[Marxism] "Left Green" government in Iceland leans toward IMF-imposed austerity

[Louis Proyect]

NY Times, July 28, 2009
A Debate Rages in Iceland: Independence vs. I.M.F. Cash
By LANDON THOMAS Jr.

REYKJAVIK, Iceland — Just months after an epic banking collapse forced 
Iceland into the arms of the International Monetary Fund, this island 
nation is locked in a fierce debate over how to pay off its creditors 
without ceding too much of its vaunted independence.

The balance Iceland strikes between bowing to the policy demands of the 
global financial community and satisfying the desires of its 
increasingly resentful population of 300,000 will be closely watched as 
I.M.F. programs in beaten-down economies from Latvia and Ukraine to 
Hungary and Romania enter a crucial phase.

”When you impose austerity, it becomes very painful and comes at a 
cost,” said Simon Johnson, a former I.M.F. economist who now teaches at 
the Massachusetts Institute of Technology. But many Icelanders are 
blaming the I.M.F. and in this case, he says, that is not warranted.

“Iceland is a rich country that behaved recklessly and helped 
destabilize the world financial system,” Mr. Johnson said. “They will 
have to take their medicine.”

While those in Iceland’s left-leaning government will not put it so 
bluntly, that is broadly the case they are making.

The first country to throw its government out of office as a result of 
the global financial crisis, Icelanders could see the government that 
replaced it topple too, leaving the country rudderless — unless it wins 
approval for a deal to repay Britain and the Netherlands the $5.7 
billion loan it used to compensate foreign depositors for losses in 
Icelandic banks.

A vote on the measure in the country’s Parliament is scheduled for next 
week. But even Iceland’s own government is riven.

“This is an attack on our sovereignty,” said Ogmundur Jonasson, the 
country’s health minister. “It reminds me of old colonial times. Gordon 
Brown had no harsh words for the United States when Lehman Brothers went 
down and billions of pounds went to the U.S. That was friendship — this 
is ‘Take the little guy and nail him to the wall.’ ” To not pass the 
bill, the government says (most of it anyway), would lead to the I.M.F. 
and other outside lenders withdrawing funds, further jeopardizing the 
country’s fragile condition.

But detractors say passing it would increase Iceland’s debt burden to 
200 percent of gross domestic product, making it one of the most 
leveraged nations in the world. Ultimately, they say, it could drive 
Iceland to default.

At the crux of this debate is the Icesave, or “Iceslave,” as it is 
called here. Icesave accounts were a top-of-the-market gambit by 
Landsbanki, the most aggressive of the failed Icelandic banks, to raise 
cash by extending its branch network from tiny Reykjavik to the high 
streets of London. The reaction to the agreement to make good on the 
accounts encapsulates all the swelling anger that Icelanders now bear 
toward bankers, foreign creditors and I.M.F. technocrats — not 
necessarily in that order.

Lilja Mosesdottir is an economist and a back-bench member of Parliament 
in the governing Left Green party. But if she were to vote now, she 
says, she would vote against the government bill. Ms. Mosesdottir, new 
to politics, swept into power this winter when the conservative party 
was overturned by the “pots and pans revolution.”

“It is like after a war and you are the loser,” she said, taking a quick 
coffee break from back-room negotiations over the deal. “This is an 
agreement that will lead to a sovereign default, and we don’t want that 
to happen.”

Whether or not she is right about default, the war analogy is apt. 
Iceland has lost billions, and others are now dictating the terms of its 
recovery.

The resentment felt here is rooted in a belief that Iceland’s core 
virtue of flinty self-reliance has been defiled by its bankers and 
foreign creditors. It is a sentiment that stretches far into the 
country’s history and culture — from the Nordic sagas to the quest for 
autonomy of Bjartur of Summerhouses, the impoverished sheep farmer in 
Halldor Laxness’s “Independent People,” the country’s best-known modern 
literary work.

As the rhetoric escalates, Iceland’s finance minister, Steingrimur J. 
Sigfusson, a lifelong leftist, finds himself in the awkward position of 
defending the Icesave plan as well as the severe economic restrictions 
that the country has been forced to endure to qualify for more money 
from the I.M.F. and other Nordic lenders. Such measures include sharp 
cuts in health spending and higher gas prices. Higher interest rates 
have pushed unemployment to about 8 percent, from 1 percent, in little 
more than a year.

Mr. Sigfusson scoffs at any notion of default and argues that the deal 
to repay creditors was the best that could have been achieved. With a 
term of 15 years, a low interest rate and a seven-year grace period, the 
deal is flexible enough to allow Iceland to repay it, he says, 
especially if the economy recovers and the government is successful in 
selling Landsbanki’s foreign assets.

“This is the greatest tragedy of all, but it has to be done,” he said, 
looking gaunt from the hours of parliamentary arm-twisting that now 
consume his days.

As to the widely held belief that it is the I.M.F. and not the 
government that is dictating policy, Mr. Sigfusson acknowledges that he 
is in close contact with the I.M.F.’s representative here.

He points to frequent disagreements, especially over the fund’s 
recommendation that the government maintain high interest rates as well 
as capital controls — a prescription he describes as similar to wearing 
a belt and suspenders at the same time. But he emphasizes that it is 
Iceland, not the I.M.F., that has the final word.

“This is a trial not just for us, but the I.M.F., too,” he said. “They 
have a lot at stake here as they must show that they are flexible enough 
to adapt their program to a developed Nordic welfare state.”

Known to many here as “the governor of Iceland,” Franek Rozwadowski, the 
I.M.F. representative, argues that this designation is inaccurate. As 
part of its program, Iceland must turn a deficit that is now 13 percent 
of G.D.P. to a surplus by 2013.

“It would be more accurate to call the relationship a collaboration in 
which Iceland has engaged the fund to help design its recovery program,” 
he said.

On Aug. 3, the I.M.F. is expected to discuss whether to disburse a 
second tranche of its $2.1 billion loan to Iceland (about a quarter has 
been disbursed so far). Mr. Rozwadowski says Iceland is on target with 
steps to balance its budget, and he hails Mr. Sigfusson for political 
courage.

Such niceties are thin gruel for many Icelanders whose personal debts 
have skyrocketed in the wake of the precipitous fall in Iceland’s 
currency, the krona.

Gunnar Sigurdsson, a theater director, says his car loan — which was 
tied to a basket of Swiss francs and Japanese yen — has doubled since 
the crisis began; his mortgage payments have jumped over 35 percent.

Personal bankruptcy is inevitable, he says, and he is now trying to make 
a “Roger and Me”-type documentary — training his camera on Iceland’s top 
politicians, bankers and, if he is lucky, Dominique Strauss-Kahn, the 
head of the I.M.F. “I have had enough of this stupidity,” he said. “I 
just want answers.”