Iceland’s government collapses

This is a couple of days old, but it doesn’t seem to have gotten much attention.

It doesn’t come as much of a surprise, given Iceland’s devastating economic situation. It’s not clear, though, just what the precipitating incident was. As late as Wednesday, the Prime Minister was saying that he wouldn’t step down, no, sir, no way. Der Speigel mentions “violent protests”, but they don’t seem to have been all that violent; brief googling only shows stuff like “lighting a bonfire” and “clashing with police”.

Elections are set for May, and polls show that if they were held today the Prime Minister’s center-right Independence Party would take a beating, but would survive in opposition. The next government would be formed by Iceland’s Green Party — which has never been part of a government before.

More information from any of our Icelandic readers would be appreciated!

This entry was posted in A Fistful Of Euros, Governments and parties and tagged by Douglas Muir. Bookmark the permalink.

About Douglas Muir

American with an Irish passport. Does development work for a big international donor. Has been living in Eastern Europe for the last six years -- first Serbia, then Romania, and now Armenia. Calls himself a Burkean conservative, which would be a liberal in Germany but an unhappy ex-Republican turned Democrat in the US. Husband of Claudia. Parent of Alan, David, Jacob and Leah. Likes birds. Writes Halfway Down The Danube. Writes Halfway Down The Danube.

18 thoughts on “Iceland’s government collapses

  1. Hi and thank you for a wonderful website, the FOE which I read daily.

    The situation in my home country, Iceland, is like this.

    1) The Prime Minister of Iceland, Geir H. Haarde, which also is the leader of the right wing Independence party (the Icelandic Republicans) has been diagnosed with cancer and has to seek treatment. He has therefore cancelled his candidacy as the leader for the party at the upcoming party convention. This was just announced yesterday.

    2) The leader of the coalition party in the present government, has also been ill and has just returned for treatment in Sweden. She intent to continue as the leader of her social democrat party.

    3) In the light of the yesterday announcement the Prime Minister has suggested that it would be appropriate to held parliamentary election as soon as possible, likely in April.

    4) There have been some protest in Iceland but most of them have been peaceful. But as always there are the usual elements that seek confrontation with the police whenever the opportunity arise and specially in these extraordinary circumstances in the aftermath of the collapse of the country’s entire banking system.

    There has been a growing tension within the coalition government. The social democrats have been trying to force the Independence Party into the direction of a EU membership considerations.

    So now the Independence Party needs to elect a new leader, and the Prime Minster has to concentrate on treatment and hopefully a full recovery. Elections are therefore almost unavoidable.

    Best regards

  2. I’m not an Icelander – I’m a Brit, living in Holland – but an old Icelandic friend of mine is living in Kopavogur.

    She says there have been protests every Saturday for the last four months in front of the Government building – people shouting “Unfit Government”. There was a particular protest there on the first day of Parliament in 2009, a “noise-protest”, to try to disrupt meeting. Started about 1pm in the afternoon, finished 3am the next morning.

    People in Iceland seem to be entirely uninformed by the Government about what’s being done or what the situation is – rumours abound. One rumour is the IMF loan is still locked up in a US bank account, unavailable.

    Apparently Parliament were debating, for example, a motion about whether or not supermarkets can sell alcohol. So the mass of people feel the Government is totally useless – worse than useless.

    My gut feeling is the reason they have no information about what’s being done is because nothing is being done, because nothing can be done.

    What *can* you do when your banking system has imploded and you have no money?

    Still the currency hasn’t been floated – you’re allowed to buy krona, but you’re not allowed to buy foreign currency (the Government still has its controls in place), which is why the ISK has been “strengthening”…

    A lot of people have foreign currency backed loans which are now very expensive. The Government I would guess is trying to protect them – but what good will it do? it can’t go on like this, the Government doesn’t have the money to subsidize all these loans via a fixed exchange rate.

    Where all the banks have been taken over by the regulator, the Government has arranged things so that mortgages are easier for people to pay – and they can take payment holidays if they need to. Again, it just seems to be defering the inexorable point where there’s no money for this.

    The general feeling seems to be that Iceland needs the euro. But that’s not going to happen for a couple of years at most.

    I’m very glad people in Iceland are free to work anywhere in the EU. That and that alone is I think what will keep them going.

  3. Actually the IMF program in Iceland seems to be going according to The Plan. The Icelandic krona is being stablaised and gradually currency restrictions are being lifted.

    Please see interview with IMF’s Poul Thomsen from last December:

    Next IMF Icelandic mission visit to Iceland it due in February.

    Unemployment is rising yes, but is still very very much lower than the EU average. Emigarion to EU has actually decilend exept maybee to Norway (not a EU member)

    Iceland’s exports are running on full steeam. Since the overextended and overleveraged banking sector is now finally, totally and luckily bust, restructuring of the entire system can proceed and is actually proceding very well.

    Best regards

  4. Funny thing: the country most seriously altering its economy due to Global Warming hoax is invariably deepest hit by current financial turmoil and economic downturn. My theory is that real (not cheap outspoken rhetoric, like in Canada or Japan) is quite comprehensive measure of mental and moral deterioration of governing circles. Once illiterate moron and pathological liar, (evidenced by embracing GW theology), always moron and liar.

    G-d helps Iceland if Green Party will gain the power…

  5. Actually thee Green party in Iceland is often called the Melon Party, i.e. green on the outside and red on the inside. If they gain power it will certainly be short lived. Drugs only work if you are really sick.

    The Icelandic economy is fundamentally very healthy and strong, but is now a victim of Mrs Mikcey Mouse and Donaldina Duck running the financial sector to their best (in)ability. The EEA rules did to some extent prevent the Government from taking preventive actions in order to limit it’s size and controlling the damage.

  6. Gunnar Rögnvaldsson wrote:

    > Actually the IMF program in Iceland seems to
    > be going according to The Plan.

    I imagine whatever The Plan is, it is strongly – if not fully – dictated by circumstance. Calling it a “plan” seems to indicate a degree of control which I think does not exist.

    > The Icelandic
    > krona is being stablaised and gradually
    > currency restrictions are being lifted.

    The krona exchange rate inside Iceland has stabalized because trading is controlled by the State. They set the original exchange rate (about 180 to the euro I think it was), which has now strengthened (to about 160), because they have “gradually lifted” restrictions, by allowing private individuals to buy krona. However, people are still not allowed to *sell* krona, so it means nothing. It’s an entirely artifical exchange rate.

    The ECB has stopped carrying an exchange rate to the krona because the official rate is artifical.

    Outside of Iceland, the exchange rate also has stabalized – at the market rate – of about 300 to the euro.

    > Unemployment is rising yes, but is still very
    > very much lower than the EU average.

    I did a quick lookup on-line. According to the Finance Ministry, unemployment end of Jan will be 6.8%. I have no idea how Iceland defines unemployment, so it’s a relative value only. In October – that is, THREE months earlier, unemployment was 1.9%.

    I can’t say being still under the EU average means very much when unemployment triples in three months.

    > Emigarion to EU has actually decilend exept
    > maybee to Norway (not a EU member)

    Is emigration different to husbands going overseas for a job while the family stays at home?

    > Iceland’s exports are running on full steeam.

    I’m concerned that most of the export companies have huge loans (see Bronte Capital) and they are going to go “pop” as well when they can’t get funding. Also, loans from the Icelandic banks are going to be being called in by the regulator since the banks are in the process of being wound up.

    > Since the overextended and overleveraged
    > banking sector is now finally, totally and
    > luckily bust, restructuring of the entire
    > system can proceed and is actually proceding
    > very well.

    The three banks are being wound up. Once that’s done, there will be no Icelandic banks.

    So – restructuring of the banking sector? what does that mean, *exactly?*

  7. Well Xavier, If a country’s entire banking system collapses drastic measures needs to be taken, and they have indeed been taken.

    If your neighbouring and allied country (UK) freeze your assets, then brings down your country’s biggest financial institutions and then puts you on a list over terrorist organizations like Al Qaeda, and then this is followed up by the entire EU which then black mails Icelandic tax payers to take over foreign banking debts so the previously debt free sovereign state of the Icelandic Republic now has a sovereign debt of 140% of GDP, you need certainly drastic measures to protect the currency and the entire economy.

    Regarding unemployment: you are talking about registered. According to Statice ( unemployment was about 4% in the 4Q. This is bound to rise and in the worst case Iceland will have to experience EU level unemployment for the fist time, but only for a one year or so.

    The Central Bank Discount rate is now 18%, so you can imagine how this unused fire power will turn the Icelandic economy around over the course of next 18 months, like the IMF predicts. Employment participation is 82-85% and this young nation will bring down the sovereign dept very very fast. Fertility is still over 2.0 and the workforce is strong and young. This is not like the ageing EU on its way down the drain over the next 4 years. Iceland will start recovering while the EU is still sinking.

    Best regards

  8. Gunnar,

    You must be working for the government, right?

    Otherwise please open your eyes. With no banks in the country and no exchangeable currency, pretty soon there will be no trade in to the country.

    Your unemployment will go through the roof and all your young and educated will move to anywhere else where they can find jobs.

    Iceland will be for a very long time a poor nation of fishermen and pensioners (the last cannot get out of there). Ragnaroek.

    I would be happy to make a bet of a decently priced bottle of wine, that my outlook is more right than yours, but as I do not believe that there will be any wine imported there pretty soon, it would be a poor bet for me.

    I hope the best for you, but am afraid that it won’t be enough.

  9. While it is on the whole true that a rising population is beneficial to the economy it isn’t in Iceland case which is just a raw material exporter of fish and electricity with not much need for extra hands

  10. Drake:

    You must be working for the government, right?


    I can assure you that I don not work for the government. But I wish I where 🙂

    Please read the latest IMF mission statement for more information about how things are proceeding in Iceland.

    The International Monetary Fund publishes reports on Iceland

    All three major banks have been rebuilt and where so within weeks (or rather days) and are now fully functioning again, thanks to a strong and well functioning legal in institutional frameworks. All smaller savings & loan bank institutions works as usually and where not affected. Who told you there where no banks functioning in Iceland?

    But yes the three biggest banks are at the moment in State ownership, but will be sold in due time.

    Iceland is probably one of few European countries with a fully privately funded pension system which means the burden on state finances is ultra light compared with most of the EU, which again means low taxes and a strong ability to pay off the public debt which was forced upon Icelandic taxpayers by the EU Cartel.

    Iceland is the tenth biggest fish exporter in the world and also a huge and rising exporter of metals. Do you have any idea how much labour it requires to build and maintain the hydro power plants enabling the production of electricity required. Only a small fraction of energy sources have so far been explored.

    Would you rather like to be in the banking sector for the next 40 years or so? The financial sector will be a hole in the ground the next 40 years. The financial sector’s Mikey Mouse & Donald Duck strategy & management guaranteed that. A hole in the ground. A black hole.

    Best regards

  11. But I should also add that there will be huge effects on businesses over the next 12 months. Many indebted companies will go bust and there will be a huge drop in GDP output, maybe 7-10%. This is almost inevitable. But thanks to strong exports and a competitive exchange rate, recovery is already in the works.


  12. Gunnar Rögnvaldsson wrote:
    > The Central Bank Discount rate is now 18%, so
    > you can imagine how this unused fire power
    > will turn the Icelandic economy around over
    > the course of next 18 months,

    The krona is not freely exchangable. The “New” Icelandic banks, if they’re offering loans at all, are offering them in freshly printed krona.

    Krona can buy internally produced products only. They cannot be used to buy overseas products because they cannot be converted into foreign currencies, since this is currently banned.

    If free exchangability is returned, a very large number of people will go bankrupt, because their loan payments will double.

    However, people will then be able to buy euros and dollars. Unfortunately, since the krona to do this with *has just been printed*, inflation – possibly even eventually hyperinflation – will kick in, making it more and more pointless to do so (and wiping out whatever savings remain).

    As far as I can see, there are fundamental problems which have to be solved before interest rate adjustments become meaningful.

    > Employment participation is 82-85%

    See previous fundamental problems.

    > and this young nation will bring down the
    > sovereign dept very very fast.

    Iceland’s systematic growth historically seems to be about 4%. This, roughly speaking, covers the interest payments on the loans which are being taken. It is hard to see how Iceland *can* pay off those loans.

    I wish I had better news and a better outlook in reply to you, Gunnar. I’m afraid Iceland is in an impossible situation. Basically, the krona has to be made freely exchangeable and people need to suffer – mass bankruptcy, loss of houses, cars, etc – and then, from that awful state, recovery can begin – except what about the massive loan repayments? those loans should never have been taken.

  13. My name is Eric I am from the United States,
    I make an intentional effort not to be misled
    by the media or government here at home, We all
    know that no goverment no matter what standards we hold them to are not absolutly incorrupt. I read all the the things posted here and on other blogs to try to get a better understainding, however I am not familiar with some of the dialect and eupehsisms used aboroad could some explain to me what it is they see from their viewpoint? Both conserative and liberal viewpoints would be good. Thanks and please rest assured not all americans are hate mongering idiots, I support Isreal for one simple fact they are Gods chosen people no matter what it is they do I will support them no matter how much It pains me. Now the war in Iraq im sorry to say it was nothing more than the american goverment trying lay claim to more
    assets namely oil in the middle east.

  14. I know that Iceland is a big exporter of fish. But i can’t see how Iceland can increase the number of workers in the fish industry as i don’t think they can increase their catch. And about the dam builders. That is done by migrant labour. So you have a choice. Import the labour or, when the job is done and it will be done, export your local builders. The first is by far the preferred solution. When those dams are build you hardly need any labour as most of the electricity will be exported to Europe

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