On October 27th a grand conference was held in Reykjavik complete with representatives of the IMF, the government and the financial sector, to congratulate themselves on the deeds that squelched Iceland’s revolution.

Here is the text of a letter signed by twenty-two activists from all walks of life on behalf of the general public and sent to the foreign participants before the conference, to point out the discrepancies between the government’s claims and reality.  They also lit red warning flares in front of the building where the conference was to take place.

“The present state of Iceland’s economy is clearly much different from that envisaged at the beginning of the IMF program for economic stabilization and reconstruction in the fourth quarter of 2008. Foreign debt at  the end of 2010 was almost double the target level under the program, while public sector debt, unemployment and inflation were all significantly higher than projected.

Before the Icelandic banking crisis in 2008, the debt of the state treasury was 26% of GDP. According to official numbers the debt has risen to 111% of GDP, but the gross national debt is officially placed at 280% of GDP. Net treasury balance has deteriorated by 140 billion Kroner or 26% of GDP between the second quarter of 2010 and the second quarter of 2011. We estimate that since the banking crisis started, Iceland has borrowed up to around 100% of GDP.  This does not include substantial foreign exchange reserve loans provided under the IMF program. Interest payments on government debt now stand at 20% of government revenue.

Municipalities

At the end of 2010, municipal liabilities were up to 586 billion Kroner. By excluding the Reykjavík Energy company‘s public guarantees of close to 300 billion Kroner and 47 billion of unfunded public pension liabilities, gross municipal debt remains at approx. 310 billion. This is equivalent to 20 % of GDP or 154% of municipal revenue.

Financial system

The cost of resurrecting the Icelandic banking system in late 2008 has been estimated at 64% of GDP, a world record. Domes-tic assets, mostly loans to productive Icelandic companies and individuals, were transferred to the new banks at 45-65% of their value. Yet bank customers are still being charged for full repayment to a failed credit regime, resulting in massive bankruptcies, foreclosures, asset stripping and job losses.

The public

At this moment at least 20% of Icelandic families are unable to repay their loans in full, and around 40% are in devastating circumstances. Only 10% of all homes are able to meet the repayments on their alleged liabilities.

Personal income after taxes has been down 27.4% for the past 3 years while prices have risen 40%, resulting in sharply reduced consumption and demand. Increasing numbers of Icelanders are eligible for food handouts although public figures are hard to come by and not necessarily accurate. Breadlines are longer and municipal welfare expenses have risen by 62% since the start of the banking crisis.

According to last year‘s tax returns, private property and real estate values have gone down while debt has gone up for Icelandic homeowners. Families in positive equity are 8.1% fewer, while the number of families in negative equity has increased by 12.1% since the preceding year.

1. Officially, unemployment is now 6.7%, an optimistic number, since many have signed up as students in order to get student loans rather than unemployment benefits. Close to 5,600 people, almost 2% of the population, or more than one family every day have left the country to seek work and a better quality of life elsewhere. A considerable number are without benefits and therefore counted. From public reports in 2010, the jobs lost can be estimated closer to 22,500 or a 8.2%.

Conclusion

The main reason for the Icelandic financial crisis was a grossly oversized banking sector. The public finds it odd that the government should be enthusiastically attempting to rebuild a failed system instead of promoting growth in the real economy. While the burden of the systemic banking catastrophe has been imposed primarily on the common people, instead of mandating general debt relief, the government is allowing the banks to decide on a case by case basis basis, how individual problems are handled. This approach is designed to maximize repayment rather than providing any semblance of compensation for the widespread embezzlement of citizens.

These policies have fueled inequality. People are outraged that high-level executives and owners of failed businesses are receiving massive debt write-offs while keeping ill-gotten profits,  and continuing their operations while the public takes the consequences. Elected representatives defending the interests of the financial sector at the expense of the public, have become a real threat to social stability in Iceland.

The financial elite has transferred its exposures and liabilities to the public balance sheet just as they have in Greece, Ireland, Portugal and elsewhere The primary victims of the financial crisis have been democracy and the rule of law.”

One of my Icelandic correspondents put the situation more succinctly: “Social benefits are unchanged in kronas, but due to inflation, higher taxes and other outside influences, purchasing power has dropped around 40% – the government calls that preservation!”

Two progressive American economists, Joseph Stieglitz and Paul Krugman, spoke at the conference, and both, more or less directly, criticized the austerity measures imposed on the people of Iceland, who had nothing to do with the 2008 crash.

While the self-congratulatory ritual was taking place in Reykyavik, meanwhile, the people of Athens were picking up the torch of rebellion. Unlike the Europeans, who understandably want to preserve the Euro, their common currency, the people of Iceland think the Greek Prime Minister, George Papandreou, did the right thing by inviting his countrymen to vote on the ‘rescue’ package being offered them. One Icelandic blogger noted with glee that this is the first time a population is invited to vote on the common currency. If it is defeated, it is understood that Greece would have to leave the Euro, endangering the entire financial system.

This situation constitutes a major world crisis, and the underlying reason for it is that whether in the tundra or by a warm blue sea, the people are demanding to rule.

Nov. 4th – Greece is being taken in hand, too.

As the United States continues to harp on the danger of a Eurozone collapse, I thought it would be interesting to read one of Europe’s foremost newspapers, France’s Le Monde. (Alas, I do not master German.)

On the day Fareed Zakaria was treating ‘the most powerful man in Europe’, Manuel Barroso, President of the European Commission, as if he were a wayward student, Le Monde published an article on the Eurozone crisis.  Here is an adaptation:

Usually, the world’s grandees focus on the succession of crises in the emerging economies of Latin America, Eastern Europe, Asia and Africa.  This time, and for the second time, the epicenter of the crisis is in the West.

All the talks make the same point: if true international cooperation and coordination fails to come about, we risk a crisis whose breadth and depth are beyond reckoning. This time, even if the debt problems of America, the Middle East or Japan are real, the sick man is rich, opulent Western Europe. To varying degrees, certain European countries have borrowed more than was reasonable. Faced with the Western world’s economic lethargy, they cannot count on growth to ensure payments on their debt.

For several days, declarations from the biggest emerging countries leave little doubt as to how they see the situation.  Rightly, they consider that Europe has the means to solve its problems without international help, and that the remedies the West has already imposed should have been adopted in Greece. They will not come to the rescue.

Nor should Europe expect any significant help from the IMF.  Madame Lagarde continues to issue dramatic warnings, and the prevailing sentiment at the meeting was well expressed by the Financial Times: “There is no more time to solve the Eurozone’s problems and avoid a world recession.” Europe is in crisis and it’s up to the Europeans to act.  No one will step up to the plate, aside from one-off gestures here and there.  But the agreement between the G20, the IMF and the European Union is more like a declaration of intent rather than a real commitment.

All agree on the need for concerted action, starting with the urgent creation of a crisis center. Europe’s institutions, fragmented and complex, deliver a cacophony of incoherent messages that create skepticism abroad about Europe’s ability to manage its crisis.  The Governor of the the Bank of Brazil offered three crucial lessons in crisis remediation:
> The more a country waits, the more it costs.
> it must have a credible plan
> To be credible, its leaders should refer only to firm decisions.

Many governments are surprised at the lack of action with respect to a problem that is, after all, relatively limited: that of Greece.  Several larger countries have experienced similar problems, even to the point of defaulting, for example Argentina which survived ten years of misery.

Wolfgang Schauble, the German Finance Minister, presented an outline for reform of the International Financial Institute which has the advantage of clarity and coherence. It also calls for fiscal coordination, which he rightly believes to be the indispensable complement to monetary union.  Europe has painfully realized the need to deepen the Eurozone via political institutions and structures capable of managing that coordination.

There was unanimous agreement with former president of the Federal Reserve, Paul Volker, who stated that Europe must now give itself an institution that will oversee and if necessary, intervene in the budgets of the Eurozone countries. Jean-Claude Trichet, President of the European Central Bank, agreed.”

Not surprisingly, this Washington-inspired common front drew sharp reactions from Le Monde’s readers.  (It is interesting for me to note that since I left France in 2000, the readership of this daily, considered to be one of the most serious papers in Europe, now includes people who cannot write French correctly. Never mind, education is a worldwide problem.)  Here are some of the comments posted on Le Monde’s site:

“The fuse is lit and Wall Street, the City and Switzerland are in trouble:
Almost 10 billion of the 15 billion ghost assets have evaporated.  The rest (and probably a lot more) will evaporate during the fourth quarter of this year, which will see the ‘implosive fusion’ of world financial assets. The main reactors will be Wall St and the City.  As foreseen by the European Laboratory of Political Anticipation (LEAP), the solutions to the problem of Euroland countries’ debts will lead to the formation of a critical mass, after which control will be impossible.  But most of the fuel that will feed the reaction and turn it into a real planetary shock is in the United States.  Since July 2011 the process has barely begun. The worst is still to come – and soon.

But let’s turn to Greece’s third crisis: Every time Washington and London have serious problems, Greece is brought to center stage. This summer was catastrophic for the United States. Now in recession, having seen its credit rating downgraded (something the experts considered impossible only six months ago), and with the paralysis of its political system exposed for all the world to see, it is incapable of taking even token measures to reduce its deficit.  At the same time, Great Britain slips deeper into a depression: austerity measures that fail to affect the budget deficit, provoke violent riots, plunging the country into the worst social crisis it has ever seen. As ever widening collusion with Rupert Murdoch is exposed, the coalition government no longer knows why it governs. The situation was ripe for a new media focus on the Greek crisis, and its logical consequence, the end of the Euro!”

Here is the text of a petition launched on a French website  www.petitions24.net/pour_labandon_de_la_dette_et_la_nationalisation_des_banques) calling for French banks to be nationalized:

‘We are well aware that our countries’ debts poison Europe. (The U.S. has the same problem, as do the developing countries. Many countries are on the brink of implosion; Greece, Ireland, Portugal, Spain, and now Italy, to mention only the most visible.)  We do not pay enough attention to the social movements this situation provokes, and which also are starting in France, one of the countries that could become bankrupt.

Until 1973, during a period known as the ‘Glorious Thirty’, much of Europe developed at an unprecedented rate.  Countries were able to manage their budgets indepen-dently, by requesting their central banks to print money when necessary. Then President Pompidou decided that European countries should only finance their debt by borrowing from private banks. http://www.notre-ecole.net/…

His finance minister, Valery Giscard d’Estaing, pushed through the January 3, 1973 law whose Article 15 specified: ‘The public treasury may not present its assets to the Banque de France’, meaning that the national bank could not directly finance the State. This law was confirmed by Article 104 of the Maastricht Treaty – which then became Article 123 of the Lisbon Treaty.

The Eurozone is unique in having this prohibition engraved in the stone of a treaty.  It means that its members are forced to borrow on the financial markets, with interest, for needs not covered by other sources of revenue. Yet countries like the US, Great Britain or Japan do not hesitate to borrow from their central banks when their economic needs require it. In France, banks can borrow at 1% from the European Central Bank and lend to the United States at 3, 5, 7% or more. (Andre-Jacques Holbecq).

This decision threw a spanner in the works.  With higher interest rates added to the debt, countries could no longer repay their loans quickly enough to avoid additional interest – a vicious circle generated by composite interest: more loans must be taken out in order to pay back the original interest, raising the level of debt.

Using France as an example, based on the end of 2009 (the debt has increased since): “The yearly increase in the pubic debt from 1980 to 2009 corresponds approximately to the yearly interest on the debt, which consequently snowballs.  In constant Euros, France’s debt went from 239 billion Euros (21% of GNP at the end of 1999 to 1489 billion Euros (78% of GNP) or an increase of 1250 billion Euros.  During the same period, we paid about 1340 billion Euros in interest to various private lenders – banks and credit firms, pension funds, life insurance companies, etc. (Andre-Jacques Holbecq).

They tried to tell us that this transformation from prosperity to indebtedness was a consequence of the ‘oil’ crisis of 1974, which is actually a legitimate demand since until then we were benefitting from energy resources at ridiculously low prices.   The banks that increased their debt were aided by the states provoked the financial crisis of 2007.

Scapegoats had to be found. Austerity plans succeeded one another, leading to privatizations and the dismantling of public services, as governments try to make their citizens responsible for the deficits they incurred.” (Note this language:  What we call the safety net, implying that it is only there for exceptional circumstances, is referred to in a matter of fact way as ‘social services’, which are part of everyone’s life. Also note the repeated use of the words ‘just’ and ‘justice’.)

The recent crisis showed the lack of scruples of the financial sector, which, at the height of the storm, continued to speculate on the misery of the world, in particular on basic foodstuffs, with the poorest countries deprived of the minimum necessary for survival, creating widespread famine.

On behalf of these countries so unjustly treated, we demand reparations by way of debt forgiveness, both vis a vis banks and other governments.
    We must say no to so much injustice, as the citizens of the world are asked to pay the price of errors committed by others.

Private banks must renounce the debts which enabled them to live well all these years. Otherwise our countries will fall like houses of cards, cards rigged from the beginning that leave us no chance of escape.’

This morning Fareed Zakaria interviewed the CEO of General Electric, tapped by President Obama to help fix the jobs crisis.  For a while Jeffrey Immelt sounded like a reasonable, old school Republican, only to find himself embarrassed by the fact that GE’s customers span the globe – and GE jobs follow.

But his worst moment came at the end (beware long interviews, even if you head one of the biggest companies in the world).  Bragging about his business relations with China, Immelt said he ordered his managers to study China’s Five Years Plans because, unlike legislation that keeps U.S. business uncertain about the future, with China, business knows what to expect. The Chinese Politburo does not have to reckon with an organized opposition, either political or industrial, hence its decisions are implemented.

With the world financial crisis felt mainly in the West, China is also all that stands in the way of a U.S. default, as the BRICs and other developing countries see consistently high growth rates. Referring to the Euro Zone crisis, Immelt warned that Greece was not the biggest problem: “It’s a tiny economy”, he said, “while Italy’s is the seventh largest in the world, and if it goes belly up, the rest of the Euro zone will not be able to save it.” According to Fareed, Christine Lagarde will probably be the last non-Asian head of the IMF.

Before moving on to an inconclusive debate about next Tuesday’s Palestinian request for statehood at the Security Council,  Fareed gave a no-holds barred critique of Obama’s Cuba policy. Our Caribbean nemesis turns out to have one of the biggest undersea reserves of petroleum in the world. Cuba watchers have known exploration was under way, but this probably wasn’t taken seriously by the White House. Otherwise why, just days ago, would Obama have declared that Cuba has not democratized enough to merit a lifting of our embargo? As oil companies from every corner of the globe rush to be part of the action off Cuba’s shores, we can only sit and watch. Worse, if there is an incident like last year’s BP disaster off the coast of Louisiana, Florida will be the most affected, and we would be hoisted by our own petard, our embargo forbidding us from sending men or machines to minimize the damage.

An Italian radio program’s story about Iceland’s on-going revolution is a stunning example of how little our media tells us about the rest of the world. Americans may remember that at the start of the 2008 financial crisis, Iceland literally went bankrupt.  The reasons were mentioned only in passing, and since then, this little-known member of the European Union fell back into oblivion.

As one European country after another fails or risks failing, imperiling the Euro, with repercussions for the entire world, the last thing the powers that be want is for Iceland to become an example. Here’s why:

Five years of a pure neo-liberal regime had made Iceland, (population 320 thousand, no army), one of the richest countries in the world. In 2003 all the country’s banks were privatized, and in an effort to attract foreign investors, they offered on-line banking whose minimal costs allowed them to offer relatively high rates of return. The accounts, called IceSave, attracted many English and Dutch small investors.  But as investments grew, so did the banks’ foreign debt.  In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent.  The 2008 world financial crisis was the coup de grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro.  At the end of the year Iceland declared bankruptcy.

Contrary to what could be expected, the crisis resulted in Icelanders recovering their sovereign rights, through a process of direct participatory democracy that eventually led to a new Constitution.  But only after much pain.

Geir Haarde, the Prime Minister of a Social Democratic coalition government, negotiated a two million one hundred thousand dollar loan, to which the Nordic countries added another two and a half million. But the foreign financial community pressured Iceland to impose drastic measures.  The FMI and the European Union wanted to take over its debt, claiming this was the only way for the country to pay back Holland and Great Britain, who had promised to reimburse their citizens.

Protests and riots continued, eventually forcing the government to resign. Elections were brought forward to April 2009, resulting in a left-wing coalition which condemned the neoliberal economic system, but immediately gave in to its demands that Iceland pay off a total of three and a half million Euros.  This required each Icelandic citizen to pay 100 Euros a month (or about $130) for fifteen years, at 5.5% interest, to pay off a debt incurred by private parties vis a vis other private parties. It was the straw that broke the reindeer’s back.

What happened next was extraordinary. The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered, transforming the relationship between citizens and their political institutions and eventually driving Iceland’s leaders to the side of their constituents. The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that would have made Iceland’s citizens responsible for its bankers’ debts, and accepted calls for a referendum.

Of course the international community only increased the pressure on Iceland. Great Britain and Holland threatened dire reprisals that would isolate the country.  As Icelanders went to vote, foreign bankers threatened to block any aid from the IMF.  The British government threatened to freeze Icelander savings and checking accounts. As Grimsson said: “We were told that if we refused the international community’s conditions, we would become the Cuba of the North.  But if we had accepted, we would have become the Haiti of the North.” (How many times have I written that when Cubans see the dire state of their neighbor, Haiti, they count themselves lucky.)

In the March 2010 referendum, 93% voted against repayment of the debt.  The IMF immediately froze its loan.  But the revolution (though not televised in the United States), would not be intimidated. With the support of a furious citizenry, the government launched civil and penal investigations into those responsible for the financial crisis.  Interpol put out an international arrest warrant for the ex-president of Kaupthing, Sigurdur Einarsson, as the other bankers implicated in the crash fled the country.

But Icelanders didn’t stop there: they decided to draft a new constitution that would free the country from the exaggerated power of international finance and virtual money.  (The one in use had been written when Iceland gained its independence from Denmark, in 1918, the only difference with the Danish constitution being that the word ‘president’ replaced the word ‘king’.)

To write the new constitution, the people of Iceland elected twenty-five citizens from among 522 adults not belonging to any political party but recommended by at least thirty citizens. This document was not the work of a handful of politicians, but was written on the internet. The constituent’s meetings are streamed on-line, and citizens can send their comments and suggestions, witnessing the document as it takes shape. The constitution that eventually emerges from this participatory democratic process will be submitted to parliament for approval after the next elections.

Some readers will remember that Iceland’s ninth century agrarian collapse was featured in Jared Diamond’s book by the same name. Today, that country is recovering from its financial collapse in ways just the opposite of those generally considered unavoidable, as confirmed yesterday by the new head of the IMF, Christine Lagarde to Fareed Zakaria. The people of Greece have been told that the privatization of their public sector is the only solution.  And those of Italy, Spain and Portugal are facing the same threat.

They should look to Iceland. Refusing to bow to foreign interests, that small country stated loud and clear that the people are sovereign.

That’s why it is not in the news anymore.