24 Jun 2014 | Tony Leon | Original Publication: BDlive
Iceland’s recent financial implosion is instructive and has a local relevance, writes Tony Leon
LAST week, I made a journey to hell and back. To be precise, I visited Mount Hekla in southern Iceland, one of the most active volcanoes in the world — there have been more than 20 eruptions between the 12th century and as recently as 2000. During the Middle Ages, local monks believed it was the physical location of "Hell’s chimney", or perhaps of purgatory itself.
Happily, on the day of my visit, the volcano was not in eruption mode. But, in August 2008, Iceland exploded itself financially and embarked on its own journey to economic perdition. Not that the first-world ambience of the capital city, Reykjavik, betrays any sign of the recent crisis on this large island that is more famous for its elusive winter lights, luxuriant fishing grounds and geothermal geysers than for its banking prowess.
In fact, it makes most other European capitals seem, even on our depleted currency, bargain basements by comparison. Its citizens throng the luxury downtown restaurants, where a bottle of rather ordinary South African pinotage is on offer at about R1,000. It’s easy to become a convert to beer with dinner at those prices.
But the point about Iceland’s recent financial implosion is instructive for two reasons that have a wider, and even a local, relevance. First, how did this sparsely populated country of about 320,000 people get into such a mess? Second, how did it emerge so quickly from the cauldron of near national insolvency to regain its place as one of the wealthiest countries, per capita, in Europe in just three years? In August 2008, just one month before Lehman Brothers collapsed and the world’s financial system froze, Iceland revealed itself as the harbinger of the global economic storm to come. Its prime minister, having been rebuffed by both the US Federal Reserve and the Bank of England, went to Moscow to seek a loan, an extraordinary posture for a founding member of the North Atlantic Treaty Organisation.
But, as he later explained, he wanted to "signal the severity of the situation" and did not want to go cap-in-hand to the International Monetary Fund (IMF) for a bail-out. But when the extent of the crunch was exposed, it was the IMF that provided the stand-by facility that helped calm its troubled economic waters. In essence, as the headline of Fortune magazine proclaimed in December 2008, Iceland was "a country which became a hedge fund".
Its three largest private banks, enjoying the loose reins of the now vanished era of deregulation and the hunt for profit and the excessive rewards for excessive risk, had become so large that their assets were 10 times the size of the economy. These banks, which duly collapsed in the wake of the crisis, had not just extended their largesse locally, but also went global. Among others, more than 100 local authorities in the UK invested about £50m in Icelandic banks.
The severity of this crisis — caused, as one local advised, by "our unique instinct for a gamble and the universal instinct for greed" — became quickly apparent. As the banks were in effect nationalised, the economy went into free-fall: unemployment hit 40% and the local stock exchange saw 90% of its value wiped out. But the countermeasures were equally swift: after the IMF facility was in place, significant tax hikes and painful austerity measures followed. Yet within three years, by August 2011, the pain had eased and the economy recovered to positive territory, budget debt was brought down sharply and the IMF facility was ended.
Today, in comparison to the downgrade of our sovereign rating from stable to negative by Fitch, the same agency has recently upgraded Iceland to stable again.
President Jacob Zuma’s state of the nation speech last week did not at first blush indicate that his administration has grasped the gravity of our own economic straits: one downgrade away from junk status or below investment grade. Or if, indeed, the government is so seized that there were no announcements and few measures to arrest the downward spiral. Perhaps the tangled alliance politics of the African National Congress makes any implementation of the necessary policy changes impossible.
The only relief in sight came from an unlikely source. In 2011, Ngoako Ramatlhodi said the "constitutional transition was a victory for ‘apartheid forces’". These were the very sentiments repeated last week in the theatrical parliamentary debut of Economic Freedom Fighters leader Julius Malema.
He was then a humble deputy minister. Now that he is charged with the far more consequential job of salvaging our mining industry as Minister of Mineral Resources, he at least appears to recognise the gravity of the situation. His decision to reconsider the investment-crushing Minerals and Petroleum Resources Development Act Amendment Bill might indicate, if followed through, there is light at the end of the tunnel. Not just greater darkness or an IMF bail-out.
• Leon is the author of Opposite Mandela (Jonathan Ball) Follow him on Twitter: @TonyLeonSA OR on Facebook: facebook.com/TonyLeonSA