I scream, you scream, we all scream for Icesave!

Iceland has a population of about 300,000 , about 140,000 taxpayers and pre-crisis GDP of about $12bn. The Royal Bank of Scotland has about 140,000 employees and pre-crisis net profit of about £8.5bn – they’re about the same size as entities. Iceland, like RBS, did very well out of the debt bubble and picked up assets all over the world in an impressive but ultimately unsustainable spending spree. And in a final point of similarity, Iceland, like RBS, owes the British government a hell of a lot of money as a result of the bursting of the bubble.



On the other hand, if Sir Fred Goodwin, the deposed former CEO of RBS, were to suddenly announce that repaying the government’s capital injections was far too onerous a burden and jeopardised RBS’s ability to pay bonuses (particularly given that the majority of RBS employees had very little involvement in the decisions which caused the bubble, and only a very few of them actually directly benefited from the huge profits made), and that there should be a referendum of RBS employees as to whether or not to repudiate their bailout obligations, I sincerely doubt whether there would be all that many blog posts saying “Well Done RBS For Standing Up To The Bullies”.

And that is effectively what has happened here; people seem to have fit this into a template of LDC debt defaults, or presumed that because the UK used powers under its Terrorism Act (which is an unreasonably draconian Act, but the actual goal of preventing a bankrupt debtor from shifting assets out of the country is hardly an intrinsically illegitimate one), it must have been bullying or acting illegitimately. In fact, the timeline is roughly as ajay describes it in comments to John Band’s post on the subject, which I plagiarised and tidied up for my own blog.

Basically, a neoliberal government encouraged the financial sector boom in Iceland (there were plenty of other political parties which thought that the increasing dependence on banking was a bad idea; they didn’t get votes) and provided a deposit guarantee scheme which allowed Landsbanki to raise deposits in the UK. When the balloon went up, the Icelandic government assured the British (and Dutch) governments that the deposits were guaranteed, and on this basis, the Brits and Netherlanders paid depositors out of their local schemes (for speed and convenience), on the understanding that the debt would be collected later. After a number of pretty shoddy corporate finance moves aimed at trying to wriggle out of this debt, the neoliberal government collapsed and a new government came in.

That government (partly under the influence of the IMF, which in general takes a dim view of OECD debtors who try to selectively default and stiff major trading partners, on the basis that one really can’t be seen to encourage that sort of thing) recognised the debt as a legitimate one and started negotiating repayment terms. After a certain amount of squabbling, an arrangement was reached which was both satisfactory to the creditors and able to get through the Icelandic Parliament. This is the bill which President Grimsson has just vetoed, sending it to the referendum. The Presidential veto is a very unusual device in Icelandic politics – since the beginning of the current constitution in 1944, it has been used precisely once, in 2004, by Grimsson, to veto a bill which would have prevented a member of his own political party from establishing a media monopoly, the existence of which media monopoly presumably is not totally irrelevant to the widespread popular support for what would otherwise look like a fairly venial attempt by a discredited former government to throw a spanner in the works of their successors’ attempts to dig the country out of the mess they created, massively damaging their international credibility in the process.

Basically, if you think Californian budgetary politics are all screwed up and held to ransom by a bunch of wildly irresponsible rightwingers who want to blame everyone but themselves, take a look at Iceland – you’re gonna love it.