Business World

Sunday 22 April 2018

Iceland's search for political guilt faces hurdles

Omar Valdimarsson

Iceland's trial of former Prime Minister Geir H Haarde for his role in the island's 2008 bank crisis may face hurdles as policies he backed have since proved key in propelling the nation's economic resurrection.

In September last year, Mr Haarde became the first political leader to be indicted for mismanagement of economic affairs during the financial crisis.

Since then, Iceland's economy has shown signs of recovering faster than the average for the 17-member euro area with a smaller public deficit, in part because of measures supported by Mr Haarde before he was forced to step down in 2009.

The Haarde government's decision to impose emergency legislation at the end of 2008 allowed it to save domestic bank assets and impose capital controls in an effort to protect the currency.

The island, which completed a 33-month International Monetary Fund programme last month, wouldn't have recovered as fast had it not been for policymakers' crisis management, according to Nobel Laureate Paul Krugman.

"It's clear that Mr Haarde gets the credit for Iceland's emergency legislation," Omar Kristmundsson, a professor in political science at the University of Iceland, said. "Most people agree that this indictment is completely ridiculous."

The parliamentary committee that last year recommended Mr Haarde be indicted said his actions from February 2008 through the beginning of October of that year exacerbated the island's boom and subsequent bust.

Mr Haarde didn't exert enough pressure on banks to shrink their balance sheets after they amassed debts equivalent to 10 times Iceland's economic output, the committee said, arguing the development was key in fuelling the collapse.


Mr Haarde himself expects to be "completely vindicated in this matter", he said earlier this week in Iceland's capital, Reykjavik.

His lawyer, Andri Arnason, this month asked the court to dismiss the case, arguing the charges were "unclear and unreasoned".

The court can take as long as four weeks to respond, prosecutor Sigridur Fridjonsdottir said.

Most Icelanders oppose the indictment, according to a June 22 MMR poll, which showed 65.7pc of voters were against the trial, while 34.3pc supported it.

"It's not enough to accuse him of being passive when the economy was collapsing, when no one can point out what it is exactly that he should have done," Mr Kristmundsson said.

"Inactions can't equal culpability when no one knows what actions would have avoided."

The parliamentary committee found that former central bank governor David Oddsson as well as the then head of the Financial Supervisory Authority Jonas Jonsson also acted negligently in the years leading up to the meltdown, according to an April 2010 report.

Mr Jonsson and Mr Oddsson, who now runs the country's second-biggest newspaper, 'Morgunbladid', escaped legal action when the state prosecutor said in June last year that a Special Investigation Commission's findings didn't warrant a criminal probe.

Mr Oddsson was head of government from 1991 until 2004, making him Iceland's longest-serving prime minister and the principal architect of the privatisation of the island's banks.

Mr Haarde served as finance minister from 1998 until 2005. He was prime minister from 2006 until 2009.

Mr Haarde's case marks the first time Landsdomur, a special court created in 1905 to hear such trials, is convening.

Prime Minister Johanna Sigurdardottir, who took over from Mr Haarde in 2009, has said she opposes the trial.

Iceland's economic rebound has pushed the cost of insuring against its default below the average for the European Union.

The island's gross domestic product will expand 2.9pc in 2012, compared with 2pc in the 17-member euro area.

Iceland's government deficit will narrow to 1.4pc of GDP, versus a 3pc shortfall in the euro bloc in 2012, the Organisation for Economic Co-operation and Development said in a May 25 report.

Iceland's economic resurrection has been achieved "with very heterodox policies -- debt repudiation, capital controls, and currency depreciation," Mr Krugman wrote in his 'New York Times' blog this month.

"It was as close as you can get to the polar opposite of the gold standard. And it has worked." (Bloomberg)

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