Just months after an epic banking collapse forced Iceland into the arms of the IMF, the island nation is locked in a fierce debate over how to pay off its creditors without ceding too much of its independence.
The balance Iceland strikes between bowing to the policy demands of the global financial community and satisfying the desires of its increasingly resentful population of 300,000 will be closely watched as IMF programs in beaten-down economies from Latvia and Ukraine to Hungary and Romania enter a crucial phase.
“When you impose austerity, it becomes very painful and comes at a cost,” said Simon Johnson, a former IMF economist who now teaches at the Massachusetts Institute of Technology. But many Icelanders are blaming the IMF and in this case, he says, that is not warranted.
“Iceland is a rich country that behaved recklessly and helped destabilize the world financial system,” Johnson said. “They will have to take their medicine.”
While those in Iceland’s left-leaning government will not put it so bluntly, that is broadly the case they are making.
The first country to throw its government out of office as a result of the global financial crisis, Icelanders could see the government that replaced it topple too, leaving the country rudderless — unless it wins approval for a deal to repay Britain and the Netherlands the US$5.7 billion loan it used to compensate foreign depositors for losses in Icelandic banks.
A vote on the measure in the country’s parliament is scheduled for next week. But even Iceland’s own government is riven.
“This is an attack on our sovereignty,” said Icelandic Health Minister Ogmundur Jonasson. “It reminds me of old colonial times. [British Prime Minister] Gordon Brown had no harsh words for the United States when Lehman Brothers went down and billions of pounds went to the US. That was friendship — this is ‘Take the little guy and nail him to the wall.’”
To not pass the bill, the government says [most of it anyway], would lead to the IMF and other outside lenders withdrawing funds, further jeopardizing the country’s fragile condition.
But detractors say passing it would increase Iceland’s debt burden to 200 percent of GDP, making it one of the most leveraged nations in the world. Ultimately, they say, it could drive Iceland to default.
At the crux of this debate is the Icesave, or “Iceslave,” as it is called in Iceland. Icesave accounts were a top-of-the-market gambit by Landsbanki, the most aggressive of the failed Icelandic banks, to raise cash by extending its branch network from tiny Reykjavik to the high streets of London. The reaction to the agreement to make good on the accounts encapsulates all the swelling anger that Icelanders now bear toward bankers, foreign creditors and IMF technocrats — not necessarily in that order.
Lilja Mosesdottir is an economist and a back-bench member of parliament in the governing Left Green party. But if she were to vote now, she says, she would vote against the government bill. Mosesdottir, new to politics, swept into power this winter when the conservative party was overturned by the “pots and pans revolution.”
“It is like after a war and you are the loser,” she said, taking a quick coffee break from back-room negotiations over the deal. “This is an agreement that will lead to a sovereign default, and we don’t want that to happen.”