BOOK OF THE DAY: FRANK BARRYreviews Meltdown Iceland: How the Global Financial Crisis Bankrupted an Entire CountryBy Roger Boyes Bloomsbury; 245pp; £12.99
I WAS in Iceland when the news came through that queues had formed outside Northern Rock.
I was there to speak at a conference that focused on Iceland, Ireland and Liechtenstein as successful smaller European states.
Even more strange was that Iceland’s most internationally renowned economist and an old friend, Thor Gylfason, had not been invited. Why he was persona non grata became clear when I spoke to him later.
The Icelandic presentations focused on international banking successes. Icelandic banks were hoovering up foreign deposits, which amounted to 10 times the country’s national income. And while bank lending also fuelled an Icelandic property bubble, much of it went to Icelandic entrepreneurs who were buying up large stakes in British highstreet chains.
Both banking systems would come crashing down in the wake of the collapse of Lehman Brothers in September 2008.
Short-term capital markets – on which Irish banks had become reliant for funding – dried up, though it soon became apparent that the crisis was one of insolvency rather than just illiquidity; in Colm McCarthy’s phrase, it was the difference between “being bust and just being broke”.
Iceland was in a particularly precarious position. Its foreign- exchange reserves were only a tiny fraction of the foreign- currency short-term liabilities of its banks. With no foreign- currency “lender of last resort”, international depositors could not be repaid. The currency collapsed, the UK used anti-terrorism laws to freeze Icelandic assets, and the country was forced to seek a bailout from the International Monetary Fund (IMF).
The Irish and Icelandic cases differ in two fundamental respects. The European Central Bank has acted as lender of last resort in response to the liquidity crisis, and is bending its own rules in dealing with the National Asset Management Agency response to insolvency. Then there is the question of scale: Icelandic banks’ total liabilities relative to national income were four times the size of Ireland’s.
Meltdown Iceland recounts the boom and bust just one year later. Though its author is a prize- winning European correspondent for the Times, the economic account is somewhat opaque.
Drama is provided, however, by the feuding clans and factions so easily identifiable in a society of just 320,000 people. Reykjavik plays the role of the dreamlike Savannah of Midnight in the Garden of Good and Evil. Iceland is studied as a microcosm of the erosion of regulatory boundaries by personal, political and family ties and backscratching deals.
Former Icelandic prime minister David Oddsson, self-proclaimed “Thatcher of the north”, plays chief villain.
He presided over the bank privatisation that saw establishment insiders amass overnight fortunes, and moved on to become governor of the central bank. Regulatory oversight was half-hearted. Icelandic banks bought up foreign banks with borrowed money.
Warnings as far back as 2001 by Nobel prizewinner Joseph Stiglitz were ignored.
Gylfason, formerly of the IMF, was the most prominent internal critic, drawing parallels with Russian privatisation and with Thailand on the eve of the Asian financial crisis. He was completely sidelined, however, even as the queues formed outside Northern Rock.
Iceland’s rise was more rapid than Ireland’s. The asset-price bubble made the average Icelandic family three times wealthier in 2006 than in 2003. Every single Icelander is now in hock to the tune of €300,000 for the banking losses alone.
Microcosm or cartoon? This is certainly a cautionary tale.
Frank Barry is professor of international business and economic development at Trinity College Dublin