March 25, 2009
Bar myself, a few dour looking cod fishermen, a delegation from the IMF and the tell-tale opportunistic financier looking for bargains, Icelandair 275 from Heathrow to Reykjavik is empty. This is hardly surprising when you consider we are bound for a bankrupt country on a Monday afternoon.
Out of the window, the true glory of the Scottish Highlands is evident as we head out in blazing sunshine past the Hebrides.
We finally pass the Westman Islands — off the southern coast of Iceland. These were home to Irish slaves, whose descendants, according to a 2001 genetic map, make up 30pc of the Icelandic population. The Irish were ‘Westmen’ and the Norse ‘Ostmen’ — from the East.
Hundreds of men and women were taken from Dublin as slaves by the Vikings to Iceland throughout the 10th century.
This explains the prevalence today of names like Njiall, Brjian and Kjormack. Most Icelandic historians suggest that the Westman islanders may even pre-date the Viking slaves and may have been the descendants of an earlier Irish colony of monks. Indeed, it is thought that the Westman Islands were an ancient stopover for the Atlantic voyages of St Brendan.
It is hard not to feel a certain proximity for these people who may well have been the first nation to experience and host the Irish diaspora!
But the commonalities don’t end there. Today Iceland is in tatters. The country turned itself into a large hedge fund, bet its future on the financial markets, and property, and lost. Each Icelander now owes more than 100 years of income to foreign banks and this money will never be paid back. As in Ireland, an oligarch class hijacked the local economy and mortgaged the next generation. House prices in Iceland went through the roof, driven by foreign borrowing and when everything was made exorbitant, Icelanders borrowed foreign money to buy inflated assets. This is precisely what went on in Ireland but, unlike Ireland, the government who presided over Iceland’s mania and was financed by its proceeds, is gone. So too are the upper echelons of the central bank and the mandarins who oversaw this nonsense. Alas we in Ireland have not rooted out this rotten core — not yet.
You’ve probably heard the joke that the difference between Ireland and Iceland is one letter and six months. Well it’s over half a year since I’ve heard this quip but timing apart, is it a valid comparison?
Yes and no. Iceland has its own currency, which means it took the brunt of the shock through a 90pc devaluation of the Krona. This means its foreign debts are now almost twice as large, but domestic debt has been wiped out. Iceland is now profoundly more competitive than before. When all its foreign debts are renegotiated, Iceland will recover very quickly and the devalued currency will make its exporting industries hypercompetitive. Iceland aims to lock in these gains by joining the euro at a deeply depreciated exchange rate.
Ireland — with our euro membership at a highly overvalued rate — has the same debts but no exporting capacity to generate revenue! I’ve heard politicians talk of the euro being the shield protecting us from an Icelandic meltdown. This is a common refrain from bankers, politicians and the mainstream economic establishment. But it omits to explain why Iceland will recover quicker than Ireland, why its debts are now its lenders’ problem and why it achieved competitive wage cuts without the lunacy of prolonged deflation — with its attendant unemployment, emigration and social problems. Iceland had a five-week deflation; we are going to have a five-year one.
The idea being put forward here is not that we should copy Iceland, but that we should think carefully about what we are about to embark on.
On the banking side, we are going (as this column predicted in November) to have a bad bank scenario whereby a financial skip is set up and all the bad debts of the boom thrown into it. To buy these assets, the State will have to raise money. Given that shareholders have been destroyed and we, the people are major shareholders now in the big banks, the State should invoke the national interest and buy the toxic debt for 5 cent in the euro from delinquent bankers — minimising the outlay and maximising the returns.
This is so straightforward that we have to ask, why the delay?
Why has it taken the minister nearly six months to act? This is a particularly relevant question because without a solution to the banks, we have no monetary policy and without monetary policy, the budget deficit explodes. Currently, the minister is constantly firefighting. The more delay, the more crisis and the less room for imaginative ideas.
On the real side of the economy, a bit of vision would see that we could do more to keep the industrial capacity of the country alive. If this means the State buying up Waterford Glass and SRTechnics and many other companies like this from the receivers at deeply discounted prices (or for free, with payments later), then so be it. This would only be copying the policy of corporate raiders of the past: buy cheap, sit on the asset and sell expensively when the market turns.
In the end, whatever we do today needs to be framed with a view to where we are likely to be tomorrow. If you think that the world will recover, then buying assets cheaply today and forcing the hand of the banks makes absolute sense.
But to see things clearly and to be unencumbered by the betrayal of the boom — when too many snouts were in the trough — we need a complete break from the past both in terms of people and ideas.
Iceland got rid of its cronies and charlatans in six weeks; what are we doing?