Description
Financial contagion refers to a scenario in which small shocks, which initially affect only a few financial institutions or a particular region of an economy, spread to the rest of financial sectors and other countries whose economies were previously healthy, in a manner similar to the transmission of a medical disease. Financial contagion happens at both the international level and the domestic level.
Case Study on Difference between Iceland and Ireland: Lessons for Global Finance, Courtesy of Two Crises
Abstract: Current literature about Europe's ongoing financial struggle focuses overwhelmingly on macroeconomic phenomena such as interest rates and bond spreads, the failures of the EMU to protect "prudent" countries like Germany from free loading small economies like Greece and Ireland, and how to reform fiscal policies throughout the region with or without harsh austerity measures. This paper examines the political economic roots of Iceland and Ireland's recent financial crises, as well as how the two countries' responses to their crises have differed, and presents a theory that a combination of systemic financial deregulation and privatization, with or without the EU's mandate or imprimatur, political protection of a financial 'class,' and citizens' implicit or explicit support for these policies created the foundations of these crises, and exacerbated their effects. It also examines the new power dynamics in Europe, whereby larger economies like Germany and the UK can push their financial irresponsibility to the side, by paradoxically penalizing (or trying to penalize) Irish and Icelandic citizenry with high-interest bailout loans contingent on brutal austerity measures. By studying the causes and consequences of Ireland's submission to these arguments, and Iceland's defiance, we can understand better the value (and economic consequences) of strong political and economic allies, as well as alternatives to the non-choices being imposed upon Europe's small countries in crisis. I. Introduction - Or, a Riddle: "Q: What's the difference between Iceland and Ireland? A: One letter and six months."(Brignall, 2009)1 Since late 2008, both Iceland and Ireland have continued to react to the consequences of major financial crises, and have been prominent casualties of the Global Financial Crisis. Mainstream literature about these countries' financial crises has focused on the roots of their causes in currency and housing speculation, the crises have deeper roots in political economy, class dynamics, and the 'new' global financial architecture. Though Iceland and Ireland followed different roads to their crises, their cases bear similarities that indict the 'new' global financial architecture of deregulated, liberalized, and
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Or a joke, depending on one's orientation.
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privatized finance allowed to run rampant. Further, both demonstrate the social costs of financial excess - in both countries, three prominent banks (Iceland's Glitnir, Kaupthing, and Landsbanki, and Ireland's Allied-Irish Bank, Anglo-Irish Bank, and the Bank of Ireland) operating with complete governmental trust borrowed and made loans far in excess of their abilities to cover, with little to no lasting real sector development to show for it, except for the unemployment and other social costs that have resulted from these two financial debacles. The differences in these countries' responses to their circumstances reveal two different paths of recovery - one that placates the rentiers, and one that addresses the needs of the 'rest'. As such, despite these countries' small size and seeming irrelevance to the 'big picture', the world would do well to pay attention to these two island nations' experiences, both before and after the recent crisis. Though the onsets of Iceland and Ireland's crises differed, the circumstances for these crises both took a substantial amount of time to develop, and shared similar characteristics. Both countries' apparent rise in financial fortune relied heavily on other bankers' willingness to believe boom-time hype - in Iceland's, regarding the value of the Icelandic Krona (ISK), and in Ireland, regarding housing prices and the prevalent construction boom - in spite of an existing and growing literature in both cases that a bust was imminent. Further, these developments might not have taken place if both had not, for different reasons, pursued significant deregulation and privatization of their respective financial sectors, and if different classes of people had not, also, benefitted from the short-term gains during the lead-up to the respective crises. Current indignation about Iceland's and Ireland's debts from different countries that invested heavily in the two nations' banks rings hollow, given the international willingness during the boom to
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ignore warning signs and calls of alarm by resident economists in both nations, as well as outside spectators. II. Origins of the Crises In the most basic terms, Iceland's financial crisis stemmed from international speculation in the ISK's rapid appreciation from the early 2000s, until the crash in 2008, as well as risk-loving Icelandic investment bankers' cavalier trading. Ireland's crisis has been similarly succinctly described as a massive construction bubble gone horribly awry. However, a brief recap of the recent history of these two countries' financial sectors reveals major parallels. For most of their histories, Iceland and Ireland had small, largely public, and heavily regulated financial sectors. Both countries instituted small reforms to modernize those sectors during the late 1970s and early 1980s, and both significantly deregulated and liberalized their financial sectors in the 1990s. The causes of these financial shifts differed - Iceland's financial liberalization occurred under the auspices of a governing group led by David Oddson, a poet cum prime minister who had formed a right-wing proliberalization and anti-regulation party in the 1980s specifically to expand the economic options of a nascent nouveau-rich group in Iceland called the Octopus. (Wade and Sigurgeirsdottir, 2010) Ireland's shift, by contrast, had much to do with its bid to enter the EU and the Eurozone. One of the stated aims of the Eurozone was to liberalize European finance so that capital could move freely and rapidly between member states' banks, with a longer term aim to shift from bank-based financial systems to a securities market-based system like the United States. (McCann, 2010) These changes had short-term macroeconomic effects that encouraged international
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investments in both Iceland and Ireland. Two elements of Iceland's new financial policy, a steady increase in interest rates from the early 2000s onward (from 5.3% in 2001 through 15.25% in 2007) to combat inflation and an aggressive entry into investment banking after decades of financial policy that had promoted stability above all outcomes, combined to create a massive inflow of foreign capital. Part of the inflow stemmed from commercial banks, institutional investors, and individuals' eagerness to take advantage of a rapidly appreciating currency. Another part arose from international bankers' willingness - if not eagerness - to take advantage of a previously untapped market of Icelandic investment banking. Michael Lewis describes an environment in which many of the executives and employees of Iceland's new banking system, which had transformed from a large number of small savings banks into a network of three large savings/commercial/investment banking hybrids, were men in their late twenties and thirties, with little experience in financial and monetary policy, particularly at the international level, and argues that, further, these men might have been uniquely risk-loving individuals that would be more prone to pushing Iceland's financial system and economy to a brink. (Lewis, 2009) In other work, Lewis has described investment bankers, particularly in the bond market, as sharks that wait for the right mark to walk into a deal. Iceland's new class of bankers would seem to be just such a population. In Ireland's case, the macroeconomic change that most mainstream authors have focused on has been Ireland's entry into the European Monetary Union (EMU). Two features of this entry helped to fuel Ireland's ensuing construction boom. First, when the euro became common currency in the Eurozone in 2002, Irish banks and consumers faced
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lower interest rates than before. Second, as members of the EMU, Irish bonds were rated at the same risk level as other member states. Paul Krugman and others have focused on this shortcoming of the EMU to excess, but it does help explain some of the onset of the housing boom, and certainly helped contribute to Ireland's eventual crisis. A feature of EMU membership that fewer mainstream economists mention, however, is the subsequent and unprecedented ease in capital transfer between member states' banks. Irish banks borrowed heavily from international banks - US, UK, German, Belgian, and other nations all lent substantial sums to Ireland's banking sector. At the same time, a large number of international banking operations set up branches in Ireland, to take advantage of the boom in construction going on. While these financial policy shifts enabled some of the bubble activity that contributed to the ultimate crises in both Iceland and Ireland, it is important to emphasize the simultaneous political and class forces at work in both nations that empowered the respective financial sectors to grow beyond the limits of reason and without promoting comparable growth in either country's real sector. Policy makers in both Iceland and Ireland protected Icelandic and Irish bankers from scrutiny, made deals with financiers regarding what regulations they would block, and presented sanguine portraits of their respective financial sectors to the rest of the world, despite mounting criticisms from domestic and international economists in both countries. Iceland's government was involved - fundamentally - with its financial sector development from the beginning. In addition to substantially decreasing corporate and financial tax rates, Oddson's government and the Central Bank during this period pursued every sort of policy they could to expand Iceland's financial reach. (Wade, 2009) Key
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policy shifts within the banking sector - including the shift from rewarding stability minded banking to rewarding risk-taking and profit-seeking banking - came under political advisement. (Danielsson and Zoega, 2009) Prior to Oddson's term as prime minister, it had been common practice for a member of each political party to be one of the Central Bank's governors - Oddson was perhaps the first Icelandic prime minister to take advantage of this system by placing an activist Central Banker in one of those positions. Throughout the period of 2000 to 2008, Iceland's Central Bank performed no significant stress tests, and failed to acknowledge the inherent risks in a country with virtually zero experience in finance becoming the second most leveraged financial system in the world, following Switzerland, a country that had made its proverbial economic name via finance. (Danielsson and Zoega, 2009) Robert Wade and others note that in addition to the government and the Central Bank's tremendous involvement in the investment-banking sector, these institutions also lobbied Icelandic citizens and other depositors heavily to buy shares in Iceland's three major banks. (Wade and Sigurgeirsdottir, 2010) After Lehman Brothers' collapse, just days before Iceland's three major banks would go into receivership, "[in] a bid to restore confidence, Oddson ordered Iceland's Central Bank to buy seventy-five percent of Glitnir's shares." (Wade and Sigurgeirsdottir, 2010, 22) At the same time, Oddson's government engaged in what reads like a protection campaign for said financial sector. Wade and Sigurgeirsdottir describe Oddson's government's machinations on behalf of the financial sector, that included defunding university and research programs that criticized Iceland's financial sector, public attacks on academics that wrote critical papers, and even intimidating "Statistics Iceland, the
7 public data agency ? into suppressing information on soaring income and wealth inequality." (Wade and Sigurgeirsdottir, 2010, 28) The Icelandic Chamber of Commerce paid different economists - including Frederic Mishkin and Richard Portes - big fees for papers that lauded Iceland's financial sector, and claimed that Iceland's Central Bank had all things financial in good working order. (Ironically, Mishkin's paper also praised Iceland's robust civil institutions and lack of corruption.) (Wade and Sigurgeirsdottir, 2010) At the same time, banks bought large shares in Iceland's major media companies, while media companies bought large shares in the banks. This weird, even incestuous, relationship perverted institutions with a duty to report and deliver information to the public. Throstur Sigurjonsson describes a scenario in which banks lobbied the news media to present favorable pictures of their financial sector, and where journalists felt little need to investigate further. This process at the very least contradicts mainstream theories of efficient finance; in practice, it fueled the actions of a financial sector out of control, misinformed a public about how their country had suddenly started to get rich, and spread the belief that Iceland's financiers could never fail. Ireland's political economy of finance during the boom appears almost tame by comparison to Iceland's, but it echoes the dynamics that enabled Iceland's financial sector to grow to such a calamitous level. First, Ireland's government maintained a very cozy relationship with its construction industry, almost from the start. When Ireland's first Celtic Tiger moment - an export-led surge in growth2 had subsided in the early 2000s, one of the Irish government's counter-cyclical policies was to stimulate growth in the housing sector. Irish fiscal policy from the early 2000s on consisted of a series of tax
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Begotten under shady provisions and to dubious benefit, according to some - but that is another story.
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cuts at the corporate and household level and structural increases in spending, largely geared toward municipal construction and property investment. It bolstered what became an unsustainable construction and housing boom, while it eliminated a fiscal safety net that the government would need when Ireland went into recession in 2008. (Honohan, 2008) The Irish government went on to encourage major Irish banks to lend more to homeowners and construction businesses - this resulted in a wave of lending that far outstripped these banks' capital reserves, and courted insolvency. (Lewis, 2011) Despite warnings from domestic economists and institutions like the IMF and OECD that Ireland's housing bubble and credit bubble had the potential to burst with dangerous effects, the Irish government did little to increase regulatory oversight of these banks' activities, and even relaxed certain regulations. When the Regulator did raise capital requirements in a nominal attempt to curb high loan to capital ratio loans, it raised the deposit minimum requirement from 4% to 4.8%. (Honohan, 2008) Kathleen Barrington, a reporter for the Sunday Business Post, writes in her blog that major Irish banks persistently and aggressively lobbied the Irish government from as early as 2005 to decrease the deposit to loan ratio and to allow those banks to create and trade mortgage backed securities. She argues further that despite the Irish Financial Regulator's resistance to such an action, in 2007 he allowed it after being told that Bertie Ahern's government supported giving the bankers what they needed.3 (Barrington, 2010)
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From Barrington's blog: As minister of finance, Brian Cowen "received another letter on the matter [of deregulations that would benefit Anglo Irish Bank et al] from his boss. Taoiseach Bertie Ahern reminded Cowen that he (Ahern) had effectively promised the banks the legislation would be delivered." (2010) This is a particularly damning statement that I haven't found any corroboration for yet.
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Gary Murphy, John Hogan, and Raj Chari seem to corroborate this anecdote, though I have found no concrete evidence of such lobbying occurring, in their 2011 article "Lobbying Regulation in Ireland: Some Thoughts from the International Evidence," as does KPV O'Sullivan in the 2010 paper "Financial Supervision in Ireland: Where to Now?" It is important to mention that Ireland lacks any "statutory regulation of lobbying," according to Conor McGrath. (McGrath, 2009, 256) McGrath describes known cases of governmental corruption in the late 1990s related to regional planning, but it is not a far leap to imagine financial interests in Ireland lobbying the government for preferential treatment - they certainly do in the United States. When Irish elected officials have proposed legislation against lobbying, it has always been the Labour Party that has introduced the motion - never Fiona Fàil, the party in charge in the lead-up and immediate aftermath of Ireland's crisis. One detail to emerge from the Irish banking crisis is the existence of the 'Golden Circle', a network of 39 individuals that held positions on at least two boards of 33 out of 40 major Irish companies, both public and private. Significantly, members of several banks' boards sat on the boards of other banks, as well as multiple firms' boards. According to a 2010 TASC report by Paula Clancy, Nat O'Connor, and Kevin Dillon, "Angle Irish Bank [had] ten links, and Irish Life and Permanent and Bank of Ireland ? each had nine links to other companies. Allied Irish Bank (AIB) also had a large number of links, to seven other firms." (Clancy, et al, 2010, 34) The intermingling of these individuals and institutions is likely to have generated connections to government agencies and actors, and may well have exacerbated the effects of the financial bubbles that grew between 2000 and 2008 in Ireland.
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As in Iceland, a tacit policy of government and media censorship appears to have emerged during the rise of Ireland's housing bubble. Michael Lewis describes the hurdles that Irish academic Morgan Kelly faced when he tried to submit an article critiquing the housing bubble, and arguing that a collapse of the Irish banking system was imminent: "The [Irish Independent]'s editor wrote back to say he found the article offensive and wouldn't publish it. Kelly next turned to The Sunday Business Post, but the editor there just sat on the piece. The journalists were following the bankers' lead and conflating a positive outlook on real-estate prices with a love of country and a commitment to Team Ireland. ("They'd all use this same phrase, 'You're either for us or against us,' " says a prominent bank analyst in Dublin.) Kelly finally went back to The Irish Times, which ran his article in September 2007." (Lewis, 2011, 5)
As in Iceland, when Irish banks' stock values began to drop, and as the risk of a run on one of them increased, Irish government officials and bankers claimed that: "the banks merely had a "liquidity" problem and that Anglo Irish was "fundamentally sound"—that the two could not be reconciled. The government had a report thrown together by Merrill Lynch, which declared that "all of the Irish banks are profitable and well capitalised." (Lewis, 2011, 6) In addition to this scuffle following one report that the Irish financial and construction sectors were not as healthy as they had been made to appear, the Irish government Department of Finance hired a Merrill Lynch economist to analyze the state of the Irish housing market and financial sector. When Philip Ingram wrote that Irish bankers were making the riskiest loans in the British Isles, two things happened, according to Lewis. First, Anglo Irish bankers phoned Merrill Lynch, and threatened to take their business elsewhere if such a report were allowed to stay out in the open, and then, Merrill Lynch retracted the report, because it, "had been a lead underwriter of Anglo Irish's bonds and the corporate broker to A.I.B.: they'd earned huge sums of money off the growth of Irish banking." (Lewis, 2011, 10) Eventually, after neutering Ingram's report, and "purging it
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of its damning quotes from market insiders, including its many references to Irish banks," Merrill Lynch would go on to fire Ingram. (Lewis, 2011, 11) This anecdote reveals a lot about the power of investment banks and financial sectors in both the US and Ireland that either could threaten an institution by withholding business if they printed some information for the public good, and that either would go along with it in the pursuit (or maintenance of expected) profits, indicates a level of power that has destructive effects. Lewis posits that it was the revised Merrill Lynch memo that effectively recommended that the Irish state guarantee its main banks, but more on that later. (Lewis, 2011) Icelandic and Irish citizens wittingly and unwittingly assisted this empowerment, too. In both countries, elites that had emerged during previous periods of growth (Iceland's initial trade liberalization, and Ireland's original Celtic Tiger surge) saw their wealth increase disproportionately to that of the rest of their countries. In Iceland, part of this had to do with participation in the burgeoning investment banking sphere. In Ireland, contractors and real estate developers earned immense sums of money during the inflation of the construction bubble. These changes show up in national inequality figures from 2000 to 2008. According to Wade and Sigurgeirsdottir, prior to the mid-nineties, Icelandic household income distribution resembled other highly egalitarian Scandinavian countries. However, the process of increasing inequality that had begun when Iceland's government created a market for fishing quotas in the eighties accelerated rapidly as Iceland's financial sector grew and grew between 2000 and 2007. (Lewis, 2009, and Wade and Sigurgeirsdottir, 2010) Stefan Olafson, an economist at the University of Iceland has done significant research on Iceland's tax rate over history, gave a presentation in January, 2010, titled,
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"From Neoliberalism to Increasing Income Inequality: Globalization, Politics, and Increasing Income Inequality in Iceland." According to Olafsson's research, not accounting for the difference in financial earnings masks the increasing disparity in income and wealth from the pre-boom time through 2009. Not accounting or financial earnings, the Gini coefficient for Icelandic couples increased by 35.8%. If one accounts for financial earnings, the Gini coefficient for Icelandic couples increases by 74.8% from 1995 through 2008. When Olafsson plots the relationship between income groups and the share of Icelandic financial earnings, it appears that the top 15% of Icelandic families earned approximately 80 percent of financial earnings in Iceland during 2007. (Olafsson, 2010) Though the literature about Irish inequality appears to disagree about whether or not Irish inequality grew or stayed constant during the original Celtic Tiger period and the more recent construction boom, it is worth noting that Ireland has one of the highest inequality rates of the European Union. While Brian Nolan and others have argued that the only way to conclude that Irish inequality has increased over the past decade is by using gross measurements like pre-tax income, others, like staff economists of the Irish think tank TASC (Think-tank for Action on Social Change) have argued that Ireland consistently ranks poorly among fellow EU nations in terms of inequality, by several measures. Whether or not the Irish Gini coefficient has risen to 32 or held constant at 32 is not a rosy picture. Further, the TASC economists argue that Ireland ranks in the bottom third of the EU in terms of its lowest quintile's share of national income, and Ireland's population at risk of falling into poverty ranks with the bottom third of EU nations on the inequality scale. The TASC economists go on to note that using Gini coefficients to
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measure the change in Irish inequality over time discounts the immense increase in topearners income during Ireland's construction boom. In addition, Ireland's poverty rate has been increasing since the early 2000s, even before the onset of Ireland's financial crisis. However, non-elite sectors of these populations also fueled these bubbles and ultimate crises. Many economists that have written about Iceland's recent boom period have discussed how Icelandic levels of consumption shot up in tandem. Anecdotal evidence abounds of lavish purchases by Icelanders of luxury imports like Land Rovers and soccer teams, as well as massive Irish house purchases and hundreds of thousands of dollars spent on things like kitchen renovations. How widespread these consumption binges were is an underexplored arena of these crises' analyses. However, in both states, individuals and households did buy shares in the banks that would go on to implode, often under the advice of either their governments, or investment advisers that they might have been expected to be able to trust. (Or, one might argue that they should have been able to trust.) Further, in both states ordinary individuals and households experienced the effects of housing bubbles in which home prices increased at least three-fold (in Iceland) and up to five-fold (in Ireland). This is what I would describe as ordinary citizens' unwitting enabling of the financial sectors of their countries, under the influence of state and financial actors that stood, in the short term, to benefit from their contributions. III. The Aftermath, and Divergence When Iceland and Ireland's financial sectors crumbled, both countries experienced significant social losses, despite the highly concentrated centers of financial activity in both nations. After the collapse of Lehman Brothers, when other banks began
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to call back their deposits in Iceland's banks, Iceland was unable to cover the demand, due to its chronically low capital reserves. Following the egress of capital, Iceland's currency the ISK plummeted to approximately half of its peak value (from 1 ISK: $0.02 to 1 ISK: $0.01). (From the Icelandic Central Bank.) The ISK has hovered at this lower value fairly consistently since the collapse of the financial sector in 2008. Ireland has not faced such a currency shock, since it continues to be a member of the EMU, and a user of the Euro. (Some, like Krugman, have argued that Iceland's "freedom" to devalue its currency - or, rather, to watch as it loses value on the international currency market - is part of the key to Iceland's recovery compared to other small nations in financial crisis, but more on that later.) (Krugman, 2011) Regardless, both countries have incurred significant declines in disposable income of approximately 20% since 2008. Logically, both have seen a spike in household debt as a percentage of disposable income, though this is a direct link to the increase in Icelandic and Irish consumption during the boom times. Unemployment has more than tripled in both countries - Iceland's rate has increased from 2.3% in 2008 to 7.8% in 2010, and Ireland's has increased from 4.4% in 2006 to 14.5% in 2011. (From Iceland's Central Bank, and Ireland's Central Statistics Office) Finally, both countries have significant levels of the population at risk of poverty, and having trouble making ends meet. Though Iceland's at risk of poverty rate has either held constant around 10% (Iceland), or even declined, and Ireland's at risk of poverty rate appears to have decreased, from 16.5% in 2007 to 14.1% in 2009 (according to Ireland's Central Statistics Office), other measures of poverty risk reveal a grimmer story. In Iceland, the percentage of households who say that it is very difficult to make ends meet has risen from 5.9% in 2008 to 13.3% in 2011,
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and in Ireland, both the consistent rate of poverty and the percentage of households that have experienced two or more forms of deprivation have both increased since 2007 - the consistent rate of poverty has gone up from 5.1% to 5.5% in 2009, and the deprivation rate has increased from 11.8% in 2007 to 17.3% in 2009. It is probable that these figures underestimate current values - 2009 was the most recent measure of poverty data that I could find for Ireland - since the Irish government has been steadily implementing austerity measures since receiving its bailout from the EMU. Finally, both countries have seen large emigrations of people - in 2008, for the first time in years, both Iceland and Ireland began to see more people emigrate than immigrate. (Lewis, 2009, 2011) Because of the high rate of international investment in both Icelandic and Irish banks, there was a large international reaction when it became clear that neither system was capitalized thoroughly enough to cover the losses outside investors had registered as the systems collapsed. Michael Lewis lists some of the biggest investors in Iceland in "Wall Street on the Tundra: "German banks put $21 billion into Icelandic banks. The Netherlands gave them $305 million, and Sweden kicked in $400 million. U.K. investors, lured by the eye-popping [boom-time] 14% annual returns forked over $30 billion -- $28 billion from companies and individuals, and the rest from pension funds, hospitals, universities, and other public institutions." (Lewis, 2009, 10-11) In addition to massive institutional investment in Icelandic banks, many citizens of the UK and the Netherlands also used retail banking services of IceSave, an e-banking service that Landsbanki had developed when its revenues had started to decrease in 2006. (Danielsson and Zoega, 2009) Lewis has also described the eagerness among international investors to get in on the Irish construction boom - most of Ireland's major banks' bondholders were not, in fact, Irish, but were major international institutional
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investors: "A political investigative blog called Guido Fawkes somehow obtained a list of the Anglo Irish foreign bondholders: German banks, French banks, German investment funds, Goldman Sachs. (Yes! Even the Irish did their bit for Goldman.)" (Lewis, 2011, 13) Simon Johnson has also written about the major international involvement in Ireland's construction boom and argued that EU members are not eager to have Ireland's banks' books examined too closely, "because it would expose the really bad decisions made by pan-European banks and their regulators over the last decade and create potential fiscal risks in other euro-zone countries." (Johnson, Baseline Scenario, 2010) A New York Times article that Johnson cites notes that Irish banks owe the Royal Bank of Scotland about $85.6 billion, and that they owe Lloyds approximately $43.5 billion. Meanwhile, in Germany, "Hypo Real Estate, a property and public sector lender owned by the government after a bailout owed its near collapse largely to problems at Depfa, its subsidiary in Dublin." (Jack Ewing and Julia Werdigier, "Ireland's Debt to Foreign Banks is Still Unknown," 2010) Ewing and Werdigier also mention at the beginning of their article that there is controversy over the reporting of how much Irish banks owe these different European banks, and that it appears that different EU governments have tried to cover up slips revealing the extent of how much their banks may have leant to Ireland during the boom years. However, the Icelandic and Irish governments' (and people's) reactions both to the onsets of their crises, and to the hue and cry that has sprung up from international investors has differ substantially. Iceland's government almost immediately bought shares of Icelandic banks before nationalizing them. Icelanders then began a sustained protest, and by January of 2009, they successfully won a series of early elections in
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which Icelandic people voted Oddson's Independence Party out, and voted in an alliance between the Social Democrats and the Left-Green Alliance. This new government quickly pursued political reforms such as beginning a bid to join the EU, as well as implementing new financial reforms, like recapitalizing Iceland's financial regulation agency FME, and initiating investigations into and prosecutions of the major bankers responsible for their country's financial collapse. Iceland has also consistently resisted European demands that it impose austerity measures in order to pay back debts at high interest rates. After Iceland's big three banks went into receivership, the UK and the Netherlands governments fully compensated all their respective citizens that had lost savings in the process; these governments then aggressively pressed Iceland to pay back the billions that they had spent to compensate their citizenry. The UK and the Netherlands even went to so far as to block Iceland's proposed bid to enter the European Union, and to block planned IMF bailouts until Iceland agreed to pay, with interest. From September 2009 through January 2010, Iceland grappled with UK and Netherlander interests until the Icelandic president refused to sign the bill committing Iceland to paying the UK and the Netherlands about €5 billion. In the vacuum following the crash, Iceland's government has held its ground about not pursuing fiscal austerity measures until the country's economy has begun to grow steadily, and has also committed to paying back those debts over a longer period of time with a lower rate of interest. (IceNews, 2011) Ireland's government, on the other hand, initially guaranteed the assets of its three major banks, and made several billion euro investments into each of the banks, in an
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attempt to get those banks lending again. When the government then discovered that Anglo-Irish bank had been hiding tens of millions of Euros worth of loans (that it has been lending to other banks and to certain very wealthy clients), it nationalized AngloIrish bank. Next, it created the National Assets Management Agency (NAMA) - an "asset management company" meant to purchase loans from Ireland's six major banks both and good - in order to "make the banks safer and more secure for depositors and investors and free them to lend again to the productive economy." ("What is NAMA?", 3/30/10) The Fine Gael party's report "Credit Where Credit is Due" argues that by now, the Irish government has paid upwards of 100 billion euros to stabilize the banking system - approximately 60 billion to recapitalize various banks and approximately 40 billion on NAMA's purchase of troubled banks' assets. (Fine Gael, "Credit Where Credit is Due," 2011) Before petitioning the EU and IMF for relief funds, Ireland's government attempted to resolve its fiscal crisis through a combination of fiscal reforms. These included: "the introduction of gradual income levies, which had the effect of sharply increasing the marginal income tax rate for middle and high income earners. For public sector workers, pay levels were de facto reduced by the introduction of a public sector pension levy, while a recruitment freeze was also implemented. Further measures were taken in the 2010 budget ... including further sizeable reductions in public sector pay levels, a reduction in social benefit levels, and a contraction in spending commitments." (Lane, 13, 2011) These reforms have had repercussions for aggregate demand, the price level, and the tax base - as Lane notes: "The underlying weak state of the economy and the collapse of the tax base meant that the baseline fiscal deficits in 2009 and 2010 were still extraordinarily large at 1112 percent of GDP, even before taking into account the one-off costs of recapitalizing the banking system." (Lane, 13, 2011)
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However, for all of the Irish government's attempts to recapitalize the banking sector in order to facilitate its ability to promote new real sector development, "Only one bank (Bank of Ireland) was able to raise significant capital, such that the State has ended up with extensive control of the Irish banking system. In turn, the high recapitalization costs led to a sharp increase in gross government debt, and increased the riskiness of the sovereign debt profile, in view of the ongoing uncertainties regarding ultimate losses in the banking sector." (Lane, 16, 2011) This futile and expensive mission to rescue the financial sector cost the Fiona Fáil party economically and politically, as "the capital transfers to [Anglo-Irish Banks and Irish Nationwide Building Society - the two worst offenders] pushed the overall 2009 general government balance to 14.5% of GDP and the 2010 balance to 32% of GDP." (Lane, 17, 2011) When the government's two-year guarantee of the six Irish banks' liabilities expired in 2010, "private sector funders that had committed funding under the guarantee" exited the Irish financial sector. (Lane, 17, 2010) In another major divergence with Iceland's post-crisis path, Ireland has turned to the European Central Bank with its proverbial tail between its legs, because of its inability to cover its banking system's liabilities - in that moment, the ECB argued that it could only provide "liquidity support [if] the process of downsizing the Irish banking system were accelerated." (Lane, 17, 2010) Next, the EMU demanded that Ireland demonstrate its ability to pay back the loan by massively downsizing its public sector, and by creating more taxes to improve government revenues. If the Fiona Fàil party had not followed what Michael Lewis alleges to have been investment bankers' advice, if it had not tried to recapitalize the banking system without taking greater control over the banking system in order to redirect its efforts, if it had simply employed better financial regulation during the lead-up to the financial crisis, it may not have found itself making
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this deal with the EMU devil. In November of 2010, despite the still ruling Fiona Fàil party's show of bluster against accepting a bailout with the high interest rates that the ECB demanded, and despite a series of popular protests, the Irish government acquiesced, and accepted the bailout of 85 billion euros, approximately 54% of Ireland's 2010 GDP, with an interest rate of 5.8% per year for a seven and a half years, and the attendant austerity terms that the Irish government is expected to enact over the term of the loan, "a discretionary fiscal tightening of€15 billion over 2011 - 2014 with€6 billion of this total to take place in 2011." (Lane, 20, 2011) The new Irish Taoiseach (Prime Minister), Enda Kenny of the Center-Right Fine Gael party has spoken out against Fiona Fàil's decision to guarantee Ireland's big three banks, but he still plans to promote austerity measures and supply-side spending in order to kickstart Ireland's economy. The difference between the amount of time that it took to the Irish to vote out the political party behind the worst of the financial chicanery and the time that it took the Icelanders to vote out the crooks is striking; so is the dogged resistance of Icelandic voters and politicians (sometimes working counter to the interests of Iceland's parliament) compared to what appears to be Irish resignation to the newly implemented austerity measures. Analyzing the consequences of these divergent actions - Iceland's decision to aggressively prosecute the bankers that perpetrated fraud, Ireland's symbolic punishment of financial players, Iceland's dedication to fiscal policy, Ireland's new government's willingness to trust markets and exports to lead Ireland into a new growth period - in the years to come may illustrate more diverging social, financial, political, and broadly economic outcomes. IV. Why the comparison?
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The question everyone asks the author of a comparison is, "Why? What do you get from comparing those n entities?" The similarities of the origins of Iceland and Ireland's financial crises and the differences between their responses to these crises reveal lessons about finance, political economy, and class that the world should pay attention to. Further, they present two distinct responses to calamities caused by the new global financial architecture - rolling over or fighting back. Iceland and Ireland's stories illustrate the seductiveness of finance. Their different routes to the privatization and deregulation of their respective financial sectors reveal that countries and states can open up to finance for different reasons - Ireland did so to accord with the proto-EU regulatory orders; Iceland did so because a small cadre of business people wanted to increase the scope of their economic domain. Whether a country liberalizes its financial sector in order to follow rules set by a larger institution like the IMF or a political or economic union, or because it has a small ruling class eager to run with financial big dogs, the outcomes may be equally disastrous for unsuspecting citizens. Iceland and Ireland's experiences ought to strike a warning knell for states national or otherwise - that contemplate loosening financial regulations in order to attract business. Iceland and Ireland also demonstrate the hidden perils of finance as growth strategy. These two countries' financial booms and busts read almost like a suspense narrative, where finance is a bomb that no one knows has been triggered. In both Iceland and Ireland, ordinary citizens consumed media, listened to their governments, and followed their bankers' advice about what sorts of things they should do with their income and wealth. If ordinary people cannot - or should not - trust the institutions that
22
exist to serve and protect them, then something is wrong with the economy and society. Further, they reveal the intricate complicity of different layers of society and finance: Icelandic and Irish media bolstered the reputations of financiers, and Icelandic and Irish governments penalized critics of the engines of their countries' rapid growth while they laid the groundwork for their bankers to do what they did. Further, citizens in both countries tacitly and explicitly supported these financial institutions, by some combination of buying houses, taking advantage of exchange rates, and continuing to vote for the political parties that enabled these financiers to plunder their countries reputations and proverbial larders. These experiences mirror other countries' experiences with rapacious rentiers, and show how much deeper analysis of finance should be than just about interest rates, exchange rates, and lending patterns. These countries also reveal a lot about international financial narratives and power dynamics. In order for Ireland and Iceland to owe so much to so many banks in so many countries in such a short period of time, lots of international players must have lent lots of capital to Icelandic and Irish banks. Analyses of Ireland's crisis that blame its EU membership and low bond prices during the boom periods for Ireland's and the EU's current sovereign debt woes miss a key part of the story - the EMU's financial structure enabled and encouraged dangerous financial practices. It liberalized financial sectors in countries that had little experience with rapid and large-scale capital transfers, and introduced them to financial instruments and actors with which they had inadequate defenses. If Irish, Icelandic, and European bankers, government officials, and citizens had read econ pop literature about how cutthroat American investment bankers are - Michael Lewis is only one example of the genre - they should have known never to trust
23
investment bankers. When Iceland's bank Glitnir went into receivership, and international depositors demanded compensation for their lost investments, David Oddson was quoted as telling them that they should have done more thorough research on the risks of investing in Icelandic banks. To a certain extent this is true - there was a literature about runaway finance during the build-up of the global financial crisis, and UK, German, French, and Netherland protests that they were done wrong ring somewhat hollow. Regardless, these four nations wield significant political and economic clout to demand compensation for their own risk loving behavior. Why should Iceland, Ireland, and any of the other small nations in financial disarray pay for those mistakes? If the answer is merely that the bigger nations have more resources to hold out on, then small states considering finance as a route to riches should again think twice. Where Iceland and Ireland's outcomes diverge reveals something else about the importance of political-economic alliances. When the UK and the Netherlands presented a block vote against one parcel of a previously agreed-upon IMF bailout package for Iceland, Norway and Sweden presented a significant political opposition. After Norway and Sweden lobbied on behalf of Iceland, the UK and the Netherlands dialed back their demands for recompense, in terms of time and amount. Ireland, by contrast, appears to lack such an ally. Its membership in the EU appears to be a millstone that yokes it to the greater EU community's demands, and the apparent docility with which it implements demanded austerity programs, compared to the violent protests in Spain and Greece, brings to mind an abused dog. Both Iceland and Ireland are used to being bullied economically by their neighbors. Iceland only gained its independence in the early 20th century after having been a Danish, Swedish, and Norwegian colony, and after that dealt
24
with virtual economic attacks by England during the Cod Wars in the 1970s. Ireland's prolonged experience of English political and economic subjugation seemed to have lifted during the initial Celtic Tiger period; now, Michael Lewis writes, Ireland appears to be re-occupied by ECB bankers. Iceland's ability to resist EU calls for austerity in order to pay back its [bankers'] debts quicker has something to do with its independence, something to do with its allies, one of which, Norway, is not even a member of the EU, let alone the EMU, and, paradoxically, may even have something to do with its remarkably small population. Whatever the reasons, Iceland's experiences with resistance indicate that an alternate route to recovery is possible, and that Ireland's method of appeasing Irish, European, and American rentiers may not be an effective, let alone the most effective, path to fundamental economic recovery, and, perhaps, that Ireland should not unduly fear an exit from the EU. Time should tell.
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Sources: Bank of Ireland, Private Banking Division. 2007. "The Wealth of the Nation." Accessed March 14, 2011, available at: www.finfacts.ie/biz10/WealthNationReportJuly07.pdf Barrington, Kathleen. 2010. "The Fake Wealth of a Nation," Informed Opinion on the Irish Business World, 4/18/10. Accessed March 14, 2011, available at: http://kathleenbarrington.blogspot.com/2010/04/fake-wealth-of-nation.html Barrington, Kathleen. 2011. "Irish Bond Grenades Explode in Berlin," Informed Opinion on the Irish Business World, 2/21/11. Accessed March 13, 2011, available at: http://kathleenbarrington.blogspot.com/2011/02/irish-bond-grenades-explode-inberlin.html Barrington, Kathleen. 2011. "Bowing to the Bankers," Informed Opinion on the Irish Business World, 2/13/11. Accessed March 13, 2011, available at: http://kathleenbarrington.blogspot.com/2011/02/bowing-to-bankers.html Bowers, Simon. 2011. "Icesave Repayment to UK Investors Splits Iceland Voters." The Guardian, 4/3/11. Accessed October 27, 2011, available at http://www.guardian.co.uk/business/2011/apr/03/icesave-bailout-splits-iceland-voters. Brignall, Miles. 2009. "Crunched: For Iceland Read Ireland?" The Guardian. Accessed on October 28, 2011, available at: http://www.guardian.co.uk/money/2009/jan/24/savings-banks. Clancy, Paula, Nat O'Connor, and Kevin Dillon. 2010. Mapping the Golden Circle. Dublin: TASC. CNN/Europe. 2009. "Iceland Applies to Join the European Union." July 17, 2009. Accessed May 10, 2009, available at: http://www.cnn.com/2009/WORLD/europe/07/17/iceland.eu.application/index.html?iref= newssearch Danielsson, Jon, and Gylfi Zoega. 2009. "The Collapse of a Country." RiskResearch, March 12, 2009. Douglas, Alex, and John Doris and Brian Johnson. 2004. "Corporate Social Reporting in Irish Financial Institutions." TQM Magazine, 16(6):387-395. Ewing, Jack and Julia Wedigier. 2010. "Ireland's Debt to Foreign Banks is Still Unknown," New York Times, 11/23/10. Accessed March 14, 2011, available at: http://www.nytimes.com/2010/11/24/business/global/24banks.html
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Fahy, Declan, Mark O'Brien, and Valerio Poti. 2010. "From Boom to Bust: A Post-Celtic Tiger Analysis of the Norms, Values, and Roles of Irish Financial Journalists." Irish Communications Review, 12: 5-20. FME. 2010. "Financial Supervisory Authority: 2010 Report." Reykjavik: Fiarmalaeftirlitid. Accessed on October 27, 2011, available at: http://www.fme.is/?PageID=580&NewsID=619. Gurdgiev, Constantin, Brian Lucey, Ciaran MacAnBhaird, and Lorcan Roche-Valley. 2010. "The Irish Economy - Three Strikes and You're Out?" (March 3, 2011). Accessed March 12, 2011, available at SSRN: http://ssrn.com/abstract=1776190 Honohan, Patrick. 2006. "To What Extent Has Finance Been a Driver of Ireland's Economic Success?" Quarterly Economic Commentary, Winter: 59-72 Honohan, Patrick. 2009. "Resolving Ireland's Banking Crisis," UCD-Dublin Economic Workshop Conference Paper, January 12, 2009. Accessed March 12, 2011, available at: http://www.tcd.ie/Economics/staff/phonohan/Honohan%20for%20UCDDEW%20conference.pdf IceNews Staff. 2009. "British and Dutch Stance on IceSave Hardening." Accessed May 10, 2009, available at: http://www.icenews.is/index.php/2009/09/28/british-and-dutchstance-on-icesave-hardening IceNews Staff. 2011. "UK, Netherlands Taxpayers Will Still Get Icesave Cash Back After Iceland No Vote." IceNews. 4/12/11 Accessed on October 27, 2011, available at: http://www.icenews.is/index.php/2011/04/12/uk-netherlands-taxpayers-will-still-geticesave-cash-back-after-iceland-no-vote/#ixzz1cavud1YL Johnson, Simon. 2010. "Will Ireland Default? Ask Belgium," NYTimes Economix Blog, 11/25/10. Accessed March 12, 2011, available at: http://economix.blogs.nytimes.com/2010/11/25/will-ireland-default-ask-belgium/ Keys, Lisa. 2009. "For Sale in ? Iceland." The New York Times, 6/30/09. Accessed May, 10, 2010, available at http://www.nytimes.com/2009/07/01/greathomesanddestinations/01gh-sale.html Kinsella, Steven. 2010. "Cycles, Crisis, and Uncertainty." University of Limerick, February 22, 2010. Accessed March 12, 2011, available at: http://stephenkinsella.net/WordPress/wp-content/uploads/2010/02/cycles.pdf Krugman, Paul. 2011. "Can Europe Be Saved?" New York Times, 1/12/11. Accessed October 29, 2011, available at: http://www.nytimes.com/2011/01/16/magazine/16Europet.html?_r=1
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Lane, Philip. 2011. "The Irish Crisis," IIIS Discussion Paper. No. 356. Accessed March 12, 2011, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1794877 Lewis, Michael. 2009. "Wall Street on the Tundra." Vanity Fair, April 2009. Lewis, Michael. 2011. "When Irish Eyes Are Crying." Vanity Fair. Accessed on October 27, 2011, available at: http://www.vanityfair.com/business/features/2011/03/michaellewis-ireland McCann, Dermot. 2010. The Political Economy of the European Union. Cambridge: Polity Press. McDonough, Terrence, Jason Loughery, Alex Klemm, Fiona Dunne, and Sinéad Pentony. 2009. "The H.E.A.P. Chart: Hierarchy of Earnings, Attributes, and Privelege Analysis." Dublin: TASC. McGrath, Conor. 2009. "The Lobbyist with 'Balls of Iron and Spine of Steel': Why Ireland Needs Lobbying Reform." Journal of Public Affairs, 9: 256-271. Murphy, Gary, John Hogan, and Raj Chari. 2011. "Lobbying Regulation in Ireland: Some Thoughts from the International Evidence." Journal of Public Affairs, 11(2): 111-119. Oakley, David. 2011. "LHC.Net Lifts Ireland's Debt Trading Costs," Financial Times, 3/24/11. Accessed March 14, 2011, available at: www.ft.com/cms/s/0/876a9bc45643-11e0-82aa-00144feab49a.html Oakley, David. 2011. "Ireland's Bond Yields Leap on Default Fears," Financial Times, 3/23/11. Accessed March 14, 2011, available at: www.ft.com/cms/s/0/ec487434-557c11e0-a2b1-00144feab49a.html Ólafsson, Stefán. 2010. "From Neoliberalism to Increasing Income Inequality: Globalization, Politics, and Income Inequality in Iceland 1995-2008." REASSESS Steering Group, Oslo, Nova Research Institute, Presentation for 1/25/10. Ólafsson, Stefán, and Arnaldur Kristjansson. 2010. "Income Inequality in a Bubble Economy: The Case of Iceland, 1992-2008." Luxembourg Income Study Conference, June 2010. O'Sullivan, K.P.V. 2010. "Financial Supervision in Ireland: Where to Now?" (July 1, 2010). Accessed October 27, 2011, Available at SSRN: http://ssrn.com/abstract=1888343 O'Toole, Fintan. 2011. "Fine Gael Banking Strategy in Meltdown." The Irish Times, 2/15/11. Accessed October 27, 2011, available at: http://www.irishtimes.com/newspaper/opinion/2011/0215/1224289816768.html
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Phillips, Leigh. 2011. "ECB Turned a Blind Eye to Predatory Lending, Ex-EU Ambassador Says," EU Observer, 3/8/11. Accessed March 14, 2011, available at: http://euobserver.com/9/31942 Reilly, Gavan. 2010. "Official Terms of the Irish Bailout Have Been Released," Business Insider, 12/1/10. Accessed March 14, 2011, available at: www.businessinsider.com/official-terms-of-the-irish-bailout-have-been-released-2010-12 RTE News Ireland Staff. 2008. "Cowen Calls For More Time on the Cards Row," RTE News/Ireland, 10/19/08. Accessed March 13, 2011, available at: http://www.rte.ie/news/2008/1019/budgethealth.html Sigurjonsson, Throstur. 2010. "The Icelandic Bank Collapse: Challenges to Governance and Risk Management." Emerald Group Publishing [Working Paper]. Accessed May 10, 2010, available at: http://www.emeraldinsight.com/journals.htm?issn=14720701&volume=10&issue=1&articleid=1840436&show=pdf Spain, John. 2011. "Ireland Calling," Irish Central, 2/22/11. Accessed March 14, 2011, available at: www.irishcentral.com/story/roots/ireland_calling/the-85-billion-euroquestion-115094589.html Steinhauser, Gabrielle. 2011."Portugal and Ireland Woes Dominate EU Summit," AP, 3/24/11. Accessed March 14, 2011, available at: www.philly.com/philly/wires/ap/business/20110324_ap_portugalirelandwoesdominateeu summit.html TASC. 2009. "The Solidarity Factor: Public Responses to Economic Inequality in Ireland." Accessed March 14, 2011, available at: http://www.TASCnet.ie Wade, Robert. 2009. "Iceland as Icarus." Challenge, 52(3): 5-33. Wade, Robert, and Silla Sigurgeirsdottir. 2010. "Lessons From Iceland." New Left Review, 65: 5-29. Fine Gael Website; Accessed March 13, 2011, available at: www.finegael.com National Asset Management Agency Website; Accessed March 13, 2011, available at: http://www.nama.ie/
doc_348180641.docx
Financial contagion refers to a scenario in which small shocks, which initially affect only a few financial institutions or a particular region of an economy, spread to the rest of financial sectors and other countries whose economies were previously healthy, in a manner similar to the transmission of a medical disease. Financial contagion happens at both the international level and the domestic level.
Case Study on Difference between Iceland and Ireland: Lessons for Global Finance, Courtesy of Two Crises
Abstract: Current literature about Europe's ongoing financial struggle focuses overwhelmingly on macroeconomic phenomena such as interest rates and bond spreads, the failures of the EMU to protect "prudent" countries like Germany from free loading small economies like Greece and Ireland, and how to reform fiscal policies throughout the region with or without harsh austerity measures. This paper examines the political economic roots of Iceland and Ireland's recent financial crises, as well as how the two countries' responses to their crises have differed, and presents a theory that a combination of systemic financial deregulation and privatization, with or without the EU's mandate or imprimatur, political protection of a financial 'class,' and citizens' implicit or explicit support for these policies created the foundations of these crises, and exacerbated their effects. It also examines the new power dynamics in Europe, whereby larger economies like Germany and the UK can push their financial irresponsibility to the side, by paradoxically penalizing (or trying to penalize) Irish and Icelandic citizenry with high-interest bailout loans contingent on brutal austerity measures. By studying the causes and consequences of Ireland's submission to these arguments, and Iceland's defiance, we can understand better the value (and economic consequences) of strong political and economic allies, as well as alternatives to the non-choices being imposed upon Europe's small countries in crisis. I. Introduction - Or, a Riddle: "Q: What's the difference between Iceland and Ireland? A: One letter and six months."(Brignall, 2009)1 Since late 2008, both Iceland and Ireland have continued to react to the consequences of major financial crises, and have been prominent casualties of the Global Financial Crisis. Mainstream literature about these countries' financial crises has focused on the roots of their causes in currency and housing speculation, the crises have deeper roots in political economy, class dynamics, and the 'new' global financial architecture. Though Iceland and Ireland followed different roads to their crises, their cases bear similarities that indict the 'new' global financial architecture of deregulated, liberalized, and
1
Or a joke, depending on one's orientation.
2
privatized finance allowed to run rampant. Further, both demonstrate the social costs of financial excess - in both countries, three prominent banks (Iceland's Glitnir, Kaupthing, and Landsbanki, and Ireland's Allied-Irish Bank, Anglo-Irish Bank, and the Bank of Ireland) operating with complete governmental trust borrowed and made loans far in excess of their abilities to cover, with little to no lasting real sector development to show for it, except for the unemployment and other social costs that have resulted from these two financial debacles. The differences in these countries' responses to their circumstances reveal two different paths of recovery - one that placates the rentiers, and one that addresses the needs of the 'rest'. As such, despite these countries' small size and seeming irrelevance to the 'big picture', the world would do well to pay attention to these two island nations' experiences, both before and after the recent crisis. Though the onsets of Iceland and Ireland's crises differed, the circumstances for these crises both took a substantial amount of time to develop, and shared similar characteristics. Both countries' apparent rise in financial fortune relied heavily on other bankers' willingness to believe boom-time hype - in Iceland's, regarding the value of the Icelandic Krona (ISK), and in Ireland, regarding housing prices and the prevalent construction boom - in spite of an existing and growing literature in both cases that a bust was imminent. Further, these developments might not have taken place if both had not, for different reasons, pursued significant deregulation and privatization of their respective financial sectors, and if different classes of people had not, also, benefitted from the short-term gains during the lead-up to the respective crises. Current indignation about Iceland's and Ireland's debts from different countries that invested heavily in the two nations' banks rings hollow, given the international willingness during the boom to
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ignore warning signs and calls of alarm by resident economists in both nations, as well as outside spectators. II. Origins of the Crises In the most basic terms, Iceland's financial crisis stemmed from international speculation in the ISK's rapid appreciation from the early 2000s, until the crash in 2008, as well as risk-loving Icelandic investment bankers' cavalier trading. Ireland's crisis has been similarly succinctly described as a massive construction bubble gone horribly awry. However, a brief recap of the recent history of these two countries' financial sectors reveals major parallels. For most of their histories, Iceland and Ireland had small, largely public, and heavily regulated financial sectors. Both countries instituted small reforms to modernize those sectors during the late 1970s and early 1980s, and both significantly deregulated and liberalized their financial sectors in the 1990s. The causes of these financial shifts differed - Iceland's financial liberalization occurred under the auspices of a governing group led by David Oddson, a poet cum prime minister who had formed a right-wing proliberalization and anti-regulation party in the 1980s specifically to expand the economic options of a nascent nouveau-rich group in Iceland called the Octopus. (Wade and Sigurgeirsdottir, 2010) Ireland's shift, by contrast, had much to do with its bid to enter the EU and the Eurozone. One of the stated aims of the Eurozone was to liberalize European finance so that capital could move freely and rapidly between member states' banks, with a longer term aim to shift from bank-based financial systems to a securities market-based system like the United States. (McCann, 2010) These changes had short-term macroeconomic effects that encouraged international
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investments in both Iceland and Ireland. Two elements of Iceland's new financial policy, a steady increase in interest rates from the early 2000s onward (from 5.3% in 2001 through 15.25% in 2007) to combat inflation and an aggressive entry into investment banking after decades of financial policy that had promoted stability above all outcomes, combined to create a massive inflow of foreign capital. Part of the inflow stemmed from commercial banks, institutional investors, and individuals' eagerness to take advantage of a rapidly appreciating currency. Another part arose from international bankers' willingness - if not eagerness - to take advantage of a previously untapped market of Icelandic investment banking. Michael Lewis describes an environment in which many of the executives and employees of Iceland's new banking system, which had transformed from a large number of small savings banks into a network of three large savings/commercial/investment banking hybrids, were men in their late twenties and thirties, with little experience in financial and monetary policy, particularly at the international level, and argues that, further, these men might have been uniquely risk-loving individuals that would be more prone to pushing Iceland's financial system and economy to a brink. (Lewis, 2009) In other work, Lewis has described investment bankers, particularly in the bond market, as sharks that wait for the right mark to walk into a deal. Iceland's new class of bankers would seem to be just such a population. In Ireland's case, the macroeconomic change that most mainstream authors have focused on has been Ireland's entry into the European Monetary Union (EMU). Two features of this entry helped to fuel Ireland's ensuing construction boom. First, when the euro became common currency in the Eurozone in 2002, Irish banks and consumers faced
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lower interest rates than before. Second, as members of the EMU, Irish bonds were rated at the same risk level as other member states. Paul Krugman and others have focused on this shortcoming of the EMU to excess, but it does help explain some of the onset of the housing boom, and certainly helped contribute to Ireland's eventual crisis. A feature of EMU membership that fewer mainstream economists mention, however, is the subsequent and unprecedented ease in capital transfer between member states' banks. Irish banks borrowed heavily from international banks - US, UK, German, Belgian, and other nations all lent substantial sums to Ireland's banking sector. At the same time, a large number of international banking operations set up branches in Ireland, to take advantage of the boom in construction going on. While these financial policy shifts enabled some of the bubble activity that contributed to the ultimate crises in both Iceland and Ireland, it is important to emphasize the simultaneous political and class forces at work in both nations that empowered the respective financial sectors to grow beyond the limits of reason and without promoting comparable growth in either country's real sector. Policy makers in both Iceland and Ireland protected Icelandic and Irish bankers from scrutiny, made deals with financiers regarding what regulations they would block, and presented sanguine portraits of their respective financial sectors to the rest of the world, despite mounting criticisms from domestic and international economists in both countries. Iceland's government was involved - fundamentally - with its financial sector development from the beginning. In addition to substantially decreasing corporate and financial tax rates, Oddson's government and the Central Bank during this period pursued every sort of policy they could to expand Iceland's financial reach. (Wade, 2009) Key
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policy shifts within the banking sector - including the shift from rewarding stability minded banking to rewarding risk-taking and profit-seeking banking - came under political advisement. (Danielsson and Zoega, 2009) Prior to Oddson's term as prime minister, it had been common practice for a member of each political party to be one of the Central Bank's governors - Oddson was perhaps the first Icelandic prime minister to take advantage of this system by placing an activist Central Banker in one of those positions. Throughout the period of 2000 to 2008, Iceland's Central Bank performed no significant stress tests, and failed to acknowledge the inherent risks in a country with virtually zero experience in finance becoming the second most leveraged financial system in the world, following Switzerland, a country that had made its proverbial economic name via finance. (Danielsson and Zoega, 2009) Robert Wade and others note that in addition to the government and the Central Bank's tremendous involvement in the investment-banking sector, these institutions also lobbied Icelandic citizens and other depositors heavily to buy shares in Iceland's three major banks. (Wade and Sigurgeirsdottir, 2010) After Lehman Brothers' collapse, just days before Iceland's three major banks would go into receivership, "[in] a bid to restore confidence, Oddson ordered Iceland's Central Bank to buy seventy-five percent of Glitnir's shares." (Wade and Sigurgeirsdottir, 2010, 22) At the same time, Oddson's government engaged in what reads like a protection campaign for said financial sector. Wade and Sigurgeirsdottir describe Oddson's government's machinations on behalf of the financial sector, that included defunding university and research programs that criticized Iceland's financial sector, public attacks on academics that wrote critical papers, and even intimidating "Statistics Iceland, the
7 public data agency ? into suppressing information on soaring income and wealth inequality." (Wade and Sigurgeirsdottir, 2010, 28) The Icelandic Chamber of Commerce paid different economists - including Frederic Mishkin and Richard Portes - big fees for papers that lauded Iceland's financial sector, and claimed that Iceland's Central Bank had all things financial in good working order. (Ironically, Mishkin's paper also praised Iceland's robust civil institutions and lack of corruption.) (Wade and Sigurgeirsdottir, 2010) At the same time, banks bought large shares in Iceland's major media companies, while media companies bought large shares in the banks. This weird, even incestuous, relationship perverted institutions with a duty to report and deliver information to the public. Throstur Sigurjonsson describes a scenario in which banks lobbied the news media to present favorable pictures of their financial sector, and where journalists felt little need to investigate further. This process at the very least contradicts mainstream theories of efficient finance; in practice, it fueled the actions of a financial sector out of control, misinformed a public about how their country had suddenly started to get rich, and spread the belief that Iceland's financiers could never fail. Ireland's political economy of finance during the boom appears almost tame by comparison to Iceland's, but it echoes the dynamics that enabled Iceland's financial sector to grow to such a calamitous level. First, Ireland's government maintained a very cozy relationship with its construction industry, almost from the start. When Ireland's first Celtic Tiger moment - an export-led surge in growth2 had subsided in the early 2000s, one of the Irish government's counter-cyclical policies was to stimulate growth in the housing sector. Irish fiscal policy from the early 2000s on consisted of a series of tax
2
Begotten under shady provisions and to dubious benefit, according to some - but that is another story.
8
cuts at the corporate and household level and structural increases in spending, largely geared toward municipal construction and property investment. It bolstered what became an unsustainable construction and housing boom, while it eliminated a fiscal safety net that the government would need when Ireland went into recession in 2008. (Honohan, 2008) The Irish government went on to encourage major Irish banks to lend more to homeowners and construction businesses - this resulted in a wave of lending that far outstripped these banks' capital reserves, and courted insolvency. (Lewis, 2011) Despite warnings from domestic economists and institutions like the IMF and OECD that Ireland's housing bubble and credit bubble had the potential to burst with dangerous effects, the Irish government did little to increase regulatory oversight of these banks' activities, and even relaxed certain regulations. When the Regulator did raise capital requirements in a nominal attempt to curb high loan to capital ratio loans, it raised the deposit minimum requirement from 4% to 4.8%. (Honohan, 2008) Kathleen Barrington, a reporter for the Sunday Business Post, writes in her blog that major Irish banks persistently and aggressively lobbied the Irish government from as early as 2005 to decrease the deposit to loan ratio and to allow those banks to create and trade mortgage backed securities. She argues further that despite the Irish Financial Regulator's resistance to such an action, in 2007 he allowed it after being told that Bertie Ahern's government supported giving the bankers what they needed.3 (Barrington, 2010)
3
From Barrington's blog: As minister of finance, Brian Cowen "received another letter on the matter [of deregulations that would benefit Anglo Irish Bank et al] from his boss. Taoiseach Bertie Ahern reminded Cowen that he (Ahern) had effectively promised the banks the legislation would be delivered." (2010) This is a particularly damning statement that I haven't found any corroboration for yet.
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Gary Murphy, John Hogan, and Raj Chari seem to corroborate this anecdote, though I have found no concrete evidence of such lobbying occurring, in their 2011 article "Lobbying Regulation in Ireland: Some Thoughts from the International Evidence," as does KPV O'Sullivan in the 2010 paper "Financial Supervision in Ireland: Where to Now?" It is important to mention that Ireland lacks any "statutory regulation of lobbying," according to Conor McGrath. (McGrath, 2009, 256) McGrath describes known cases of governmental corruption in the late 1990s related to regional planning, but it is not a far leap to imagine financial interests in Ireland lobbying the government for preferential treatment - they certainly do in the United States. When Irish elected officials have proposed legislation against lobbying, it has always been the Labour Party that has introduced the motion - never Fiona Fàil, the party in charge in the lead-up and immediate aftermath of Ireland's crisis. One detail to emerge from the Irish banking crisis is the existence of the 'Golden Circle', a network of 39 individuals that held positions on at least two boards of 33 out of 40 major Irish companies, both public and private. Significantly, members of several banks' boards sat on the boards of other banks, as well as multiple firms' boards. According to a 2010 TASC report by Paula Clancy, Nat O'Connor, and Kevin Dillon, "Angle Irish Bank [had] ten links, and Irish Life and Permanent and Bank of Ireland ? each had nine links to other companies. Allied Irish Bank (AIB) also had a large number of links, to seven other firms." (Clancy, et al, 2010, 34) The intermingling of these individuals and institutions is likely to have generated connections to government agencies and actors, and may well have exacerbated the effects of the financial bubbles that grew between 2000 and 2008 in Ireland.
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As in Iceland, a tacit policy of government and media censorship appears to have emerged during the rise of Ireland's housing bubble. Michael Lewis describes the hurdles that Irish academic Morgan Kelly faced when he tried to submit an article critiquing the housing bubble, and arguing that a collapse of the Irish banking system was imminent: "The [Irish Independent]'s editor wrote back to say he found the article offensive and wouldn't publish it. Kelly next turned to The Sunday Business Post, but the editor there just sat on the piece. The journalists were following the bankers' lead and conflating a positive outlook on real-estate prices with a love of country and a commitment to Team Ireland. ("They'd all use this same phrase, 'You're either for us or against us,' " says a prominent bank analyst in Dublin.) Kelly finally went back to The Irish Times, which ran his article in September 2007." (Lewis, 2011, 5)
As in Iceland, when Irish banks' stock values began to drop, and as the risk of a run on one of them increased, Irish government officials and bankers claimed that: "the banks merely had a "liquidity" problem and that Anglo Irish was "fundamentally sound"—that the two could not be reconciled. The government had a report thrown together by Merrill Lynch, which declared that "all of the Irish banks are profitable and well capitalised." (Lewis, 2011, 6) In addition to this scuffle following one report that the Irish financial and construction sectors were not as healthy as they had been made to appear, the Irish government Department of Finance hired a Merrill Lynch economist to analyze the state of the Irish housing market and financial sector. When Philip Ingram wrote that Irish bankers were making the riskiest loans in the British Isles, two things happened, according to Lewis. First, Anglo Irish bankers phoned Merrill Lynch, and threatened to take their business elsewhere if such a report were allowed to stay out in the open, and then, Merrill Lynch retracted the report, because it, "had been a lead underwriter of Anglo Irish's bonds and the corporate broker to A.I.B.: they'd earned huge sums of money off the growth of Irish banking." (Lewis, 2011, 10) Eventually, after neutering Ingram's report, and "purging it
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of its damning quotes from market insiders, including its many references to Irish banks," Merrill Lynch would go on to fire Ingram. (Lewis, 2011, 11) This anecdote reveals a lot about the power of investment banks and financial sectors in both the US and Ireland that either could threaten an institution by withholding business if they printed some information for the public good, and that either would go along with it in the pursuit (or maintenance of expected) profits, indicates a level of power that has destructive effects. Lewis posits that it was the revised Merrill Lynch memo that effectively recommended that the Irish state guarantee its main banks, but more on that later. (Lewis, 2011) Icelandic and Irish citizens wittingly and unwittingly assisted this empowerment, too. In both countries, elites that had emerged during previous periods of growth (Iceland's initial trade liberalization, and Ireland's original Celtic Tiger surge) saw their wealth increase disproportionately to that of the rest of their countries. In Iceland, part of this had to do with participation in the burgeoning investment banking sphere. In Ireland, contractors and real estate developers earned immense sums of money during the inflation of the construction bubble. These changes show up in national inequality figures from 2000 to 2008. According to Wade and Sigurgeirsdottir, prior to the mid-nineties, Icelandic household income distribution resembled other highly egalitarian Scandinavian countries. However, the process of increasing inequality that had begun when Iceland's government created a market for fishing quotas in the eighties accelerated rapidly as Iceland's financial sector grew and grew between 2000 and 2007. (Lewis, 2009, and Wade and Sigurgeirsdottir, 2010) Stefan Olafson, an economist at the University of Iceland has done significant research on Iceland's tax rate over history, gave a presentation in January, 2010, titled,
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"From Neoliberalism to Increasing Income Inequality: Globalization, Politics, and Increasing Income Inequality in Iceland." According to Olafsson's research, not accounting for the difference in financial earnings masks the increasing disparity in income and wealth from the pre-boom time through 2009. Not accounting or financial earnings, the Gini coefficient for Icelandic couples increased by 35.8%. If one accounts for financial earnings, the Gini coefficient for Icelandic couples increases by 74.8% from 1995 through 2008. When Olafsson plots the relationship between income groups and the share of Icelandic financial earnings, it appears that the top 15% of Icelandic families earned approximately 80 percent of financial earnings in Iceland during 2007. (Olafsson, 2010) Though the literature about Irish inequality appears to disagree about whether or not Irish inequality grew or stayed constant during the original Celtic Tiger period and the more recent construction boom, it is worth noting that Ireland has one of the highest inequality rates of the European Union. While Brian Nolan and others have argued that the only way to conclude that Irish inequality has increased over the past decade is by using gross measurements like pre-tax income, others, like staff economists of the Irish think tank TASC (Think-tank for Action on Social Change) have argued that Ireland consistently ranks poorly among fellow EU nations in terms of inequality, by several measures. Whether or not the Irish Gini coefficient has risen to 32 or held constant at 32 is not a rosy picture. Further, the TASC economists argue that Ireland ranks in the bottom third of the EU in terms of its lowest quintile's share of national income, and Ireland's population at risk of falling into poverty ranks with the bottom third of EU nations on the inequality scale. The TASC economists go on to note that using Gini coefficients to
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measure the change in Irish inequality over time discounts the immense increase in topearners income during Ireland's construction boom. In addition, Ireland's poverty rate has been increasing since the early 2000s, even before the onset of Ireland's financial crisis. However, non-elite sectors of these populations also fueled these bubbles and ultimate crises. Many economists that have written about Iceland's recent boom period have discussed how Icelandic levels of consumption shot up in tandem. Anecdotal evidence abounds of lavish purchases by Icelanders of luxury imports like Land Rovers and soccer teams, as well as massive Irish house purchases and hundreds of thousands of dollars spent on things like kitchen renovations. How widespread these consumption binges were is an underexplored arena of these crises' analyses. However, in both states, individuals and households did buy shares in the banks that would go on to implode, often under the advice of either their governments, or investment advisers that they might have been expected to be able to trust. (Or, one might argue that they should have been able to trust.) Further, in both states ordinary individuals and households experienced the effects of housing bubbles in which home prices increased at least three-fold (in Iceland) and up to five-fold (in Ireland). This is what I would describe as ordinary citizens' unwitting enabling of the financial sectors of their countries, under the influence of state and financial actors that stood, in the short term, to benefit from their contributions. III. The Aftermath, and Divergence When Iceland and Ireland's financial sectors crumbled, both countries experienced significant social losses, despite the highly concentrated centers of financial activity in both nations. After the collapse of Lehman Brothers, when other banks began
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to call back their deposits in Iceland's banks, Iceland was unable to cover the demand, due to its chronically low capital reserves. Following the egress of capital, Iceland's currency the ISK plummeted to approximately half of its peak value (from 1 ISK: $0.02 to 1 ISK: $0.01). (From the Icelandic Central Bank.) The ISK has hovered at this lower value fairly consistently since the collapse of the financial sector in 2008. Ireland has not faced such a currency shock, since it continues to be a member of the EMU, and a user of the Euro. (Some, like Krugman, have argued that Iceland's "freedom" to devalue its currency - or, rather, to watch as it loses value on the international currency market - is part of the key to Iceland's recovery compared to other small nations in financial crisis, but more on that later.) (Krugman, 2011) Regardless, both countries have incurred significant declines in disposable income of approximately 20% since 2008. Logically, both have seen a spike in household debt as a percentage of disposable income, though this is a direct link to the increase in Icelandic and Irish consumption during the boom times. Unemployment has more than tripled in both countries - Iceland's rate has increased from 2.3% in 2008 to 7.8% in 2010, and Ireland's has increased from 4.4% in 2006 to 14.5% in 2011. (From Iceland's Central Bank, and Ireland's Central Statistics Office) Finally, both countries have significant levels of the population at risk of poverty, and having trouble making ends meet. Though Iceland's at risk of poverty rate has either held constant around 10% (Iceland), or even declined, and Ireland's at risk of poverty rate appears to have decreased, from 16.5% in 2007 to 14.1% in 2009 (according to Ireland's Central Statistics Office), other measures of poverty risk reveal a grimmer story. In Iceland, the percentage of households who say that it is very difficult to make ends meet has risen from 5.9% in 2008 to 13.3% in 2011,
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and in Ireland, both the consistent rate of poverty and the percentage of households that have experienced two or more forms of deprivation have both increased since 2007 - the consistent rate of poverty has gone up from 5.1% to 5.5% in 2009, and the deprivation rate has increased from 11.8% in 2007 to 17.3% in 2009. It is probable that these figures underestimate current values - 2009 was the most recent measure of poverty data that I could find for Ireland - since the Irish government has been steadily implementing austerity measures since receiving its bailout from the EMU. Finally, both countries have seen large emigrations of people - in 2008, for the first time in years, both Iceland and Ireland began to see more people emigrate than immigrate. (Lewis, 2009, 2011) Because of the high rate of international investment in both Icelandic and Irish banks, there was a large international reaction when it became clear that neither system was capitalized thoroughly enough to cover the losses outside investors had registered as the systems collapsed. Michael Lewis lists some of the biggest investors in Iceland in "Wall Street on the Tundra: "German banks put $21 billion into Icelandic banks. The Netherlands gave them $305 million, and Sweden kicked in $400 million. U.K. investors, lured by the eye-popping [boom-time] 14% annual returns forked over $30 billion -- $28 billion from companies and individuals, and the rest from pension funds, hospitals, universities, and other public institutions." (Lewis, 2009, 10-11) In addition to massive institutional investment in Icelandic banks, many citizens of the UK and the Netherlands also used retail banking services of IceSave, an e-banking service that Landsbanki had developed when its revenues had started to decrease in 2006. (Danielsson and Zoega, 2009) Lewis has also described the eagerness among international investors to get in on the Irish construction boom - most of Ireland's major banks' bondholders were not, in fact, Irish, but were major international institutional
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investors: "A political investigative blog called Guido Fawkes somehow obtained a list of the Anglo Irish foreign bondholders: German banks, French banks, German investment funds, Goldman Sachs. (Yes! Even the Irish did their bit for Goldman.)" (Lewis, 2011, 13) Simon Johnson has also written about the major international involvement in Ireland's construction boom and argued that EU members are not eager to have Ireland's banks' books examined too closely, "because it would expose the really bad decisions made by pan-European banks and their regulators over the last decade and create potential fiscal risks in other euro-zone countries." (Johnson, Baseline Scenario, 2010) A New York Times article that Johnson cites notes that Irish banks owe the Royal Bank of Scotland about $85.6 billion, and that they owe Lloyds approximately $43.5 billion. Meanwhile, in Germany, "Hypo Real Estate, a property and public sector lender owned by the government after a bailout owed its near collapse largely to problems at Depfa, its subsidiary in Dublin." (Jack Ewing and Julia Werdigier, "Ireland's Debt to Foreign Banks is Still Unknown," 2010) Ewing and Werdigier also mention at the beginning of their article that there is controversy over the reporting of how much Irish banks owe these different European banks, and that it appears that different EU governments have tried to cover up slips revealing the extent of how much their banks may have leant to Ireland during the boom years. However, the Icelandic and Irish governments' (and people's) reactions both to the onsets of their crises, and to the hue and cry that has sprung up from international investors has differ substantially. Iceland's government almost immediately bought shares of Icelandic banks before nationalizing them. Icelanders then began a sustained protest, and by January of 2009, they successfully won a series of early elections in
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which Icelandic people voted Oddson's Independence Party out, and voted in an alliance between the Social Democrats and the Left-Green Alliance. This new government quickly pursued political reforms such as beginning a bid to join the EU, as well as implementing new financial reforms, like recapitalizing Iceland's financial regulation agency FME, and initiating investigations into and prosecutions of the major bankers responsible for their country's financial collapse. Iceland has also consistently resisted European demands that it impose austerity measures in order to pay back debts at high interest rates. After Iceland's big three banks went into receivership, the UK and the Netherlands governments fully compensated all their respective citizens that had lost savings in the process; these governments then aggressively pressed Iceland to pay back the billions that they had spent to compensate their citizenry. The UK and the Netherlands even went to so far as to block Iceland's proposed bid to enter the European Union, and to block planned IMF bailouts until Iceland agreed to pay, with interest. From September 2009 through January 2010, Iceland grappled with UK and Netherlander interests until the Icelandic president refused to sign the bill committing Iceland to paying the UK and the Netherlands about €5 billion. In the vacuum following the crash, Iceland's government has held its ground about not pursuing fiscal austerity measures until the country's economy has begun to grow steadily, and has also committed to paying back those debts over a longer period of time with a lower rate of interest. (IceNews, 2011) Ireland's government, on the other hand, initially guaranteed the assets of its three major banks, and made several billion euro investments into each of the banks, in an
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attempt to get those banks lending again. When the government then discovered that Anglo-Irish bank had been hiding tens of millions of Euros worth of loans (that it has been lending to other banks and to certain very wealthy clients), it nationalized AngloIrish bank. Next, it created the National Assets Management Agency (NAMA) - an "asset management company" meant to purchase loans from Ireland's six major banks both and good - in order to "make the banks safer and more secure for depositors and investors and free them to lend again to the productive economy." ("What is NAMA?", 3/30/10) The Fine Gael party's report "Credit Where Credit is Due" argues that by now, the Irish government has paid upwards of 100 billion euros to stabilize the banking system - approximately 60 billion to recapitalize various banks and approximately 40 billion on NAMA's purchase of troubled banks' assets. (Fine Gael, "Credit Where Credit is Due," 2011) Before petitioning the EU and IMF for relief funds, Ireland's government attempted to resolve its fiscal crisis through a combination of fiscal reforms. These included: "the introduction of gradual income levies, which had the effect of sharply increasing the marginal income tax rate for middle and high income earners. For public sector workers, pay levels were de facto reduced by the introduction of a public sector pension levy, while a recruitment freeze was also implemented. Further measures were taken in the 2010 budget ... including further sizeable reductions in public sector pay levels, a reduction in social benefit levels, and a contraction in spending commitments." (Lane, 13, 2011) These reforms have had repercussions for aggregate demand, the price level, and the tax base - as Lane notes: "The underlying weak state of the economy and the collapse of the tax base meant that the baseline fiscal deficits in 2009 and 2010 were still extraordinarily large at 1112 percent of GDP, even before taking into account the one-off costs of recapitalizing the banking system." (Lane, 13, 2011)
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However, for all of the Irish government's attempts to recapitalize the banking sector in order to facilitate its ability to promote new real sector development, "Only one bank (Bank of Ireland) was able to raise significant capital, such that the State has ended up with extensive control of the Irish banking system. In turn, the high recapitalization costs led to a sharp increase in gross government debt, and increased the riskiness of the sovereign debt profile, in view of the ongoing uncertainties regarding ultimate losses in the banking sector." (Lane, 16, 2011) This futile and expensive mission to rescue the financial sector cost the Fiona Fáil party economically and politically, as "the capital transfers to [Anglo-Irish Banks and Irish Nationwide Building Society - the two worst offenders] pushed the overall 2009 general government balance to 14.5% of GDP and the 2010 balance to 32% of GDP." (Lane, 17, 2011) When the government's two-year guarantee of the six Irish banks' liabilities expired in 2010, "private sector funders that had committed funding under the guarantee" exited the Irish financial sector. (Lane, 17, 2010) In another major divergence with Iceland's post-crisis path, Ireland has turned to the European Central Bank with its proverbial tail between its legs, because of its inability to cover its banking system's liabilities - in that moment, the ECB argued that it could only provide "liquidity support [if] the process of downsizing the Irish banking system were accelerated." (Lane, 17, 2010) Next, the EMU demanded that Ireland demonstrate its ability to pay back the loan by massively downsizing its public sector, and by creating more taxes to improve government revenues. If the Fiona Fàil party had not followed what Michael Lewis alleges to have been investment bankers' advice, if it had not tried to recapitalize the banking system without taking greater control over the banking system in order to redirect its efforts, if it had simply employed better financial regulation during the lead-up to the financial crisis, it may not have found itself making
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this deal with the EMU devil. In November of 2010, despite the still ruling Fiona Fàil party's show of bluster against accepting a bailout with the high interest rates that the ECB demanded, and despite a series of popular protests, the Irish government acquiesced, and accepted the bailout of 85 billion euros, approximately 54% of Ireland's 2010 GDP, with an interest rate of 5.8% per year for a seven and a half years, and the attendant austerity terms that the Irish government is expected to enact over the term of the loan, "a discretionary fiscal tightening of€15 billion over 2011 - 2014 with€6 billion of this total to take place in 2011." (Lane, 20, 2011) The new Irish Taoiseach (Prime Minister), Enda Kenny of the Center-Right Fine Gael party has spoken out against Fiona Fàil's decision to guarantee Ireland's big three banks, but he still plans to promote austerity measures and supply-side spending in order to kickstart Ireland's economy. The difference between the amount of time that it took to the Irish to vote out the political party behind the worst of the financial chicanery and the time that it took the Icelanders to vote out the crooks is striking; so is the dogged resistance of Icelandic voters and politicians (sometimes working counter to the interests of Iceland's parliament) compared to what appears to be Irish resignation to the newly implemented austerity measures. Analyzing the consequences of these divergent actions - Iceland's decision to aggressively prosecute the bankers that perpetrated fraud, Ireland's symbolic punishment of financial players, Iceland's dedication to fiscal policy, Ireland's new government's willingness to trust markets and exports to lead Ireland into a new growth period - in the years to come may illustrate more diverging social, financial, political, and broadly economic outcomes. IV. Why the comparison?
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The question everyone asks the author of a comparison is, "Why? What do you get from comparing those n entities?" The similarities of the origins of Iceland and Ireland's financial crises and the differences between their responses to these crises reveal lessons about finance, political economy, and class that the world should pay attention to. Further, they present two distinct responses to calamities caused by the new global financial architecture - rolling over or fighting back. Iceland and Ireland's stories illustrate the seductiveness of finance. Their different routes to the privatization and deregulation of their respective financial sectors reveal that countries and states can open up to finance for different reasons - Ireland did so to accord with the proto-EU regulatory orders; Iceland did so because a small cadre of business people wanted to increase the scope of their economic domain. Whether a country liberalizes its financial sector in order to follow rules set by a larger institution like the IMF or a political or economic union, or because it has a small ruling class eager to run with financial big dogs, the outcomes may be equally disastrous for unsuspecting citizens. Iceland and Ireland's experiences ought to strike a warning knell for states national or otherwise - that contemplate loosening financial regulations in order to attract business. Iceland and Ireland also demonstrate the hidden perils of finance as growth strategy. These two countries' financial booms and busts read almost like a suspense narrative, where finance is a bomb that no one knows has been triggered. In both Iceland and Ireland, ordinary citizens consumed media, listened to their governments, and followed their bankers' advice about what sorts of things they should do with their income and wealth. If ordinary people cannot - or should not - trust the institutions that
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exist to serve and protect them, then something is wrong with the economy and society. Further, they reveal the intricate complicity of different layers of society and finance: Icelandic and Irish media bolstered the reputations of financiers, and Icelandic and Irish governments penalized critics of the engines of their countries' rapid growth while they laid the groundwork for their bankers to do what they did. Further, citizens in both countries tacitly and explicitly supported these financial institutions, by some combination of buying houses, taking advantage of exchange rates, and continuing to vote for the political parties that enabled these financiers to plunder their countries reputations and proverbial larders. These experiences mirror other countries' experiences with rapacious rentiers, and show how much deeper analysis of finance should be than just about interest rates, exchange rates, and lending patterns. These countries also reveal a lot about international financial narratives and power dynamics. In order for Ireland and Iceland to owe so much to so many banks in so many countries in such a short period of time, lots of international players must have lent lots of capital to Icelandic and Irish banks. Analyses of Ireland's crisis that blame its EU membership and low bond prices during the boom periods for Ireland's and the EU's current sovereign debt woes miss a key part of the story - the EMU's financial structure enabled and encouraged dangerous financial practices. It liberalized financial sectors in countries that had little experience with rapid and large-scale capital transfers, and introduced them to financial instruments and actors with which they had inadequate defenses. If Irish, Icelandic, and European bankers, government officials, and citizens had read econ pop literature about how cutthroat American investment bankers are - Michael Lewis is only one example of the genre - they should have known never to trust
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investment bankers. When Iceland's bank Glitnir went into receivership, and international depositors demanded compensation for their lost investments, David Oddson was quoted as telling them that they should have done more thorough research on the risks of investing in Icelandic banks. To a certain extent this is true - there was a literature about runaway finance during the build-up of the global financial crisis, and UK, German, French, and Netherland protests that they were done wrong ring somewhat hollow. Regardless, these four nations wield significant political and economic clout to demand compensation for their own risk loving behavior. Why should Iceland, Ireland, and any of the other small nations in financial disarray pay for those mistakes? If the answer is merely that the bigger nations have more resources to hold out on, then small states considering finance as a route to riches should again think twice. Where Iceland and Ireland's outcomes diverge reveals something else about the importance of political-economic alliances. When the UK and the Netherlands presented a block vote against one parcel of a previously agreed-upon IMF bailout package for Iceland, Norway and Sweden presented a significant political opposition. After Norway and Sweden lobbied on behalf of Iceland, the UK and the Netherlands dialed back their demands for recompense, in terms of time and amount. Ireland, by contrast, appears to lack such an ally. Its membership in the EU appears to be a millstone that yokes it to the greater EU community's demands, and the apparent docility with which it implements demanded austerity programs, compared to the violent protests in Spain and Greece, brings to mind an abused dog. Both Iceland and Ireland are used to being bullied economically by their neighbors. Iceland only gained its independence in the early 20th century after having been a Danish, Swedish, and Norwegian colony, and after that dealt
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with virtual economic attacks by England during the Cod Wars in the 1970s. Ireland's prolonged experience of English political and economic subjugation seemed to have lifted during the initial Celtic Tiger period; now, Michael Lewis writes, Ireland appears to be re-occupied by ECB bankers. Iceland's ability to resist EU calls for austerity in order to pay back its [bankers'] debts quicker has something to do with its independence, something to do with its allies, one of which, Norway, is not even a member of the EU, let alone the EMU, and, paradoxically, may even have something to do with its remarkably small population. Whatever the reasons, Iceland's experiences with resistance indicate that an alternate route to recovery is possible, and that Ireland's method of appeasing Irish, European, and American rentiers may not be an effective, let alone the most effective, path to fundamental economic recovery, and, perhaps, that Ireland should not unduly fear an exit from the EU. Time should tell.
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