Former Iceland PM facing jail for his role in financial crash
Trial of Geir Haarde begins as prosecutors seek accountability
Iceland was a pioneer of recklessness during the credit boom. And now the small nation in the north Atlantic is a pioneer in political accountability during the credit bust.
Geir Haarde, the Icelandic prime minister between 2006 and 2009, appeared in a special constitutional court in Reykjavik yesterday on charges of "failures of ministerial responsibility" during the 2008 financial meltdown.
Geir Haarde heads a cast of hundreds who could face prosecution for their part in Iceland's financial implosion.
Iceland's special prosecutor Olaf Hauksson has named more than 200 suspects in his criminal investigation into the country's financial crisis.
So far, those convicted in connection with the country's big banks -- Landsbanki, Kaupthing and Glitnir -- include former Kaupthing brokers who got six months in jail for manipulating bond deals and Baldur Gudlaugsson, a former permanent secretary at the finance ministry, who received two years for insider trading of Landsbanki shares. Haukur Thor Haraldsson, a former managing director with Landsbanki, was sentenced to two years in July for embezzlement.
But there is an irony here. For the economy that Mr Haarde helped to wreck has fared surprisingly well since the bust.
Iceland experienced one of the most severe recessions in the world when the markets crashed in 2008. Economic output fell by about 12pc over two years. But the latest report on Iceland by the International Monetary Fund shows that growth is resuming. GDP is expected to increase by a relatively healthy 2.5pc in 2011.
Public finances are on a sustainable path too, with government debt projected to fall to 80pc of GDP in 2016.
The turnaround should not be exaggerated. Iceland is still more than 10pc below pre-crisis output levels. Unemployment remains at about 6.7pc, considerably higher than before 2007. The standard of living of most Icelanders is well down. Access to foreign currency is tightly controlled and and risks to recovery remain. Central bank interest rates are going up in order to curb inflation and this could stifle growth. Yet, the fact remains that the outlook for the Icelandic economy is looking rather healthier than other distressed economies in Europe such as Greece, Portugal and Ireland.
So how did Iceland manage it? There were four pillars to Icelandic policy in the aftermath of the bust: external assistance, debt repudiation, currency depreciation and capital controls. So far Iceland has received €1.56bn in assistance from the IMF. It also received €2.12bn from Nordic nations to bolster the foreign exchange reserves of its central bank.
The contrast between Iceland and Ireland, where we assumed responsibility for all the liabilities of our bust banking sector, is stark. Thanks to the blanket bailout, total government debt is now more than 100pc of GDP, four times pre-crisis levels.
Our reward for these assurances from the markets has been a rise in the cost of insuring our sovereign bonds. (© Independent News Service)