Lessons from Iceland

While Iceland may seem far removed from Asia, the economic crisis it is facing offers lessons to all nations on what they should avoid so as not to end up in the same boat. At the end of last year, Iceland negotiated a $2.1 billion bailout from the International Monetary Fund and nationalised three of its largest banks -- Kaupthing Bank, Landsbanki and Glitner Bank -- which had begun defaulting on $62 billion of foreign debt. As a result of the banks' collapse, foreign investors fled Iceland, prompting the value of its currency, the krona, to drop 50% in one week in January alone. That means Iceland is enduring a pain eerily familiar to many politicians in Asia who remember the Asian financial crisis. We asked Steingrímur Sigfússon of the Left-Green Movement, who on February 1 became the nation's minister of finance, about his plans to repair his nation's economy. 

What are you doing right now to fix the problems in Iceland?
We are reorganising the banking sector. We are going to create a specialised asset management company to deal with some of the problems of the large businesses. We are re-establishing new banks. They are functioning but don't have a balance sheet yet. This is a process we are trying to speed up and we hope by the end of March or early April they will be operating in full swing and have a proper balance sheet and be fully recapitalised. 

We are also dealing at the same time with savings banks and the smaller financial institutions. Most of them are still functioning and didn't go down, but it's equally important to make sure that they can continue to survive. Of course, there are a lot of other issues with regard to the situation in general that we must handle. We are trying to create jobs and avoid rising unemployment and household debt. One very central issue is to create a situation where we can start lowering interest rates, which are extremely high. There are explanations for that, but we feel we are in such a situation with rising unemployment and falling GDP that we should see quite rapid lowering of interest rates in the coming month and that will be very helpful for the Icelandic economy.

Three of the major Icelandic failed banks had significant operations in Asia. Landsbanki had offices in Hong Kong and Singapore, Glitnir Bank had an office in Shanghai and Kaupthing was quite active in the Samurai bond market. Do you have plans to rebuild your business in Asia or is the focus right now 100% only on Iceland?
I think it would be unrealistic to suggest or really believe that the Icelandic banks will become internationally active in the next few years. Of course we need to do business with others and we have to reestablish the contacts we have, but I don't think Icelandic banks as such are going to be very active in international banking business. The fate of the old banks are still unclear, whether they could be recapitalised or if foreign shareholders could come in, it's too early to say what will happen. But what we are doing now is first and foremost making sure that we have a sound, operational, internal banking system in Iceland that is able to service our industries and export companies and have contacts with the foreign bank community. So we have no plans for expansion overseas as yet.

If you could turn back the clock a year, and do things over again, what would you change? Or put another way, what would you have done differently and what would you advise other nations not to do?
I would do a lot of things differently. For instance, I would not have privatised the banks the way it was done. Two big state banks were privatised totally at the same time and the majority shareholding went to a single owner, instead of a spread ownership. Then they were allowed to grow out of all proportions in context to the Icelandic economy. So the situation became really worrying, fast, without anyone doing anything. So a much more careful approach was needed. And a lot of bad decisions were taken in terms of economic management. We lost control of inflation. The trade deficit became sky high and all these alarming signs were not enough to wake up the past government.

So you need an operational government that stays awake and is not asleep. And you always should take very seriously alarming signs, such as a trade deficit and rising inflation. This simply wasn't done. And so the people in government and the key institutions in the financial system were simply not doing their job. And that's always going to end terribly as we can see. 

Of course, one also has to keep in mind that for us, what came after these mistakes was the international financial crisis and that was a big cause in how badly things went for Iceland. But the system was weak already and a lot of mistakes had been made. And so, as I put it, the main responsibility for what happened in Iceland lies with us. But of course the global financial crisis is a factor. And we also cannot forget the actions taken by the UK government on October 8, they were extremely harmful to Iceland and really outrageous - using anti-terrorist law to freeze Icelandic assets and other actions which brought down the biggest bank, the biggest company in Iceland, Kaupthing. This was very, very harsh and unfriendly. And we of course wonder: Would they have done the same if we were Germany? I don't think so. You didn't see them turn to the anti-terrorist law when Lehman Brothers went down even though that caused a lot of losses in the UK. So we have the feeling that we were really badly treated. All the same, as I say, the main responsibility lies with us and we should be honest enough to admit it.

When you look around the globe do you see other countries that might be in the same situation?
Yes, unfortunately things are not getting any better and a few European countries such as Latvia and Hungary have been forced to apply for help from the IMF just like we have done. And the problems are really accumulating and are quite huge - even in the UK, they are having a really tough time. And of course that doesn't help anyone. 

The difficulty is that the problems that individual countries are dealing with at home are harder to sort out because of the deteriorating global economic situation. A lot depends on how the US is going to get out of their problems, and how successful Obama and his government are, because of the global importance of the US, but it looks to me as though it's going to be a very gloomy situation for a year or a few more.

When you talk to people about withstanding the current pain you're enduring, do you point to Asia and say: it ended up stronger for having lived through the Asian financial crisis?
Absolutely.