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.”
Whether or not she is right about default, the war analogy is apt. Iceland has lost billions, and others are now dictating the terms of its recovery.
The resentment felt is rooted in a belief that Iceland’s core virtue of flinty self-reliance has been defiled by its bankers and foreign creditors. It is a sentiment that stretches far into the country’s history and culture — from the Nordic sagas to the quest for autonomy of Bjartur of Summerhouses, the impoverished sheep farmer in Halldor Laxness’ Independent People, the country’s best-known modern literary work.
As the rhetoric escalates, Finance Minister, Steingrimur Sigfusson, a lifelong leftist, finds himself in the awkward position of defending the Icesave plan as well as the severe economic restrictions that the country has been forced to endure to qualify for more money from the IMF and other Nordic lenders. Such measures include sharp cuts in health spending and higher gas prices. Higher interest rates have pushed unemployment to about 8 percent, from 1 percent, in little more than a year.
Sigfusson scoffs at any notion of default and argues that the deal to repay creditors was the best that could have been achieved. With a term of 15 years, a low interest rate and a seven-year grace period, the deal is flexible enough to allow Iceland to repay it, he says, especially if the economy recovers and the government is successful in selling Landsbanki’s foreign assets.
“This is the greatest tragedy of all, but it has to be done,” he said, looking gaunt from the hours of parliamentary arm-twisting that now consume his days.
As to the widely held belief that it is the IMF and not the government that is dictating policy, Sigfusson acknowledges that he is in close contact with the IMF’s representative in Iceland.
He points to frequent disagreements, especially over the fund’s recommendation that the government maintain high interest rates as well as capital controls —a prescription he describes as similar to wearing a belt and suspenders at the same time. But he emphasizes that it is Iceland, not the IMF, that has the final word.
“This is a trial not just for us, but the IMF, too,” he said. “They have a lot at stake here as they must show that they are flexible enough to adapt their program to a developed Nordic welfare state.”
Known to many here as “the governor of Iceland,” Franek Rozwadowski, the IMF representative, argues that this designation is inaccurate. As part of its program, Iceland must turn a deficit that is now 13 percent of GDP to a surplus by 2013.
“It would be more accurate to call the relationship a collaboration in which Iceland has engaged the fund to help design its recovery program,” he said.
On Monday, the IMF is expected to discuss whether to disburse a second installment of its US$2.1 billion loan to Iceland (about a quarter has been disbursed so far). Rozwadowski says Iceland is on target with steps to balance its budget, and he hails Sigfusson for political courage.
Such niceties are thin gruel for many Icelanders whose personal debts have skyrocketed in the wake of the precipitous fall in Iceland’s currency, the krona.
Gunnar Sigurdsson, a theater director, says his car loan — which was tied to a basket of Swiss francs and Japanese yen — has doubled since the crisis began; his mortgage payments have jumped more than 35 percent. Personal bankruptcy is inevitable, he says, and he is now trying to make a “Roger and Me”-type documentary — training his camera on Iceland’s top politicians, bankers and, if he is lucky, Dominique Strauss-Kahn, the head of the IMF.
“I have had enough of this stupidity,” he said. “I just want answers.”
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