Report on the economic situation in Iceland three years after the collapse of the financial sector

by

Birgitta Jónsdóttir, Margrét Tryggvadóttir and Thor Saari

Members of Parliament for The Movement.

A letter to the panel guests to the conference called Iceland’s Recovery – Lessons and Challenges to be held in Reykjavik on October 27th. as it is our wish to convey information and facts about the economic situation in Iceland that we are not sure you will be provided with prior to, or at the conference.

Introduction

To begin with the conference itself is at the core of a massive public relations effort by the government of Iceland and is part of a setup in order to convey to the world the achievements of the Icelandic government. As such the conference is unique in Iceland’s history, though the goal is not. Be reminded that in early 2008 the Icelandic government through a cooperative effort that included government ministers, the Confederation of Icelandic Employers, the Chamber of Commerce, the Financial Supervisory Authority, the Central Bank and the Icelandic Financial Services Association (representing the financial sector), embarked on what can only be called a vast program of misleading information, half-truths and deception about the health of Iceland’s financial sector.

This program was presented both domestically and to the international community, including high ranking government officials of neighbouring countries. This was done in 2008 even though as early as in February of that year it was revealed to the Cabinet and the political parties behind the government that the finances of the banking sector were not sustainable and that it would crash sometime soon and not later than in the second half of 2008. Some of the these same people, from these same organizations and political parties will sit beside you at this conference and provide you with their side of the story.

The Crash

The collapse of the banking sector dragged large parts of the economy down with it leading to a complete collapse in the construction industry, finance and investment. The currency depreciated by over 50% during 2008 leading to a surge in inflation as imports are a major part of the economy. An example is the Japanese Yen going from less than 0.5Yen/ISK to more than 1.3 Yen/ISK in a few months. The currency collapse and the following surge in inflation led to a mutation upwards in household mortgages as virtually all of them were either FX-linked or index-linked (to CPI) and most borrowers went from being in good financial health to being technically insolvent at the least. While some of this is surely to blame on the households themselves as overleveraging was common, these lending practices were encouraged by the banks and the government all the way through to October 2008, even though they knew this was unsustainable. The government knew exactly what would happen but continued to praise the banking system and the banks were taking large positions against the ISK via an array of derivative contracts while at the same time encouraging FX-loans to Icelandic homeowners.

The banks collapsed in October, the government took over the banking sector and established new banks on the remnants of the older ones. In the restructuring process it was decided to transfer assets (loan portfolios) from the now defunct banks to the new banks as part of the equity side of their balance sheet, while at the same time leaving most of the debt behind in the old banks.

Household debt

As the asset transfer took place the assets were re-valued and written down to something estimated to resemble a „fair value“ of about 40% of the book value, on average. Household mortgages were written down by approximately 40%, ending with a fair value of about 60% of the previous book value. However, following the transfer these write-downs were not passed on to households (as recommended by the IMF) but instead the new banks got a free hand in trying to collect the previous full book value of the loans.

Facing massive public protests and a large scale bankruptcy by the household sector the government has since tried to establish policies to resolve this household debt problem. The solutions have not worked. One of them (most common) is a write-down of mortgages to 110% of the estimated value of the home. Because of underlying inflation and the CPI-indexing of mortgages, these mortgages very quickly increased again to 120% and then to 130% of the estimated home value, requiring repeated attempts to reach the 110% level. The results are that some 26.000 individuals are registered in serious default. If each of these individuals represents a household, this means that approximately 35% of all households in Iceland are still in a serious default position with their debts, even after being able to tap in to their pension funds in order to stay solvent.

The solution to the FX-indexed loan problem has also been a disaster as via government legislation the FX-linked loans were converted to ISK loans starting at the initial borrowing date and then re-valued using the Central Bank policy rate for the period of the loan. However, the CB policy rate was at times over a three year period was close to 20% reaching 21% at the most. Needless to say people would never have borrowed money at these rates in the first place, but they are now forced to pay up and shut up.

This has lead to stagnation in private consumption, possibly the only area where economic growth can occur considering the current situation of no investment and decreasing global prices for Iceland’s exports. A “Japanese” decade (or more) is perhaps what lies ahead, at the best.

Monetary policy, the financial sector and the currency

It is also interesting to observe the dynamics around the making of this facade of economic recovery as the economy is basically being re-built on the same hollow ground and with the same rotten wood that led to the crash. The architect of the previous monetary policy that worked so disastrously is now the Governor of the Central Bank and is advocating a return to the old policy with a slight twist of some bells and whistles that look dubious at the best. His assistant, the Deputy Governor was the Central Bank’s chief economist in the years prior to and during the Crash, never uttering a word publicly about the disastrous policy or upcoming problems. Most of the same staff as before is still at the CB, which by the way became insolvent during the crash.

The financial sector is being reconstructed with more or less the same bank-secrecy laws in place, unknown ownership of two of the banks and without splitting up the banks in to separate commercial and investment banks. Most of the same staff as before the crash is still employed in the banks, including managers, division chiefs, regulatory supervisors, accountants and analysts.

The Icelandic currency is not freely tradable any more as strict currency controls are in place. While the plan is to lift the controls as soon as possible, the problem is that the plan includes lifting the controls while floating the currency in to the same environment that led to it’s collapse in the first place. While there has been some talk about the necessity of either abandoning the ISK altogether and adopting another monetary unit (Euro, US Dollar, Canada Dollar, Norwegian Krona) or a New Icelandic Krona based on a new footing (NIK), no proper research in that area has taken place.

The only possible conclusion to be drawn from this is that the economy will likely face another crash in the near future.

The General Government Debt Issue

As is fairly common the Icelandic government has an inclination to shroud it’s debt statistics in a veil that is not easily lifted all at once (see table on page 6). While the official numbers look perhaps not too bad by some international standards, with central government debt amounting to 1.345 billion ISK at year-end 2010 or approximately 87% of GDP, one must bear in mind that this debt bears high interest and is in part (at least 25%) indexed to the CPI. Currently the interest payments only on this debt are estimated to be about 17%-20% of government income in the 2012 budget. Central government debt continues to increase with new borrowing exceeding repayments by 11 billion ISK in 2012. Municipal debt amounts to 215 billion ISK, bringing the general government debt level up to 101% of GDP. Currently one municipality is insolvent and 10 to 15 other municipalities are in serious debt trouble, some technically insolvent already.

The state has however gone to great lengths to finance it’s activities by means that do not account directly as central government debt, that is by the use of state guarantees (contingent liabilities). These guarantees while differing somewhat in their nature (direct vs. indirect guarantees) have for example been used to finance all the loans provided by the Housing Financing Fund (all CPI indexed), by far the largest lender of mortgages in Iceland and to finance large hydro-electric power plants by the National Power Company. All together these guarantees amount to 1.508 billion ISK or approximately 98% of GDP.

In addition there are so-called extraordinary state guarantees on all domestic bank deposits and on assets taken over by two of the newly established private banks. These guarantees are granted by the Minister of Finance according to provisions in the Emergency Laws passed in 2008 and amount to 1.542 billion ISK or approximately 92% of GDP. Guarantees to municipality-owned companies by municipalities amount to 324 billion ISK and un-funded pension obligations by the state and by local governments to state and municipal employees pension funds amount to 383 billion ISK. Add to this the Central Bank debt of 280 billion ISK and the debt overhang of Iceland’s general government and its institutions is obviously enormous.

While of course it is not appropriate to add up all these different obligations one must keep in mind the risk involved as the Housing Finance Fund needed a large infusion of cash from the government last year, the Central Bank became insolvent in 2008 and other state guaranteed entities have also gone under.

Conclusion

Though we have perhaps presented you with a rather bleak picture of the current economic situation in Iceland please bear in mind that very little of the necessary restructuring has taken place and that neither political nor personal responsibility for the crash has been accepted by anyone. So far after almost three years of investigation, only three people have been charged by the Special Prosecutor, two of them found not guilty and one found guilty. It is our worry that Iceland is heading straight on into another economic crash and political turmoil that will be far worse than the last one. Raising a critical voice might make a difference and is the purpose of this letter.

Sincerely yours,

Birgitta Jónsdóttir,

Margrét Tryggvadóttir,

Þór Saari

Members of Parliament for

The Movement.

The island Iceland in Brave New World

"The words galvanized Bernard into violent and unseemly activity. "Send me to an island?" He jumped up, ran across the room, and stood gesticulating in front of the Controller. "You can't send me. I haven't done anything. lt was the others. I swear it was the others." He pointed accusingly to Helmholtz and the Savage. "Oh, please don't send me to Iceland. I promise I'll do what I ought to do. Give me another chance. Please give me another chance." The tears began to flow. "I tell you, it's their fault," he sobbed. "And not to Iceland. Oh please, your fordship, please …" And in a paroxysm of abjection he threw himself on his knees before the Controller. Mustapha Mond tried to make him get up; but Bernard persisted in his groveling; the stream of words poured out inexhaustibly.

In the end the Controller had to ring for his fourth secretary."Bring three men," he ordered, "and take Mr. Marx into a bedroom. Give him a good soma vaporization and then put him to bed and leave him."The fourth secretary went out and returned with three green-uniformed twin footmen. Still shouting and sobbing. Bernard was carried out.

"One would think he was going to have his throat cut," said the Controller, as the door closed. "Whereas, if he had the smallest sense, he'd understand that his punishment is really a reward. He's being sent to an island. That's to say, he's being sent to a place where he'll meet the most interesting set of men and women to be found anywhere in the world. All the people who, for one reason or another, have got too self-consciously individual to fit into community-life. All the people who aren't satisfied with orthodoxy, who've got independent ideas of their own. Every one, in a word, who's any one. I almost envy you, Mr. Watson."Helmholtz laughed."

Aldous Huxley - Brave New World - chapter xvi page 224 

Worlds are magic, writers are shamans - it is interesting how our world is becoming Brave New World. Time for a gathering soon in Iceland of  all the people who, for one reason or another, have got too self-consciously individual to fit into community-life. All the people who aren't satisfied with orthodoxy, who've got independent ideas of their own.

Nato Parliamentary Assembly in Romania

I am currently in the Romanian Parliament in Bucharest participating in the NATO parliamentary assembly. I am in the Civic Dimension of Security Committee. A few months ago Lord JOPLING presented a report on Cyber Security. His report dealt with a wide range of topics: WikiLeaks and Anonymous were of great concern in his report, where he wove together real and serious attacks on nations such as Estonia with the threat of leaks: a very dangerous trend. Leaking information to the public domain is not an act of war, I would rather classify it a civic duty to expose war crimes.

I have not been able to find a legal way to provide changes in this biased report. I did criticize it harshly yesterday and basically said i could not support it with all its factual errors and biased perspective and attempts to make cyber attacks into something that would justify the usage of article 5. Apparently such criticism is not common here at the assembly on reports. The Lord thus offered me to send in info on factual errors. I did. I have with some great help from activists from all over the world gone through this report step by step and provided both amendments and deeper perspectives. You can download it HERE as pdf.

In the draft resolution on cyber security is no mention of the factual errors in Lord Jopling report and no proper way for me to amend those. Looking through the draft resolution on Cyber Security the following struck me with discomfort:

“9. URGES member governments and parliaments of the North Atlantic Alliance:

1. to ensure swift implementation of the revised NATO Policy on Cyber Defence and the related cyber defence Action Plan, adopted in June 2011, introducing the cyber dimension in all three of NATO’s core tasks: collective defence, crisis management and co operative security;
   
   

We are URGED to ensure swift implementation of: revised NATO Policy on Cyber Defence and the related cyber defence Action Plan, adopted in June 2011

As this is a secret document and we will not be given access to review the policy. It is not wise for us the parliamentarians present here to ensure swift implementation of something we have not seen and will not be granted access to. It makes a mockery of the Nato parliamentary assembly to request its members to accept this process. If this is a common practice I urge all parliamentarians to abstain from participating in such an act because we cant possibly ask for legalizing something we have not been able to scrutinize and this process of accepting policies blindly is not very democratic and it does not provide the needed core information for us to have debate and offer political guidance and authority.

Thus I have requested that we will delete sub-paragraph 9.a in the draft resolution on Cyber Security unless we be given prior access to NATO Policy on Cyber Defence and the related cyber defence Action Plan, adopted in June 2011.

No one has chosen to do a report on the findings in the Afghan War logs. I will ask if my committee would be willing to do that at this assembly, there are not many like minded parliamentarians at the assembly and thus harder to get a Rapporteur status. I will keep on trying.

Here is the entire draft resolution:

Civil dimension of security

209 CDS 11 E

Original: English

NATO Parliamentary Assembly

DRAFT RESOLUTION

on

CYBER SECURITY

presented by

Lord JOPLING (United Kingdom)

General Rapporteur

The Assembly,

1. Recognizing the benefits offered by the cyber domain to our societies as well as to the defence and security sector, including opportunities for greater situational awareness and co ordination among the armed forces of the Allies as well as for the Alliance‘s public diplomacy;

2. But also concerned with the emergence of a new category of threats that target national information infrastructures, and that could seriously undermine the security interests of the Alliance and its member states;

3. Anxious that cyber defence capabilities and awareness of cyber threats vary significantly across NATO member states thereby weakening the Alliance’s overall cyber security;

4. Welcoming the decisions made by the leaders of the Alliance at the NATO Lisbon Summit and the meeting of NATO Defence Ministers in June 2011, identifying cyber security as one of the key priorities of the Alliance;

5. Saluting NATO’s approach aimed at expanding its cyber defence policy to include centralized cyber protection of all NATO bodies and the use of NATO’s defence planning processes in the development of the Allies’ cyber defence capabilities. ;

6. Believing that, in view of the growing scope and severity of cyber attacks, in addition to exploiting fully the opportunities offered by Article 4, the potential application of Article 5 of the Washington Treaty in case of a serious cyber attack against the Alliance or its individual members, should not be ruled out;

7. Noting that legislative “black holes” still exist both at a national level and in terms of international law when it comes to setting security standards for the cyber domain;

8. Emphasizing that stricter security regulations for the cyber domain should not come at the cost of reduced civil liberties and rights, such as freedom of speech and the right to communicate over the Internet, and noting the key role of the Internet in mobilizing democratic movements in authoritarian countries;

9. URGES member governments and parliaments of the North Atlantic Alliance:

a. to ensure swift implementation of the revised NATO Policy on Cyber Defence and the related cyber defence Action Plan, adopted in June 2011, introducing the cyber dimension in all three of NATO’s core tasks: collective defence, crisis management and co operative security;

2. to promote domestic awareness of cyber threats, taking into account lessons learned from milestone events including the cyber attacks against Estonia in 2007 and against Georgia in 2008 as well as the emergence of Stuxnet malicious software;

3. to scrutinize domestic legal frameworks, ensuring that coherent and effective laws are in place to address the evolving cyber threats;

4. to provide necessary support for the efficient functioning of national Computer Incident Response Teams, and to invest sufficiently in the training of national cyber security experts;

5. to promote closer partnerships between governments and the private sector in order to ensure the security of government networks and improve the exchange of expertise in case of a breach of security;

6. to ensure that the introduction of additional security measures in the cyber domain are accompanied by adequate mechanisms of parliamentary and public oversight over their respective government institutions;

7. to support international efforts to develop universal norms of acceptable behaviour in the cyber domain that would ban the use of cyber attacks against civilian targets, promote exchange of best practices and establish mechanisms of international assistance to stricken nations, while ensuring full universal access to the Internet as a venue for the exchange of ideas and information;

8. to ensure that adequate attention is paid to the physical protection of networks, including undersea fiber-optic infrastructures;

10. URGES relevant NATO bodies:

1. to ensure that NATO Computer Incident Response Capability is fully operational by the end of 2012, and that NATO’s cyber defence services are centralized;

2. to facilitate, if requested, national efforts of NATO member states to acquire adequate cyber defence expertise and state-of-the-art technologies;

3. to test the efficacy of NATO and member states’ cyber defence efforts through NATO’s periodic international exercises, and to ensure that these exercises are fully funded, staffed and well-attended;

4. to use capabilities such as NATO Cyber Defence Management Board and NATO Co operative Cyber Defence Centre of Excellence, to analyze rapid developments further in the cyber domain and to develop strategies for strengthening cyber defences across the Alliance, while exploiting the advantages of the information age through initiatives such as NATO Network Enabled Capability;
5. to develop efficient co-operation mechanisms with the relevant EU institutions, with the particular aim of supporting the EU’s legislative efforts to establish robust cyber security standards across the private sector;

6. to increase assistance, if requested, to NATO partner countries in the field of cyber security, particularly by sharing best practices and raising awareness of cyber threats.

_______________

Five young Tibetans have lit themselves on fire in the last ten days

Letter from Tendor, Executive Director for Students for Tibet: please share it...

"This morning, I opened my laptop to the devastating news that two more Tibetans -- aged 18 and 19 -- self-immolated today.

In the last 10 days, five young Tibetans have lit themselves on fire in Ngaba in eastern Tibet. Since March, seven Tibetans have committed acts of self-immolation. We believe at least two have died but cannot confirm this as Chinese authorities refuse to disclose any information on their conditions. 

While these young men have decided to sacrifice their lives, it's not an escape from life's suffering they are seeking. It's freedom. Not only for themselves, but for their nation.

China's tyranny is driving Tibetans to take extreme actions previously unheard of in our culture. In their desperation, Tibetans are crying out to the world for help.

China's systematic repression and tyrannical rule in Tibet -- stationing officials in the monasteries, disappearing monks by the hundreds, shutting down phone lines, cutting off the internet, installing surveillance cameras and military checkpoints everywhere -- have created a spiraling nation-wide crisis.

Enough is enough. The world must intervene now to save Tibetan lives.

In the coming days, as part of a broad coalition of Tibetan NGOs and Tibet Support Groups, Students for a Free Tibet will launch a new campaign that says ENOUGH! and calls for global diplomatic intervention to save Tibetan lives.

We need your help. We are calling for world leaders to issue a coordinated international response to condemn China's repressive measures in Ngaba and across Tibet and to institute multi-lateral mechanisms to advocate for the Tibetan people.

Most immediately, we must pressure China to withdraw its security forces from Ngaba and stop the ongoing harassment and torture of Tibetan monks at Kirti monastery.

On November 3-4, Chinese President Hu Jintao will sit with world leaders in Cannes, France at the G20 summit. We're encouraging as many Tibetans and supporters as possible to be there to protest the Chinese government. 

On Wednesday, November 2nd, we're also calling for a mass mobilization in Cannes, France and cities around the world to intensify the pressure on China.

Tibetans have endured unimaginable suffering under Chinese occupation for the last 50 years. But until now there has not been a single known case of self-immolation. Today conditions in Ngaba and at Kirti Monastery have driven Tibetans to a breaking point.

Please, help us show Tibetans in Ngaba and across Tibet that their deep pain and suffering has not gone unnoticed by the world. Together, we can build a global force that Chinese leaders cannot ignore.

With urgency,

Tendor
Executive Director"