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Will Iceland Vote "No" on April 9, or commit financial suicide?

Michael Hudson

 

But Ireland, Greece and Iceland are now being told horror stories about what might happen if governments do not commit financial suicide. The fear is that debtors may revolt, leading the Eurozone to break up over demands that financialized economies turn over their entire surplus to creditors for as many years as the eye of forecasters can see, acquiescing to bank demands that they subject themselves to a generation of austerity, shrinkage and emigration.

That is the issue in Iceland's election this Saturday. It is the issue now facing European voters as a whole: Are today's economies to be run for the banks, bailing them out of unpayably high reckless loans at public expense? Or, will the financial system be reined in to serve the economy and raise wage levels instead of imposing austerity.

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            What seems remarkable is that Icelandic voters may take seriously their prime minister's threat that a "No" vote on the Icesave bailout would lead the UK and Holland to blackball Icelandic entry. The new Conservative Prime Minister has little love for Mr. Brown, and realizes that his own voters are not eager to support membership of a country that is willing to sacrifice the domestic economy to pay bankers for what looks like shady loans. And what of the rest of Europe? Is buckling under to unfair bank demands really the way to make friends with the indebted PIIGS countries? Do these countries want to admit another neoliberal advocate favoring banks over their domestic economies? Or would Iceland make more friends by voting "No"?

            Last weekend half a million British citizens marched in London to protest the threatened cutbacks in social services, education and transportation, and tax increases to pay for Gordon Brown's bailout of Northern Rock and the Royal Bank of Scotland. The burden is to fall on labor and industry, not Britain's financial class. The Daily Express, a traditionally campaigning national paper, is now running a full throttle campaign for Britain to leave the EU, on much the same ground that Britain has long rejected joining the euro.

            What is the rational of Iceland and other debtor countries paying, especially at this time? The proposed agreements would give Britain and Holland more than EU directives would. Iceland has a strong legal case. Social Democratic warnings about the EU seem so overblown that one wonders whether the Althing members are simply hoping to avoid an investigation as to what actually happened to Landsbanki's Icesave deposits. Britain's Serous Fraud Office recently became more serious in investigating what happened to the money, and has begun to arrest former directors. So this is a strange time indeed for Iceland's government to agree to take bad bank debts onto its own balance sheet.

            The EU has given Iceland bad advice: "Pay the Icesave debts, guarantee the bad bank loans, it really won't cost too much. It will be fairly easy for your government to take it on." One now can see that this is the same bad advice given to Ireland, Greece and other countries. "Fairly easy" is a euphemism for decades of economic shrinkage and emigration.

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            What makes the problem worse is that foreign-currency debt is not paid out of GDP (whose transactions are in domestic currency), but out of net export earnings - plus whatever the government can be persuaded to sell off to private buyers. For Iceland, the question would become one of how many of its products and services - and natural resources and companies - Britain and the Netherlands would buy.

            It is supposed to be the creditor's responsibility to work with debtors and negotiate payment in exports. Instead of doing this, today's creditors simply demand that governments sell off their land, mineral resources, basic infrastructure and natural monopolies to pay foreign creditors. These assets are forfeited in what is, in effect, a pre-bankruptcy proceeding. The new buyers then turn the economy into a set of tollbooths by raising access fees to transportation, phone service and other privatized sectors.

            One would think that the normal response of a government in this kind of foreign debt negotiation would be to appoint a Group of Experts to lay out the economy's position so as to evaluate the ability to pay foreign debts - and to structure the deal around the ability to pay. But there has been no risk assessment. The Althing has simply accepted the demands of the UK and Holland without any negotiation. It has not even protested the fact that Britain and Holland are still running up the interest clock on the charges they are demanding.
            Why doesn't Iceland's population behave like that of Ireland or Greece, not to mention Argentina or the United States, and say to Europe's financial negotiators: "Nice try! But we're not falling for it. Your creditor game is over! No nation can be expected to keep committing financial suicide Ireland-style, imposing economic depression and forcing a large portion of the labor force to emigrate, simply to pay bank depositors for the crimes or negligence of bankers."

            The credit rating agencies have tried to reinforce the Althing's attempt to panic the population into a "Yes" vote. On February 23, Moody's threatened: "If the agreement is rejected, we would likely downgrade Iceland's ratings to Ba1 or below." If voters approve the agreement, however, "we would likely change the outlook on the government's current Baa3 ratings to stable from negative,"  in view of a likely "cut-off in the remaining US$1.1 billion committed by the other Nordic countries and probably also to delays in Iceland's IMF program."

            Perhaps not many Icelanders realize that credit ratings agencies are, in effect, lobbyists for their clients, the financial sector. One would think that they had utterly lost their reputation for honesty - not to mention competence - by pasting AAA ratings on junk mortgages as prime enablers of the present global financial crash. The explanation is, they did it all for money. They are no more honest than was Arthur Andersen in approving Enron's junk accounting.

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            So returning to the problem of the credit rating agencies, how can anyone believe that agreeing to pay an unpayably high debt would improve Iceland's credit rating? Investors have learned to depend on their own common sense since losing hundreds of billions of dollars on the ratings agencies' reckless ratings. The agencies managed to avoid criminal prosecution by noting that the small print of their contracts said that they were only providing an "opinion," not a realistic analysis for which they could be expected to take any honest professional responsibility!

            Argentina's experience should provide the model for how writing off a significant portion of foreign debt makes the economy more creditworthy, not less. And as far as possible lawsuits are concerned, it is a central assumption of international law that no sovereign country should be forced to commit economic suicide by imposing financial austerity to the point of forcing emigration and demographic shrinkage. Nations are sovereign entities.
            It thus would be legally as well as morally wrong for Iceland's citizens to spend the rest of their lives paying off debts owed for money that should rather be an issue between Britain's Serious Fraud Office and the British bank insurance agencies.

            Overarching the vote is how high a price Iceland is willing to pay to join the EU. In fact, as the Eurozone faces a crisis from the PIIGS debtors, what kind of EU is going to emerge from today's conflict between creditors and debtors. Fears have been growing that the euro-zone may break up in any case. So Iceland's Social Democratic government may be trying to join an illusion - one that now seems to be breaking up, at least as far as its neoliberal extremism is concerned. Just yesterday (Thursday, April 7) a Financial Times editorial commented on what it deemed to be Portugal's premature cave-in to EU demands:

            Another eurozone country has been humbled by its banks. Earlier this week, Portugal's banks were threatening a bond-buyers' go-slow unless the caretaker government sought financial help from other European Union countries. ... Lisbon should have stuck to its position. ... it should still resist doing what the banks demanded: seeking an immediate bridging loan. ... By jumping the gun, the government risks having scared markets away entirely. That may prejudice the outcome of negotiations about the longer-term facility.
            The caretaker government has neither the moral nor the political authority to determine Portugal's future in this way. It should not precipitately abandon the markets. That may mean paying high yields on debt issues in coming months - higher than they might have been had the government not folded its hand too soon. ... The right time to opt for an external rescue would have been at the end of a national debate."[1]

 

            The same should be true for Iceland. Looking over the past year, it seems that the island nation has been used as a target for a psychological and political experiment - a cruel one - to see how much a population will be willing to pay that it does not really owe for what bank insiders have stolen or lent to themselves.

            This is not only an Icelandic problem. It remains a problem in Ireland, and in the United States for that matter, as well as in Britain itself.

            The moral is that creditor foreclosure - or voluntary forfeiture to pay international bankers - has become today's preferred mode of economic warfare. It is cheaper than military conquest, but its aim is similar: to gain control of foreign property and levy tribute - in a way that the tribute-payers accept voluntarily. Land is appropriated and foreclosed on - or, what turns out to be the same thing, its rental income is pledged to foreign bank branches extending mortgage credit that absorbs the net rent. The result is economic austerity and chronic depression, ending the upsweep in living standards promised a generation ago.

            Iceland's government seems to have become decoupled from what is good for voters and for the very survival of Iceland's economy. It thus challenges the assumption that underlies all social science and economics: that nations will act in their own self-interest. This is the assumption that underlies democracy: that voters will realize their self-interest and elect representatives to apply such policies. For the political scientist this is an anomaly. How does one explain why a national parliament is acting on behalf of Britain and the Dutch as creditors, rather than in the interest of their own country accused of owing debts that voters in other countries have removed their governments for agreeing to?

[1] "Banks 1, Portugal 0," Financial Times editorial, April 7, 2011.

 

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Athugasemdir

[Ásthildur Cesil Þórðardóttir, 8.4.2011 kl. 20:55]

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