You pays your money, you takes your chances
So the Icelandic President vetoed the parliamentary bill which would have approved a repayment scheme to the British and Dutch governments. The issue will now become a referendum, wherein the people of Iceland will vote for the repayment scheme or vote against it. Either way, a subsequent repayment plan, even if this one is voted down, will probably not receive a Presidential veto, after the current furore.
Allow me to go against the grain of the anger expressed that “we’re” being ripped off by Icelanders. I think they should vote no to this repayment plan. Actually I think there’s an argument that they should refuse to pay at all, bearing in mind that these are schemes in which investors freely chose to invest their money (despite, in the later years, the schemes receiving mixed reviews as regards long term viability) and which collapsed through no fault of the Icelandic taxpayer, at whose door the burden of repayment is to be laid.
The link to our own situation should be clear. We, the average people, who haven’t enough disposable income to consider pissing it away in investments we don’t understand, are being asked to pay more money to our government, to cover the money they’ve used to bail out the banks (and, on a populist note, sustain the bonuses of various bankers). While bailing out the banks, like Icelandic repayment, was and is a necessary move, I don’t see that it should be me or the average Icelander paying for it.
Similarly, while repayment of certain investors in the Icelandic funds is necessary, particularly the bumfuzzled local authorities who spent their constituent’s taxes, there’s no reason why it should fall on many of the Icelanders being asked to pay for it. This money was invested and lost far above the heads of the man in the street, literally and metaphorically. On what level is it right to ask him to pay it back?
One might argue that the taxes accrued by the government from the banks, and then spent on Icelandic infrastructure, education and welfare might be repaid by taxpayers. But that’s an entirely different amount to the $35bn investors lost, and the $5bn the repayment deal concerns. This is not the deal put forward by the vetoed law, and now in the referendum, under which the government would oblige itself to repay the investments plus 5.5% interest.
If we don’t expect to downgrade our own living standards and public services in response to the banking crisis, and Left or Right, this seems to be the message underpinning British general election campaigns, then why should we expect Icelanders to willingly relinquish theirs?
Ultimately this is a battle between capitalism and democracy. The rules of the economic system dictate that Iceland should conform to the expectations of foreign investors (and particularly their representatives in foreign governments), otherwise they’ll be frozen out of the EFTA and the loans of the IMF will be suspended, potentially halting Iceland’s economic recovery.
On the other hand, the people of Iceland are angry that the ‘bubble’ – which was not the creation of the Icelandic people, nor arguably its government or companies on the basis that, under capitalism, everyone tries to market themselves for all they are worth – has led to such devastating consequences as a debt of £116,000 per person in Iceland.
Whether it is New York in the 1970s or Liverpool in the 1980s or any number of other instances where this conflict has emerged, our position should be to support democracy, regardless of the financial consequences. We should do this in the knowledge that if we breach the dam of received economic opinion enough times, through the rude participation of the Commons in politics, then that orthodoxy will be forced to change. Credit rating downgrades will cease to have meaning if they become globally ubiquitous.
Fighting for the link up of these democratic movements, and orienting them towards the real problem of an unaccountable financial and political elite, is a goal of socialist internationalism.
Read EEA law, realise why repayment is necessary.
Lee, that’s a quite spectacular missing of the point. Well done.
Dave, v good indeed. Crystallised in one para what it’d have taken me about 4,000 to (and I may well still take when I write something on how an ‘endgame’ process might be played out as conflict between ‘sovereign debt’ and the will/power of the commons.
Giles at Free Thinking Economist is having similar thoughts. He will as likely as not take a different view based on assumptions about the value of liberal democracy/property rights than than what the likes of you conceive as democracy, and tie it to an understanding of morality that you don’t hold to. Nevertheless, it’s interesting to see an intelligent person writing from a liberal perspective juggling the same variables as you do here.
I’ll simply copy this comment over to his post and see what turns up. If you win the debate, he will be required to change the name of his blog to Free-but-only-until-recently-within-a-liberal-paradigm-of-capital-dominance Thinking Economist. That’s only fair.
The variables are simple. Iceland is part of the EEA, they knew they would have to keep enough money to ensure that they could guarantee 20k EUR of personal accounts. They failed to do this in the first instance.
Iceland attempted to break the law straight away with lack of assurance for giving the money it owed…money that is harvested through the businesses that run in it’s own country.
After a clear message of what that would mean in the eyes of the international community they changed their mind and needed $5bn to bail them out.
They need to pay that money back, and what is being asked for is a deal where it is paid back with 5.5% interest, the first 7 years interest only, from 2017 a full 8 years after the initial loan and plenty of time to economically stabilise. The repayments are also capped at 6% of Icelandic GDP for a level of fairness.
You can crow until the cows go home that it is somehow moral for this country to steal about £2.2bn of UK money, and democratic for them to be the ones that decide on whether it is UK tax payers or themselves that fall out of pocket.
But of course, for all this talk of “investors” knowing the risks, the government of Iceland should have too. They knew they had to guarantee 20k Eur yet they didn’t keep the funds or agreements to do so. From day one of Icesave opening it’s doors Iceland knew, and it’s people are a part of that, that if their bank went down they’d have to play a part in things.
But clearly this isn’t about logic or reason, it’s about another chance for some left wingers to take some jabs at right wingers, right?
Yes Lee, both Dave and I have read what the situation is. My point is simply that in your talk of ‘Iceland’ ‘they’ and ‘the government’ you conflate the stuff that Dave has written his post in order to unpick. That’s how you miss the point. This isn’t about jabs at right wingers, it’s about a critique of the basic tenets of capitalism and its conflation of sovereignty and the will of the people.
You may not agree, that’s fine. You’re on the other side and we can politely agree to diagree via blog, but to do that you need actually to acknowledge what the argument is about.
Except the variables are not contained or explained within the terms you put forward, Lee.
“Iceland” is not one person. You may blame the Icelandic government for not being able to guarantee the requisite amount for personal accounts, but a) that’s a different government and b) it’s not the same thing as the individual people of Iceland. So when you say Iceland, which Icelanders, as it is people who will have to work to repay the money, are you referring to?
I’m differentiating between your average Icelander, and the people responsible. If you think that this is taking a jab at right-wingers, well that’s true enough, but that’s not mutually exclusive from logic or reason. It’s perfectly logical, as if we consistently work within a right-wing narrative, e.g. of conflating a nation-state with all its people, then we end up with right-wing policies such as end up hurting our own people.
My hands are freezing. That is my excuse for this weak reply:
There are several parties in the chain of obligations. Dumb/Opportunistic UK saver lends his money to Icesave. IceSave buys asset (UK) too high. Iceland in general enjoys fine 6 years acting like it’s Mayfair. Then asset falls; IceSave bust; UK government wants entire financial system not b*ggered, so bails out. Is left with minus #2.2bn. Iceland had promised to obey certain rules to allow period of Mayfair fun.
Who is to be blamed? Top of list: icesave, and executives that creamed off money. But equity gone, bankers all over the world now. Then the savers. At the least they should give back all the interest they ever got, and take a hit. But that would have produced systemic crisis and uncertainty. So they have had a real result. Then the Icelandic people had several years of very high incomes. They should take SOME of the hurt. But, also, they have a brutal trade-off: walk away from agreement, reputation shattered, higher cost of K in future. If they want to play with K they have to weigh up the trade off which in my post I argue may be less, once the assets are sold.
Dave, your comparison with the UK acts like the only beneficiaries of the good times – and the bailouts – were the financial elite. This is not so. Without the monies used to bail out the financial system, all living standards would have endured a disorderly destruction. I happen to argue that the wealthy have benefited the most. As myself an owner of London Property, I can appreciate that my house is worth 20-30% more than it would be had it not been for QE and bailout. More taxes on wealth.
A working economic system is a massive public good, a teat we all suck from. A contribution from all is appropriate. If taxes are 5% higher for 10 years, that means #1k pa for median households, and #5k per household for rich ones. It does not sound mad.
Iceland: different. They ain’t going to be a hedge fund again.
Fingers. Dropping. Off.
Hey Giles, I specifically didn’t talk about the bankers being the only people to benefit. In fact I explicitly mention that the people of Iceland have likely benefitted. Like you, I recognize that bankers simply benefitted the most. But cui bono is not the overriding consideration here; the bankers were also the people with their hands on the decision making levers. The people of Iceland decidedly were not.
Now my hands are warmed up:
‘While bailing out the banks, like Icelandic repayment, was and is a necessary move, I don’t see that it should be me or the average Icelander paying for it.’
Who should bail out the banks? By definition, it is the non-banks. If not the taxpayer, who did you have in mind?
‘If we don’t expect to downgrade our own living standards and public services in response to the banking crisis, and Left or Right, this seems to be the message underpinning British general election campaigns’
Come on. We all know this is a falsehood. Why choose the economic maths predicated on the halftruths of the election campaign as your starting point? We are going to have to downgrade those things: we do not have the collective money, however divvied up, the support the same level of spending as before. the Icelanders are relinquishing theirs, whether expected to by British Bloggers or not: this is just an argument about the form in which their lives may be disrupted. Higher taxes from 2016 onwards; frozen out of credit markets; a sulk and emigration; etc. Iceland, economically, is like a moon colony. It buys most things from abroad. There is no earthly way by some effort of will or defiance that they can keep 2006 living standards, no matter how many new economic paradigms are asserted in the common rooms of the Left.
‘Whether it is New York in the 1970s or Liverpool in the 1980s or any number of other instances where this conflict has emerged, our position should be to support democracy, regardless of the financial consequences.’
Bear in mind that many of the creditors are also voters. Suppose we were talking about, say, #300bn of the UK national debt. Some bright spark asserts that since Democracy Rules, and is such a fine thing, we should default on that debt. Hail, bright new morning of a new economic orthodoxy, boldly asserted! Or rather, not; there is nothing new in the world about people deciding to borrow money and then not repay it when things get tough. Read up on Philip II and Edward III – it is an old fashion. There would not be a gladsome rush towards a new credit ratings free world of nefish economics. Instead, widespread turmoil, vanishing finance, bankruptcy, broken enterprises, cratering living standards.
I suspect that enough of democracy would understand this enough to vote against it, in the case of Britain. A different calculus for Iceland, admittedly, which is why my post is equivocal in their case.
I dare say that the reason there’s so much interest in Iceland is not the actual loan, or indeed who benefited most from Iceland’s former economic model, but in the fact that we have a president witb enough balls/temerity (accroding to political taste) effectively to announce the possibility a sovereign debt default and pass the decision back to the people of Iceland. The question is whether that might/can/should become a precedent for Greece and others including, by overspill regional/local governments. A dangerous/welcome precedent, it could be, even more so than let’s say the Argentina default which was born of desperation rather than political statement and referral back to the people of that political statement (I appreciate that’s only one interpretation of the presidential move).