The Blame Game

Nov 12, 2009

Dear TBT,

The recent open letter by Gunnar Sigurosson to the MD of the International Monetary Fund would have made interesting reading if one could only take it seriously. To blame the IMF for Iceland’s woes is both unfair and unreasonable. Since when did a bank put its clients’ interests before its own? Would you censure the doctor if he asks you to pay for medicine which will keep you alive? Love them or hate them, you gladly took their money and you can’t complain now at the conditions thrust upon you. The IMF has left a trail of bewilderment across the globe, especially in Africa.

However, they are a bank whose job it is to lend money to those countries in short term need. There is hardly a nation on earth which is not in its debt, financially. Many of those countries are trapped in a spiral of debt from which it will be difficult to disentangle themselves, from the smallest such as Latvia to richer countries like Britain.
Latvia, thanks to outside influences, just got bowled along with those who caused their own downfall through greed and mismanagement in the banking sector. Iceland is one of those and should consider itself lucky that it was able to borrow money from any source - given the parlous state of its economy and currency.

To blame the government of the day is, again, taking the easy route. In 2002, Iceland’s three banks were worth just a few billion dollars, but such was the country’s haste to turn itself into a world class financial powerhouse that thousands of people borrowed huge sums to invest in banking and other stocks, sending their values rocketing. During the subsequent four years the paper value of the three banks would rise to 140 billion dollars - totally unsustainable. People found themselves wealthy beyond their dreams. They also invested in foreign currency. Fishermen sold their boats and went into stocks and shares. It would have been a brave government who tried to stop that monster in its tracks. Any attempt at regulation would have been scoffed at. Not least because members of the government also were involved in the ‘gold rush.’

Icelandic children will indeed inherit the burden of debt, but it was the avarice of the country’s adults who placed it upon them, not the IMF, for all its abhorrence. In fact, it was they who advocated stringent measures to combat bank profligacy. This from the Icelandic Finance Ministry during an IMF committee visit in 2003: “The IMF committee emphasizes that structural changes, directed at increased privatization as well as the strengthening of institutions and regulations in the field of public finance, are instrumental to securing growth in coming years.” But it was too late, the gravy train was gathering speed and the advice was ignored.

In 2003, Iceland’s gross national debt stood at 130 per cent of GDP. A level of debt rarely seen in developed countries, hence the discussions with the IMF, and that was way before the present crisis began. Where were the letters of concern then? To intimate that your problems began with the banking crisis in 2008 is illusory.

The signees of the letter are obviously feeling shame and humiliation. One financial wit observes:  “Iceland is no longer a country – it is a hedge fund.” Maybe, but hedge funds are finding their way back into favor, and so will Iceland. But not yet. Like Latvia – there’s more pain to come. Accession to the EU might help, but not necessarily. In the meantime another open letter, not to Strauss-Kahn but to the youth of Iceland apologizing for the future hardship bestowed upon them in the pursuit of easy money might help, and might be viewed with more sympathy than the one to the MD of the IMF.
Best wishes to you.

Harry Gaffney
Riga

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