 2008 – just 3 months before the crash!

No wonder then that Mr Haarde argues that

None of us realised at the time that there was something fishy (sic) within the banking system as now appears to have been the case.

Moreover, he added, "nobody predicted that there would be a financial collapse in Iceland."

Well, that last point is not quite true. Many did, like Professor Robert Wade. In my book The Coming First World Debt Crisis (2006) I drew attention to a report by Danske Bank which flashed strong warning lights:

Iceland seems not only to be overheating, but also looks very dependent on the willingness-to-lend of global financial markets. This raises the question of whether the economy is facing not just a recession but also a severe financial crisis.

Yet if Iceland got it all wrong in the lead-up to the October 2008 banking collapse, the country (which still has its own currency) has since done much that is interesting and positive, ignoring or going against the counsel of orthodox economists:

  • Iceland nationalised the domestic parts of its banks, and allowed the non-domestic parts to go bankrupt

  • Iceland looked after its own citizens first, and refused to be bullied by the UK and the Netherlands demanding preferential treatment for non-existent ‘loans’ at usurious rates of interest

  • Iceland’s President responded to popular dissatisfaction with proposed deals with the UK and the Netherlands, by allowing a democratic vote – which confirmed overwhelming opposition

  • Iceland imposed capital controls to stop hot money flows into or out of the country.

  • It gave special protection to home-owners threatened by banks foreclosing.

Despite (because of) all the above, GDP grew by 2.7 per cent in 2011, and unemployment - though high at 6.9 per cent - is far below the current EU average of 10.2 per cent. The IMF’s latest country report (March 2012) states

Iceland’s post-crisis recovery has taken hold. After two years of recession, growth turned positive in 2011, led by domestic demand. The labor market improved, although the unemployment rate remains high… A moderate economic expansion is projected going forward.

So compared with the Eurozone, Iceland is not doing so badly. And compared to Ireland, which has followed very different policies, it’s steaming ahead. Ireland’s GDP rose by 0.7 per cent in 2011, and unemployment is now double Iceland’s at 14.7 per cent. Given that many of Europe’s governments are now run by unaccountable technocrats, the same ones that developed the kind of policies that brought Iceland down, one must congratulate the people of this small country for insisting on the democratic accountability of its political class.

Iceland's former Prime Minister Geir Haarde speaks to the press during his trial. Photograph: Getty Images
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What happens when a president refuses to step down?

An approaching constitutional crisis has triggered deep political unrest in the Congo.

Franck Diongo reached his party’s headquarters shortly after 10am and stepped out of a Range Rover. Staff and hangers-on rose from plastic chairs to greet the president of the Mouvement Lumumbiste Progressiste (MLP), named after the first elected leader of the Democratic Republic of Congo.

Diongo, a compact and powerfully built man, was so tightly wound that his teeth ground as he talked. When agitated, he slammed his palms on the table and his speech became shrill. “We live under a dictatorial regime, so it used the security forces to kill us with live rounds to prevent our demonstration,” he said.

The MLP is part of a coalition of opposition parties known as the Rassemblement. Its aim is to ensure that the Congolese president, Joseph Kabila, who has been president since 2001, leaves office on 19 December, at the end of his second and supposedly final term.

Yet the elections that were meant to take place late last month have not been organised. The government has blamed logistical and financial difficulties, but Kabila’s opponents claim that the president has hamstrung the electoral commission in the hope that he can use his extended mandate to change the rules. “Mr Kabila doesn’t want to quit power,” said Diongo, expressing a widespread belief here.

On 19 September, the Rassemblement planned a march in Kinshasa, the capital, to protest the failure to deliver elections and to remind the president that his departure from office was imminent. But the demonstration never took place. At sunrise, clashes broke out between police and protesters in opposition strongholds. The military was deployed. By the time peace was restored 36 hours later, dozens had died. Kabila’s interior minister, claiming that the government had faced down an insurrection, acknowledged the deaths of 32 people but said that they were killed by criminals during looting.

Subsequent inquiries by the United Nations and Human Rights Watch (HRW) told a different story. They recorded more fatalities – at least 53 and 56, respectively – and said that the state had been responsible for most of the deaths. They claimed that the Congolese authorities had obstructed the investigators, and the true number of casualties was likely higher. According to HRW, security forces had seized and removed bodies “in an apparent effort to hide the evidence”.

The UN found that the lethal response was directed from a “central command centre. . . jointly managed” by officials from the police, army, presidential bodyguard and intelligence agency that “authorised the use of force, including firearms”.

The reports validated claims made by the Rassemblement that it was soldiers who had set fire to several opposition parties’ headquarters on 20 September. Six men were killed when the compound of the UDPS party was attacked.

On 1 November, their funerals took place where they fell. White coffins, each draped in a UDPS flag, were shielded from the midday sun by a gazebo, while mourners found shade inside the charred building. Pierrot Tshibangu lost his younger sibling, Evariste, in the attack. “When we arrived, we found my brother’s body covered in stab marks and bullet wounds,” he recalled.

Once the government had suppressed the demonstration, the attorney general compiled a list of influential figures in the Rassemblement – including Diongo – and forbade them from leaving the capital. Kinshasa’s governor then outlawed all political protest.

It was easy to understand why Diongo felt embattled, even paranoid. Midway through our conversation, his staff apprehended a man loitering in the courtyard. Several minutes of mayhem ensued before he was restrained and confined under suspicion of spying for the government.

Kabila is seldom seen in public and almost never addresses the nation. His long-term intentions are unclear, but the president’s chief diplomatic adviser maintains that his boss has no designs on altering the constitution or securing a third term. He insists that Kabila will happily step down once the country is ready for the polls.

Most refuse to believe such assurances. On 18 October, Kabila’s ruling alliance struck a deal with a different, smaller opposition faction. It allows Kabila to stay in office until the next election, which has been postponed until April 2018. A rickety government of national unity is being put in place but discord is already rife.

Jean-Lucien Bussa of the CDER party helped to negotiate the deal and is now a front-runner for a ministerial portfolio. At a corner table in the national assembly’s restaurant, he told me that the Rassemblement was guilty of “a lack of realism”, and that its fears were misplaced because Kabila won’t be able to prolong his presidency any further.

“On 29 April 2018, the Congolese will go to the ballot box to vote for their next president,” he said. “There is no other alternative for democrats than to find a negotiated solution, and this accord has given us one.”

Diongo was scathing of the pact (he called it “a farce intended to deceive”) and he excommunicated its adherents from his faction. “They are Mr Kabila’s collaborators, who came to divide the opposition,” he told me. “What kind of oppositionist can give Mr Kabila the power to violate the constitution beyond 19 December?”

Diongo is convinced that the president has no intention of walking away from power in April 2018. “Kabila will never organise elections if he cannot change the constitution,” he warned.

Diongo’s anger peaked at the suggestion that it will be an uphill struggle to dislodge a head of state who has control of the security forces. “What you need to consider,” he said, “is that no army can defy a people determined to take control of their destiny . . . The Congolese people will have the last word!”

A recent poll suggested that the president would win less than 8 per cent of the vote if an election were held this year. One can only assume that Kabila is hoping that the population will have no say at all.

This article first appeared in the 01 December 2016 issue of the New Statesman, Age of outrage