What can the leader of a democratic country do when one quarter of its population presents a petition opposing repayment of foreign debt and backs it up with a mass protest outside his residence, with red torches firing up the snowy landscape? To stave off revolt and breakdown of order, the head of state has two options: repudiate the debt altogether to restore public faith in the government or buy time by resorting to constitutional technicalities.
Iceland?s President, Olafur Grimsson, faced this dour choice on New Year?s Eve in Reykjavik and picked the latter course because of tremendous parallel pressure from creditors?the UK and the Netherlands?and capital markets. Instead of immediately signing the bill that would have repaid London and Amsterdam $5 billion or renouncing all liability, he announced a national referendum (slated for late February or early March) for a clear national verdict.
The tiny Scandinavian state hopes to convince its citizens to rethink their stance in the interregnum and secure a ?Yes? vote. The country?s finance minister has expressed confidence that public opinion can be moulded fast in the run-up to the referendum, by appealing to the average Icelanders? identity of being ?honest hard-working people? who honour debts.
Until December last year, more than 70% of Icelanders disagreed strongly with the government?s pledge to repay the UK and the Netherlands, but new opinion polls seem to bear out the state?s optimism that the rejection rate is falling and will become a minority view by the time of the referendum.
The two creditor nations, which are furious at the delays and setbacks to repayment, should be hoping for such an outcome because they themselves are cash-strapped and hurting from the aftermath of the financial crisis. Every penny counts dearly in an economically shrunk Europe.
The saga of Iceland?s fall from the glorious perch of the Nordic Tiger into a supplicant that defaults on its debts is emblematic of the ripple effect of the financial collapse of late 2008. One of the first economies to fall into the red immediately after the Lehman Brothers bankruptcy, Iceland had risen since the mid-nineties on a wave of excessive leverage facilitated by state deregulation. All three of its big banks?Glitnir, Kaupthing and Landsbanki?collapsed like dominoes in a single week of mayhem in October 2008.
These banks were the prime drivers of the relentless economic growth and rise in living standards for Icelanders when the going was good. Their core profit-making divisions, like Landsbanki?s Icesave scheme, dangled super-high interest rates and attracted hundreds of thousands of foreign investors, whose money was then re-lent and re-invested in risky ventures across Europe. When the bubble burst and left the Icelandic banks high and dry, the over-financialised economy came down like a house of cards and left the taxpayers to repay all the fleeced foreign investors.
Desperate for a national bailout, Iceland?s government turned to Russia first for a $3.2-billion loan, but ended up signing debt agreements with the IMF and fellow Scandinavian countries Denmark, Finland and Sweden. Since the creditworthiness of Iceland had hit rock bottom and the rating agencies had downgraded it to junk status, the IMF insisted that its own loan is conditional upon Reykjavik repaying Britain and the Netherlands for the Icesave debts.
Iceland?s Centre-Left government is thus caught in a Catch-22 between impatient creditors and enraged citizens who shudder at being yoked to the onerous burden left behind by Icesave, amounting in per capita terms to $15,000. Fresh threats have been issued by the UK after the postponement drama in Reykjavik that Iceland risks isolation from the international community and blacklisting from future multinational, bilateral or national funding channels to finance its recovery from the current prostrate condition.
Failure to repay Britain and the Netherlands is also jeopardising Iceland?s pending application to enter the European Union. Reykjavik cannot afford to bypass this coveted membership, as being inside the EU is likely to help the country avoid complete economic collapse. The only reason similarly blighted economies like Greece, Ireland and Spain are able to stay afloat is because they are within the multilateral, comforting space of the Euro zone.
Since Iceland possesses neither an EU seat nor a wealthy benefactor of last resort like Abu Dhabi (which recently saved Dubai from crushing sovereign debt), external factors compel Reykjavik to eventually repay Britain and Holland for the Icesave debt.
The losers will be Icelandic citizens, who will be overloaded with high taxation and lowered standards of living in the bleak future. Their anger is palpable, but it is worth remembering that these same crestfallen Icelanders rode the Nordic Tiger when the going was great and enjoyed stupendous increases in income and purchasing power for two decades. The same financial practices that gifted Icelanders high per capita incomes and per capita social spending have now condemned them to a steep decline in the quality of life. In many ways, this dilemma parallels that of taxpayers in all the crisis-hit and debt-laden countries that now face evictions from homes, job losses and even starvation.
When many ordinary Americans, for instance, were raking in the moolah during what economist Joseph Stiglitz termed the roaring nineties, none of them thought twice about how unsustainable the path of easy money and low-interest credit was.
To be fair, Icelanders, like average consumers of most depressed economies today, have learnt hard lessons after becoming victims of bubbles based on predatory lending and misinformation. But as the task of rebuilding shattered economies beckons, unfortunate commoners whose personal fortunes underwent rollercoaster shocks should ask more critical questions and mobilise to shape new structures that steer clear of the fatal charms of casino capitalism.
?The author is associate professor of world politics at the OP Jindal Global University