Iceland entered a period of financial crisis in 2008, with the country subsequently involved in a prolonged dispute over losses generated in the Netherlands and the UK by an Icelandic bank. Jon Danielsson writes that the crisis in Iceland has much in common with the ongoing crisis in Greece, not least the heavy pressure exerted on both countries by foreign governments. He argues that just as in Iceland, this pressure has been counterproductive in Greece, hardening opposition to any potential settlement

Danielsson, Jon

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Credit: Ben Bodien (CC-BY-SA-3.0)8/19/2015Iceland illustrates why political ‘hectoring’ from foreigncountries is bound to fail in Greeceblogs.lse.ac.uk/europpblog/2015/08/19/iceland-illustrates-why-political-hectoring-from-foreign-countries-is-bound-to-fail-in-greece/Iceland entered a period of ﬁnancial crisis in 2008, with the country subsequently involved in aprolonged dispute over losses generated in the Netherlands and the UK by an Icelandic bank. JonDanielsson writes that the crisis in Iceland has much in common with the ongoing crisis in Greece,not least the heavy pressure exerted on both countries by foreign governments. He argues that justas in Iceland, this pressure has been counterproductive in Greece, hardening opposition to anypotential settlement.In observing what has been happening in Greece, I am struck by many parallels with the Icelandiccrisis. The two crises demonstrate that the commonalities in crisis tend to be bigger than the diﬀerences. Leavingthe economics aside, here I want to focus on the political and international relations aspects, and in particular howthe Icelandic Icesave dispute has many echoes in how the Greek crisis is playing out and the impact of subjectingdebt agreements to referenda.A brief background to the Icesave disputeI have discussed this before, so here is just a brief synopsis. An Icelandic bank, regulated and deposit insured inIceland, when rejected by professional creditors in 2007 opted to get funding by opening online branches in Britainand the Netherlands, under the name of Icesave. It was quite successful, not least because it oﬀered above marketinterest rates.However, ultimately the professionals proved rightand the bank failed in October 2008. This was at theheight of the Global Crisis, and the UK and Dutchauthorities opted to unilaterally bail out Icesave’sretail depositors, motivated by a desire to preventeven more disruption to ﬁnancial markets.After spending €3.9 billion on the bailout, the Britishand Dutch tried to claim the money back from theIcelandic deposit insurance fund. They found itlacking and hence wanted the Icelandic governmentto repay them instead. It hesitated, after all thisamounted to 42 per cent of GDP and a sovereigndefault was looming.However, the legal case was always uncertain andwhen the case was ultimately decided byinternational courts, it ruled in Iceland’s favour.Ultimately, it turned out to be a storm in a teacup, theestate of Icesave had more than enough money to make everybody whole. The British and the Dutch governmentseven proﬁted from the whole thing.Dictating an Icesave deal1/3The government of Iceland initially accepted the British and the Dutch claims and assembled a team to negotiate theterms. They were heavily outgunned. At the time, I likened this to Iceland sending my local ﬁrst division footballteam, Grotta, to play against Manchester United. The Icelanders soon realised that the agreement was lacking andthat its authorities were less than competent in their negotiations with the foreign powers. Opposition to the Icesaveagreement started to build and an acrimonious debate started, both domestically and with the outside world.At the time, Iceland came under very strong pressure from every relevant government to give in. Trade sanctionswere threatened, the IMF held up its aid package to force Iceland to accept the claim, and Iceland’s maininternational friend, Norway, took on the role of main enforcer. The Icelanders got the impression that they stoodalone against the world, with Poland being the only country oﬀering support. In the debate, Britain kept a very lowproﬁle; I do not recall any of its politicians commenting on Icesave publicly.It was diﬀerent in the Netherlands where Icesave became a major political issue. Two men stand out – the foreignminister, Maxime Verhagen, and the ﬁnance minister, Wouter Bos. Both frequently commented on Icesave,threatening Iceland if it did not pay back the Icesave money. Their domestic comments were immediately translatedinto Icelandic, inﬂuencing public opinion. At the time, Iceland was negotiating with the EU for membership and MrVerhagen linked membership to Iceland accepting the Icesave obligations. The Dutch oﬃcials were joined bypolitical leaders from across Europe. Still, all this public hectoring was counterproductive.There were several reasons for this. The pressure and public exhortations were perceived as unreasonable. TheIcelanders thought that the Dutch authorities were equally responsible; after all, they had been repeatedly warnedagainst allowing the Icesave bank to start operations. They worried that adding on a foreign currency debt of 42 percent of GDP might trigger a sovereign default. Ultimately, the Icelanders bristled at being dictated to by hectoringforeign oﬃcials.The desire for reform needs to come from withinSo what does this have to do with Greece? The parallel is in how the international community pressured Iceland togive in and how the Icelanders reacted to the pressure. Greece has been under continuous and very public pressureto reform its economy. Leaving aside the question of whether these reforms are needed, all the public hectoringseems to be quite counterproductive at least in terms of voter perceptions.In their dealings with Greece, the foreign authorities have repeatedly and loudly told the Greek people they have toreform, that their way of doing things is wrong and that the way of the foreigners is right. I don’t think this will work,and the recent referendum clearly suggests that voters would like to take an even harder line than their currentleaders. This has ominous implications for the next election. After all, the Greek economy was collapsing when thetroika was being obeyed. Leaving aside the question of whether there is causality, the voters certainly did see one.ReferendaIceland has another factor in common with Greece – they are the only two countries that have subjected sovereigndebt settlements to a referendum, as analysed recently by Amber Curtis, Joseph Jupille and David Leblang. Theyargue that while the vote was supposedly about economics and Europe, it really was about domestic politics andthe attitude of the voters toward the government. The outcomes therefore signal the political direction of thecountries.In addition, attitudes towards national sovereignty played a key role in both countries. Nationalists were more likelyto say “no”, and the pro-European cosmopolitans “yes”. One long-term consequence of the Icesave dispute hasbeen the hardening of Iceland’s anti-European and isolationist views. And in the subsequent national elections, theIcelanders voted in parties that had campaigned against both the Icesave deal and EU membership, including aprime minister who built his career on the “no” vote.2/3One important diﬀerence between the Icelandic and Greek referendums is that in the former case, the question wasclear and so were the consequences. In the Greek case that is not so, and this reﬂects the diﬀerences in theoutcome – 61 per cent of Greeks said no, and over 90 per cent of Icelanders.ConclusionThe lesson from Iceland is that the population will instinctively reject foreign pressure. It doesn’t matter whether it issensible or not, so long as it is imposed, it will be resisted.If the Greeks don’t want to reform their economy, the foreign authorities wanting that for them will be disabused. Thehectoring by foreign oﬃcials, who are addressing their own voters as much as the Greeks, is likely to becounterproductive. At the end of the day, the will to reform needs to come from within, and the sooner the Troikarealises this, the easier it will be to deal with the Greek situation.Please read our comments policy before commenting .Note: This article originally appeared at Vox. It gives the views of the author, and not the position of EUROPP –European Politics and Policy, nor of the London School of Economics.Shortened URL for this post: http://bit.ly/1KuJUT9 _________________________________About the authorJon Danielsson – LSE Department of Finance / Systemic Risk CentreJon Danielsson is Associate Professor in Finance at the LSE’s Department of Finance and Directorof the LSE’s Systemic Risk Centre. His research interests include ﬁnancial risk modelling,regulation of ﬁnancial markets, models of extreme market movements, market liquidity, and ﬁnancialcrisis. He has published extensively in both academic and practitioner journals, and has presentedhis work in a number of universities, public institutions, and private ﬁrms.3/3

Iceland illustrates why political ‘hectoring’ from foreign countries is bound to fail in Greece

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