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
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