Thorvaldur Kristmundsson/AP
Protesters burn an effigy of the Icelandic Prime Minister Geir Haarde during a Jan. 21
demonstration in Reykjavik, Iceland, over the handling of the financial crisis
. (AP)

Financial Collapse Claims Iceland’s Conservative Government

January 27, 2009 10:34 AM
by Emily Coakley
Geir Haarde resigned as Iceland’s prime minister Monday, and today a new government, led by the left-leaning Social Democratic Alliance party, was formed.

Protests Lead Prime Minister to Resign

The new coalition will stay in place until May, when elections that were already scheduled will take place. Ingibjorg Gisladottir is the head of the Social Democratic Alliance but will not become prime minister. She’s recovering from brain surgery and plans to appoint Johanna Sigurdardottir as the interim prime minister, the Associated Press reported.

Icelanders, unhappy with the country’s failing banks and other economic troubles, have been critical of Haarde’s conservative government for not overseeing the banks well enough.

“Thousands of angry Icelanders have demonstrated against the ousted government in recent weeks, clattering pots and kitchen utensils in what some commentators have called the ‘Saucepan Revolution,’” AP reported.

Reuters says Haarde is the first world leader to be ousted as a result of the global economic crisis.

Background: Iceland’s economic troubles

In September and October, Iceland’s government took over the country’s three largest banks and halted trading on its stock exchange. In the past year, the country’s currency, the krona, has dropped by nearly half against the euro.

“Iceland’s banking sector dwarfed the rest of the economy over the past decade. The country’s banking sector is some eight or nine times larger than its gross domestic product. High interest rates beckoned scores in foreign deposits—far exceeding locally held accounts and exposing the country to the financial ills of the world at large. Kaupthing, for one, accumulated debts stemming from funding British transactions of more than $5.2 billion within five years,” findingDulcinea reported.

Iceland’s troubles worsened in early October, when British Prime Minister Gordon Brown invoked antiterrorism legislation to freeze some £4 billion in United Kingdom accounts held by Landsbanki, an Icelandic bank that was failing, according to The New York Times.

The British treasury then seized assets of another Icelandic bank’s British subsidiary, Kaupthing Singer & Friedlander. According to The New York Times, “The British government’s seizure of [KSF’s] assets precipitated the immediate collapse of its parent bank, Kaupthing, which the Icelandic government had been propping up and had hoped would survive.”

The Financial Times in October reported that Iceland has asked British legal firm Lovells to explore “possible claims against the [U.K.] Treasury stemming from the Nordic country’s banking collapse.”

According to a spokesman for the law firm, “Lovells has provided advice to the Icelandic government on English and international aspects of the financial turmoil in the country.”

Icelanders set up a Web site called Icelanders Are NOT Terrorists, with an online petition signed by more than 73,000 people, asking for an end to abuse of the antiterrorism legislation.

And an unnamed lawyer who is connected to the issue told the Financial Times, “People are cross. People are very cross.”

Earlier in October, The Mail on Sunday reported that Britain’s Minister of Finance, Alistair Darling, knew some time ago that Iceland’s banks were in trouble. A leaked transcript of an Oct. 7 phone call with Iceland’s Finance Minister, Arni Mathiesen, showed that Darling didn’t believe assurances from another Icelandic official.

“I was very concerned about the London banking position and they kept saying there was nothing to worry about. And you know, with the position we are now in, there will be a lot of people in this country who put money in and who stand to lose an awful lot of money and they will find it difficult to understand how that has happened,” Darling is quoted as saying in the transcript.

Vince Cable, a spokesman for the Liberal Democrat Treasury, told the Mail on Sunday, “If it’s true that the Government did know all about these problems and doubted Icelandic reassurances, this shifts the balance of responsibility. Mr. Darling has to explain himself.”

In November, Iceland’s government announced it would repay Britons the first £18,000 they had in their Icesave accounts, according to the Daily Mail.

“[I]n the aftermath of the collapse of Icesave, Iceland appeared to be planning to compensate its domestic depositors but not foreign ones,” the paper said. There were fears that even if Iceland honored its foreign account holder demands, they wouldn’t have enough money.

More than a quarter million Brits had Icesave accounts, and the country’s Financial Compensation Service has already paid £250 million to many Icesave customers. After Icesave compensates for the first £18,000 of a person’s account, the service is to kick in the next £32,000 to cover up to £50,000 of an individual’s account, the Daily Mail said.

Opinion & Analysis: Who are the terrorists, exactly?

Some in Britain were appalled by the government's use of anti-terror legislation. David Vance, a self-described author and political analyst, writes on Tangled Blog that Brown’s actions, when he knew Iceland wasn’t a terrorist state, are emblematic of “this government’s attempts to marginalise our liberty in the guise of ‘fighting terrorism.’” Although it’s important to fight terrorism, Vance writes, “how can we trust a government that uses terror legislation so casually to punish Icelanders for the crime of imprudent bank practises?” 

On the Daily Telegraph’s Web site, Daniel Hannan wrote a blog post called “Gordon Brown, not Iceland, acted like a terrorist.” Brown, Hannan says, “has collapsed the economy of a Nato ally and damaged British interests into the bargain. It is he, not the Icelanders, who has failed to observe the norms of behaviour among civilised states.”

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