8th January, 2009

This piece appeared on the Guardian’s Comment site:

“Today the people of Iceland, a country whose population, at 317,000, is somewhat smaller than Leicester’s, are required by the British political, financial and economic establishment to carry the full burden of the losses suffered by Landsbanki’s depositor programme Icesave.

We consider this to be unfair, for the following reasons.

First, the British political and financial establishment bear co-responsibility with Icelandic regulators and bankers for the losses of British investors. Indeed Iceland’s financial policies and practice fell foursquare within the deregulated and liberalised framework set in Britain and the United States since the 1970s. We therefore bear a greater share of responsibility.

Well after the credit crunch froze interbank lending in August 2007 – a day we have dubbed “debtonation day” – the then-president of the Royal Economic Society of Britain, Professor Richard Portes, published a report on the state of Iceland’s financial sector.

His November 2007 report was uncontroversial with Britain’s and Iceland’s regulators, economists, bankers and investors. It assumed that the Anglo-American liberalisation model to which Iceland’s government had succumbed was a fixed, sound and immutable system – for Iceland and the rest of the world. It commended the “successful and resilient” banks of Iceland. That small country’s financial system, enthused Portes, was based on “an exceptionally healthy institutional framework. The banks have been highly entrepreneurial without taking unsupportable risks. Good supervision and regulation have contributed to that, using EU legislation.”

Portes went further, complaining that “market suspicion” had caused the mini-crisis of early 2006, and that Icelandic banks “had lower ratings than their Nordic peers”. He saw “no justification for this in their risk exposure.” We now know that Portes was profoundly misguided, and that his report was misleading. Iceland’s banks were dangerously over-leveraged, and dismissive of exchange rate risks. Supervision and regulation by the British government and the European Union was far from good. It was lax, irresponsibly so, and created victims of those investors that had, in good faith, trusted the judgment of orthodox economists and the supervision of regulators.

Given this co-responsibility for the crisis, Britain, the EU and other governments should not resort to force majeure to put Iceland in a “debtors’ prison”, to quote the Financial Times.

Britain is a country of 60 million people. If we took full responsibility for the losses incurred by private investors in Icesave, it would cost every UK citizen about £36 in total. If the burden for these nationalised losses is to be carried wholly and exclusively by every Icelandic citizen – man, woman and child – the cost would be a prohibitive £6,800 each, impacting harshly on their lives and public services.

Acceptance of co-responsibility would help rebalance this inequitable division of losses. The postponement by the Icelandic president of the debt repayment legislation, pending a national referendum, gives the British Treasury the chance to withdraw its punitive approach and reach a fair outcome to the crisis.”