In These New Times

A new paradigm for a post-imperial world

Britain’s ‘gunboat’ diplomacy still angers Iceland

Posted by seumasach on July 24, 2009

Ambrose Evans-Pritchard


22nd July, 2009

Iceland’s new finance minister Steingrímur Sigfússon is not looking for a fight with Britain. But like every citizen of this rocky outpost, he thinks the British government’s draconian sanctions against his country at the height of the financial crisis last year were grotesque and have made it much harder to clinch a deal to refund IceSave depositors in the UK.

“To apply anti-terrorist laws to freeze Icelandic assets is a long way beyond what is acceptable and it has left a lot of bad feelings,” he told The Daily Telegraph. Almost nobody on this island nation can fathom what made Britain think it proportional to list Iceland’s central bank alongside al-Qaeda as a terrorist organisation.

“Somehow we have to solve this problem in a civilised manner, but the IceSave agreement is very unpopular. People feel that this imposes a terrible burden,” he said. Indeed, he himself has to walk a daily gauntlet, passing youths wearing “IceSlave” T-shirts on the Hverfisgata drag.

Mr Sigfússon, a Left-Green radical, said his moral mission is to slam the door on the Iceland’s 20-year foray into free-market adventurism, an era that saw the big three banks evolve from sleepy state lenders into global-macro hedge funds with liabilities equal to 11 times GDP.

The trio of Landsbanki (mother of IceSave), Glitnir, and Kaupthing collapsed in October with $60bn (£36bn) in foreign debts, a colossal sum for a nation of just 300,000 people.

“We’re going to move away completely from these catastrophic policies. We will bring the country back to its course as a Nordic welfare society, with a strong public sector, and a redistribution of wealth,” he said.

Einars Már Gudmundsson, Iceland’s top novelist, said Britain’s conduct had been deeply wounding. “We have always been a good ally. We lost more fishermen shipping cod to England during the war than you lost on the battlefield, proportionally,” he said.

“This proves what socialists have always said, that in a capitalist world, nobody is your friend. I have sympathy for British people foolish enough to believe Landsbanki, but I had never heard of IceSave till this happened. We were told that what these banks did abroad was nothing to do with us, but when it all went wrong the responsibility fell back on us. It is why we feel a great sense of injustice,” he said.

Officials are angry that Britain used its influence to block a deal with the International Monetary Fund and Nordic states at the worst moment of the crisis last November. (Britain said Iceland had violated its European Economic Area duties by shuffling assets in favour of domestic interests) But what rankles reformers is that Labour has continued to mete out the much same treatment to the Socialist-Green coalition brought to power in February by the so-called “Saucepan Revolution”.

“There has not been any real change in Britain’s approach. It has been 18th century gunboat diplomacy at every stage,” said one official.

Under the proposed IceSave deal, the Icelandic state will cover $5.5bn in deposits for some 200,000 British and 120,000 Dutch savers drawn into Landsbanki’s snare at the height of the credit bubble.

Britain and the Netherlands will provide a loan at 5.55pc interest. It must be repaid within 15 years, with seven-year grace period. Central bank estimates suggest that the terms will increase Iceland’s public debt by 20pc of GDP. The repayments will be around 2.5pc of GDP annual from 2016 onwards.

Iceland’s government is stoically backing the deal, deeming it the only way to re-enter polite society, keep IMF loans flowing, and clear the way for Iceland’s EU accession.

In case there was any doubt, Dutch foreign minister Maxime Verhagen said this week that a deal is “absolutely necessary” to clear the way for Iceland’s EU bid.

Whether the IceSave deal will clear Iceland’s Althingi – the world’s oldest parliament, dating to 930 AD – is another matter. All opposition parties intend to block it, and MPs for the ruling coalition are torn.

“It is very dangerous for the state to take on this sort of debt responsibility,” said Sigmundur David Gunnlaugsson, chair of the Progressive Party.

The No camp is circulating an internal memo from Sweden’s Riksbank that pins much of the responsibility for the IceSave debacle on Britain and the EU.

It said “absurd” EU rules – which cover Iceland through the EEA – have created a regulatory dog’s dinner. “While Icelandic politicians and regulators are responsible for allowing highly leveraged expansion, they are not the only ones to blame,” it said.

The EU directive was muddled, stipulating only that states must set up a “guarantee scheme” for banks, not that they are liable for all losses. It was well-known that these schemes are often private foundations with tiny resources, yet the UK “hardly bothered” to inform savers of this fact. It let IceSave state on its website that savers enjoyed protection equal to the UK’s own scheme.

“The conclusion is clear: the EU host countries (UK and Holland) are also to blame for Iceland’s disaster. Consequently, it would be reasonable that they carry some of the burden. It takes two to tango,” said the report acidly.

For Britain, an irksome precedent has been set. Allies can expect no quarter if they spiral into a deep financial crisis. This could come back to haunt.

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