Iceland and the Demonic Nature of Money

Dr Bruno Bandulet

How one of the world’s richest countries collapsed over night – and what we can learn from it.

When I was flying to Iceland in summer 2006 in order to visit the economic miracle near the Arctic Circle and to talk to people of the Issue Bank and of Kaupthing, the biggest private bank, it was utterly unimaginable that this high developed national economy would collapse within a few days in October 2008. Measured against its per capita income Iceland was then richer than the US, Germany and Great Britain. They had an exemplary pension system with capital cover, the state debts amounted to only 27% of GDP, the government’s budget showed a surplus, the creditworthiness of state securities was AAA [triple A, highest creditworthiness], and the low taxes an example for the whole of Europe.

Iceland – laboratory and writing on the wall

Although in 2006 some risks and dark sides were looming due to the private sector’s foreign debts and an enormous current account deficit (compare Gold&Money Intelligence, August/September 2006), aggravating factors were necessary that the financial- and economic system was going to collapse in the following two years. In 2008 the small island turned into a laboratory and the writing on the wall for the entire western system, which was based on artificial money without coverage. The question arose whether other nations would experience anything similar in future. However, the three big Icelandic banks had not been involved in the dot.com bubble, which burst in 2000, nor had they invested in real estate junk bonds and securitizations which were responsible for the crash in Europe and America in 2008. On a list compiled by management consultants Arthur D. Little in 2006, about the most efficient European banks, Kaupthing was number 2. And in November 2007 the UBS wrote about the same money houses that was going to collapse in 2008 “The banks are well managed and produce a successful balance as clever investors.”

As always in such cases, the catastrophe was caused by a combination of personal and third-party negligence. Kaupthing and the others had bought so many interests and shares in companies in Scandinavia and Great Britain (of course on the nod) that just before the collapse their assets had climbed to 200 billion dollar, i.e. eleven fold the Icelandic GDP. The relation was similar to the one in Switzerland – but with two significant differences: first of all, two thirds of the debts accumulated by the Icelandic private sector (not by the government) were foreign currencies; and second, when it became tough, there was no “lender of last resort”, i.e. a central bank. In 2008 the central bank (the Sedlabanki) did not have the necessary foreign exchange reserves. They could not print dollars or euro, only Icelandic kronas, which were of course inacceptable for paying back any foreign debts. Therefore the first lesson is: when a nation affords a high current account deficit and thereby runs into massive foreign debts (which is applicable to the US as we all know), they should have sufficient internationally acceptable currencies, which they can produce themselves if necessary. Therefore the game will end for the USA only when other countries are no longer willing to accumulate dollars.

This explains sufficiently why Iceland was so vulnerable. But they did not plunge into ruin by themselves, they had to be pushed. Anglo-Saxon hedge funds and the government of Gordon Brown, the perfidious Albion, saw to that. How the drama was staged is subject of a book by Ásgeir Jónsson, chief economist of the meanwhile nationalised Kaupthing bank. The book is well written, well translated and reads like a thriller. The author manages to present complicated matters in a comprehensible way.

Interestingly enough, they succeeded only at the second try. The hedge funds started their first attack in winter 2005/2006, when the Icelandic krona had become the darling of carry traders, while the central bank was standing on the sidelines looking on while money creation was speeding up and when economy and stock market were already precariously overheated. Jónsson vividly explains in his book how the hedge funds were hunting in a pack, how the attack was worked out by an informal club of 50 similar funds (minimum member fee 50 000 dollar), how the krona and bank shares were short sold, and at the same time the fall was being heated up by using credit default swaps. A “triple play”, in which one effect is reinforced by the other two. This worked for a few months until the Icelandic government started a counter-attack, in one case they lodged an official complaint, until the US house Morgan Stanley recommended their customers to buy Icelandic bank shares again because the country “could not be driven into a collapse.” At the end of May everything was over – at least for the time being.

As it turned out in 2008, the so-called “Geyser-crisis” of 2006 had been just foreplay and a last warning. If the banks, according to Jónsson, had drawn their consequences, they would have been able to sell their foreign equity investments with “enormous profit”. However, the tragic end became obvious on 31 January 2008, when a dubious group of hedge fund managers followed an invitation by the US banks Merrill Lynch and Bear Stearns and met at Hotel 101 in Reykjavik. Their conversation became increasingly sneering, Jónsson remembers, when the managers boasted with their short sellings, and then went on to the bar where the wine flowed freely until the first of them keeled over. Their tactics were the same as in 2006, but the irony of it was that some of the involved American banks fell even before the Icelandic.

After the crash of Lehmann Brothers in September 2008 and the collapse of the inter-bank-market, the Icelandic institutions could not hold on any longer. On 6 October the government announced an emergency law, on 7 October Glinir and Landsbanki, and on 9 October Kaupthing were nationalised. In the first days in October there was a bank-run which was reminiscent of the 30s. People were queuing in front of the banks in Reyjkjavic, who emptied their accounts until only a few 5000 krona bills (the biggest bills) were left. The government had new money printed abroad, but in the eastern part of the island there were small riots among Polish migrant workers, grocery shops were crowded with customers stockpiling supplies, and some who did not trust their bank notes any more, bought luxuries such as Bordeaux wine, cognac or Rolex watches. It was a panic which almost broke out in Europe as well and the US, a reminder that acceptance of uncovered paper currency is solely a matter of trust.

Abroad: Denied Support and Disgraceful Consequences

The Federal Reserve, the Bank of England and the European Central Bank left the Icelanders out in the rain. Moreover, the British financial services authority confiscated their deposit business with Kaupthing, and drove its subsidiary Singer&Friedländer into bankruptcy, although in September it had almost rolled in money. Other Icelandic assets were frozen by the Brown government on the basis of the anti-terror-law from 2001, and also on 8 October prime minister Gordon Brown had the Icelandic central bank and the Icelandic Treasury put on the same terror list with al-Qaida and the Taliban. Since then London’s reputation as a bastion of legal security has been severely tarnished. In addition, Gordon Brown declared Iceland “insolvent”, which is as incorrect today, as it was then. The government in Reykjavik is clearing their debts like they did before, but the latter have soared in the course of this crisis and, from a present-day perspective, will reach a peak of 140% of the GDP by 2010. Approximately, half account for Icelandic krona, the other half are foreign currencies. At the behest of London and exerting brutal pressure, the EU is trying to make the Icelandic government, and thus their tax-payers, liable for their debts, to an extent no other sovereign state would accept. Comparisons with the Versailles dictation and its financial consequences are not far fetched. Apparently, they want to use the Icelanders as a warning – a whole generation would be financially enslaved. Meanwhile the pressure on the krona has subsided due to capital controls. On the peak of the catastrophe it had fallen to 300 Euro; lately the onshore exchange rate (in Iceland) was at 184 and offshore (in London) about 220. While their economy is still shrinking, the balance of trade in Iceland is in the plus again, so that they will have good prospects to get back on their feet in the near future – provided the EU and the IMF deign to fair conditions with regard to debt repayment. Why should the Icelanders pay for the foreign indebtedness of Landsbanki/IceSave, which amount to 60% of the annual economic performance? The British demands are disgraceful and immoral.

But even at best it will take a few years to stabilise the economy and the financial system. The real income and therefore standard of life have taken a tumble, and unemployment has reached the German level. Those who possessed financial assets suffered most. The share market lost 95%, there are now hardly any Icelandic titles traded on the stock market. But also the real, i.e. inflation-adjusted house prices fell by 20% in 2009. According to a prognosis by the central bank they will lose another 25% in 2010.

In case an Icelandic retail investor held corporate bonds, he lost practically everything in the collapse. Whoever had parked money in a bank did not have a nominal loss, but would have suffered a loss of purchasing power due to a temporarily very high inflation, which is meanwhile regressing. Safest investments would have been inflation-indexed bonds, so-called HFF bonds. Also pension funds survived the crises relatively undamaged, because half of their capital is invested in inflation-indexed krona bonds (and only a small amount in foreign shares). Far and away the best investment would have been gold. However, before the crisis nobody in Iceland thought of buying coins and bars – and now gold is not available on the island, due to capital controls, although possession has not been forbidden. If you do not expect the worst for Western Europe in the coming years, you should study the case of Iceland. A number of useful lessons can be drawn from that example.

And the hedge funds? After satisfying their greed with their short sellings of krona and bank shares, they changed their position on the peak of the crisis, bought bank bonds very cheaply and managed to increase their stakes six fold. As soon as the insolvent banks are wound up, they will be owned by foreign creditors, i.e. bond owners. One always wins. The Icelanders are closing ranks, they prefer buying home products to foreign ones, they are reading more books than ever before, and are responding to the collapse with a surprising baby boom. This is the reaction of a people that has some faith in its future, despite of everything.”
___________________________________________________________________________________

Source: Gold & Money Intelligence. Bandulet Verlag GmbH, Kurhausstrasse 12, D-97688 Bad Kissingen. (phone: +49-(0)-971-682 57, fax: +49-(0)971-690 56) www.bandulet.de
Via: http://www.currentconcerns.ch/index.php?id=965
Illustration: http://www.hearye.org/media/2008/graph-iceland.jpg

This article may also be of interest:
A Call to the People of the World to Support Iceland Against the Financial Blackmail of the British and Dutch Governments and the IMF

Appendix I
DECLARATION
by the President of Iceland, Ólafur Ragnar Grímsson

The collapse of our banks and the difficulties following in the wake of the world economic crisis have created profound difficulties. Although the Icelandic state has undertaken various liabilities of a magnitude greater than those involved in the Icesave case, the debate on this case has become the focus regarding how we deal with the challenge of the past and also of the future.

The Althingi has now again passed legislation on this matter. This amends the current law, the Act No. 96/2009, which the Althingi passed on 28 August and which was based on agreements with the Governments of the United Kingdom and the Netherlands. The President approved that Act on 2 September, with a reference to a special statement.

Following the passing by the Althingi of the new Act on 30 December, the President has received a petition, signed by about a quarter of the electorate, calling for the Act to be subjected to a referendum. This is a far larger proportion of the electorate than the criterion that has been referred to in declarations and proposals from the political parties.

Public opinion polls indicate that the overwhelming majority of the nation is of the same opinion. In addition, declarations made in the Althingi and appeals that the President has received from individual Members of Parliament indicate that the majority of the Members are in favour of holding such a referendum.

Since the new Act was passed by the Althingi, the President has had extensive discussions with Ministers in the Government of Iceland: the Prime Minister, the Minister of Finance, the Minister for Foreign Affairs and the Minister of Economic Affairs.

It is the cornerstone of the constitutional structure of the Republic of Iceland that the people are the supreme judge of the validity of the law.

Under the Constitution, which was passed on the foundation of the Republic in 1944, and which over 90% of the nation approved in a referendum, the power which formerly rested with the Althingi and the King was transferred to the people. It is then the responsibility of the President of the Republic to ensure that the nation can exercise this right.

At this crucial juncture it is also important to emphasise that the recovery of the Icelandic economy is a matter of vital urgency. Clearly, agreement with other nations and good cooperation with international organizations and all other parties that have an influence on the country’s economy and financial standing are preconditions for this recovery. The solution of the Icesave dispute is a part of such a harmonious process. It is also a prerequisite for the nation to be able to regain its former strength as soon as possible and embark, in collaboration with others, on a programme of recovery which will secure the welfare and prosperity of all people in Iceland. In the President’s declaration of 2 September 2009, it was stated that the solution would have to “take account of the fair rights of the nation, Iceland’s interests in the years ahead and a shared international responsibility.”

It has steadily become more apparent that the people must be convinced that they themselves determine the future course. The involvement of the whole nation in the final decision is therefore the prerequisite for a successful solution, reconciliation and recovery.
In the light of all the aforesaid, I have decided, according to Article 26 of the Constitution, to refer this new Act to the people. As stated in the Constitution, the new Act will nevertheless become law and the referendum will take place “as soon as possible.”

If the Act is approved in the referendum then naturally it will remain in force. If the referendum goes the other way, then the Act No. 96/2009, which the Althingi passed on 28 August, on the basis of the agreement with the Governments of the United Kingdom and the Netherlands, will continue to be law, recognizing that the people of Iceland acknowledge their obligations. That Act was passed by the Althingi with the involvement of four of the parliamentary parties, as stated in the President’s declaration of 2 September.

Now the people have the power and the responsibility in their hands.
It is my sincere hope that this decision will lead to permanent reconciliation and prosperity for the people of Iceland, at the same time laying the foundations for good relations with all other nations.

Bessastaðir, 5 January 2010
Ólafur Ragnar Grímsson

•••••

Appendix II
History Is Important to the Icelanders

“The dominant culture in the new country would become distinctively Nordic though the Celtic element in the population would be manifested in an odd tendency toward literacy and storytelling. Icelanders became bards of the Viking world and witnesses to history. […]
The same instincts that had made the chiefs flee Norway contributed to the foundation of a parliament in 930 – the Althing. […]

The Icelandic republic was simple and effective. The country was divided into 39 constituencies (Godord), each of which elected a single representative (Godi) to the national assembly. This political system, much like Jeffersonian democracy in the united States, was built from a yeoman class of free, independent farmers who could switch their allegiance to a different Godi whenever they chose (women could act as Godis as well as men, provided they had a man who spoke for them in the Althing). The motto of the commonwealth was “with the laws we shall build our country,” words that are inscribed on the badges of Icelandic policemen in the present day. […]

To Icelanders, the ancient founders of their nation are gone but never forgotten. Most of them are known by name, and all living Icelanders can trace their bloodline to them through genealogical records and a family tree that is rooted in the days of the original settlement. […]

Iceland has never excelled at collective, elaborate planning, discipline, or attention to detail. It has never needed a strong central command to organize for war or national defence, and because of its diminutiveness, it has never required the construction of a sophisticated bureaucracy. In the Icelandic mind, success is the reward for personal daring, ingenuity, improvisation, and an eye for the main chance – just as it was in the Viking times.”

Source: Ásgeir Jónsson: Why Iceland? How One of the World‘s Smallest Countries Became the Meltdown‘s Biggest Casualty. MacGraw-Hill 2009, ISBN-13: 978-0-07-163284-3

•••••

Appendix III
Article 26 of Iceland’s Constitution

If Althingi has passed a bill, it shall be submitted to the President of the Republic for confirmation not later than two weeks after it has been passed. Such confirmation gives it the force of law. If the President rejects a bill, it shall nevertheless become valid but shall, as soon as circumstances permit, be submitted to a vote by secret ballot of all those eligible to vote, for approval or rejection. The law shall become void if rejected, but otherwise retains its force.
Source: www.government.is/constitution/
The Petition

„I call on the President of Iceland, Mr. Ólaf Ragnar Grímsson, to veto the Icesave legislative bill. I consider it to be a reasonable demand that the economic burden placed on the current and future generations of Icelanders, in the form of a State guarantee for Icesave payments to the UK and Dutch governments, be subject to a national referendum. “

The online petition was started on 25 November 2009 at the InDefence website (www.indefence.is). The resulting number of bona fide signatories was 56,089, with 55,160 signatures from Icelanders of voting age, or in other words 23,3% of all voters in Iceland.
Source: www.indefence.is

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