In contrast to our Government's mantra that banks cannot fail, Iceland's population is poised to vote against a deal to repay Icesave's debts, writes ELAINE BYRNE
I LIKE to describe the manner in which I play Gaelic football as that of being a determined footballer. Unfortunately referees do not always agree with this well-intentioned interpretation and from time to time my team have had to do without my presence on the field of play.
This reached a crescendo some years back when my team’s narrow lead in an important game was subsequently translated into a narrow loss.
A consequence of my behaviour was that my team were knocked out of the championship. The dressing room was not that interested in the nuances of the justifications offered and, ever so gently, suggested that I amend my definition of determination.
My style of play was one that took great physical risks with the rules, more than was probably necessary. This was perhaps because of a particular ability, proficiently learned on the playing fields of rural Wicklow, and widely known in footballing terms as “getting away with it”.
The financial world describes this as moral hazard. If someone is protected from the consequences of risk-taking, they inevitably take more risks. This is why the Icelandic referendum next Saturday on bailing out the Icesave bank is so interesting. The concept of moral hazard is being recalibrated.
When the Icelandic banking system collapsed in October 2008, the Icelandic government agreed to reimburse Britain and the Netherlands €3.8 billion for the deposits defaulted by Icesave.
The Icesave deal and the recapitalisation of Landsbanki and the other Icelandic banks have placed a severe economic burden on future generations of Icelandic citizens. The government estimate that the country’s overall external debt level will reach an incredible 320 per cent of GDP by the end of the year.
The Icelandic president, Olafur Ragnar Grimsson, refused to sign the Icesave deal into legislation and has instead put the issue of bailing out Icesave to referendum. Grimsson said that an internet petition against Icesave, organised by Icelandic civic society and signed by 25 per cent of the electorate, was a motivating factor for his decision. Grimsson believes that because of the long-lasting consequences for every citizen there must be national consensus on the Icesave issue.
Barring the success of continuing last-minute talks between Iceland, Britain and the Netherlands, it is expected that Saturday’s referendum will overwhelmingly reject proposals to repay Icesave’s debts through a state guarantee. Iceland’s tiny population of 317,000 is understandably angry that they have to pay the price for the irresponsible behaviour of reckless bankers. They believe that it is unfair that Iceland’s long-term economic recovery is impeded by the failures of a private commercial bank which operated overseas.
In last week's Financial Times, columnist John Kay robustly described the UK as a bully which "should be ashamed" of itself. The sentiment of Kay's comments was reflected in yesterday's strongly worded Financial Timeseditorial, which argued that "focus on Iceland's responsibility deflects attention from the fact that European cross-border banking rules are powerless to deal with any large-scale bank collapse. The priority is to fix the system so that we can let banks fail without having to bail them out again".
And there we have it.
The venerable Financial Timeshas said that banks should be allowed to fail. And where did this conclusion suddenly arise from? Because, according to that same Financial Timeseditorial, "the wrath of the Icelandic public raises the prospect of citizens elsewhere refusing to pay for public debts seen as someone else's fault".
The rejection by citizens that they must take financial responsibility for the failures of banks and bankers is, Kay believes, a “game-changing event”.
Will citizens of other countries similarly follow suit? Instead of grumbling about the prospect of bailing out the banks, Icelandic civic society got organised. Like Howard Beale, that fictional character from the 1976 movie Network, they got angry and decided that they were not going to take this any more.
Henry Paulson, secretary of the US treasury from 2006 to 2009, also argued along these lines in a recent New York Times opinion piece. In order to address “the moral hazard issue” he argued, “the government needs broad-based authority to liquidate any failing financial institution . . . We must send a clear signal to market participants that whenever this process is put in motion, the outcome is liquidation; we cannot leave any hope that we would inject taxpayer dollars to preserve the failing firm in its present form.”
No such clear signal has reached the Department of Finance. When Anglo Irish Bank was nationalised in January 2009, Brian Lenihan was resolute: “You cannot let your banks fail.” Yet, Anglo will report losses of up to €12 billion in the coming weeks and despite a €4 billion injection, a further €6 billion is now anticipated.
Indeed, Prof Morgan Kelly of UCD has suggested that the taxpayer is likely to lose well over €25 billion on Anglo alone.
Should Ireland follow the Iceland example and refuse to bail out Anglo? What are the consequences when the voices of civic society become louder in a country’s economic affairs?
No football training this week. Flights booked for the referendum count in Reykjavik.