In my Money Week column this week, I've been explaining why Iceland shouldn't pay back the money it owes to Britain. Here's a taster.
To pay or not to pay? To paraphrase the Prince of another small, snowy kingdom, that is the question the Icelandic people are going to face in a referendum.
The country hardest hit by the collapse of the financial system is pondering being the first to say, heck, the bankers can go swing. Someone might have to clear up the mess they created, but it isn’t going to be us.
What should the rest of the world make of that? In truth, there are complex, complicated issues at stake. On the one hand, debts should be honoured. Integrity and trust are important to countries, as indeed they are to companies and individuals. Against that, it is surely crazy that a whole country, for a whole generation, should effectively be bankrupted.
In reality, the Icelanders are right to draw a line in the sand. They should say something very simple: that whole country’s can’t be held responsible for the losses run up by a wild and irresponsible financial elite: and that investors can’t expect always to be bailed out. If they make that point clearly and forcefully enough, the independent-minded islanders will be sending out an important message to the rest of the world.
The facts at issue are not terribly complicated. Some of the Icelandic banks sold very aggressively priced saving products abroad, mainly in the UK and the Netherlands. When their banks collapsed during the credit crunch, the British and Dutch governments agreed to guarantee the deposits that people had been made with the Icelandic banks.
Now, the Icelandic government has agreed to repay slightly more than $5 billion to both countries to help shoulder the cost of that bail-out. The trouble is, the ordinary Icelanders aren’t quite so sure they want to foot that bill. Iceland is a democratic little country. A petition gathered enough signatures to force a referendum on the deal. The vote is now scheduled for late February or early March. If it gets voted down, Iceland won’t pay.
The polls suggest they won’t. The latest test of opinion found 62% of voters supported blocking the re-payments, whilst only 38% were in favour to writing the cheque. Unless someone can come up with some compelling arguments over the next few weeks why they should pay up, it looks like the deal is going to be thrown out. The debts won’t get re-paid. And the British and Dutch governments will both have to add a few more billion to the cost of the financial rescues.
It would be easy to criticise that. A country, you might argue, should pay off its debts, just as an individual should. It can’t expect other countries to ride to the rescue. If Iceland doesn’t agree to the repayments, its credit rating will be shot to pieces, and its reputation will never recover. True, paying the money back might well be a long, hard slog. But it is better than being known as a country that rats on its obligations.
There is truth in all of that. And yet, the arguments on the other side of the ledger are just as compelling.
The debts were not, let’s remember, run up by the Icelandic government, or by the Icelandic people. They were run up by a few wild bankers, who swallowed too much of their own propaganda, and expanded with a recklessness that makes even Sir Fred Goodwin’s reign at Royal Bank of Scotland look sober and responsible by comparison.
There were other parties who were just as guilty. What about the host governments? Regulators in Britain and the Netherlands allowed Icelandic banks to operate in their country. Surely they must bear some responsibility as well?
And what about the depositors themselves? Again, shouldn’t they shoulder some of the losses? When they saw that one of the Icelandic banks was offering 1% more on a deposit account that the local building society, didn’t they pause to wonder how that was being achieved? And whether excessive risks were being run? And if they didn’t – since it was surely obvious - haven’t they only got themselves to blame.
After all, the sums involved aren’t trivial. The debts amounts to £11,000 per Icelander, or 40% of the country’s GDP. It is a big burden to carry, particularly for a nation that has to embark on the arduous task of rebuilding its economy following the collapse of its banking system. It will create a debilitating shortage of capital. In effect, meeting these obligations may cripple the country for a generation.
There is point here that is of far wider significance than what happens to Iceland and its debts. The nub of this debate is that whole countries can’t be held hostage by the actions of a financial elite. And that not all debts within the financial system can always be covered by a government somewhere.
If Iceland voted no, it would give people pause for thought right around the world. Why, for example, should the British taxpayer have to spend billions bailing-out the mistakes made by RBS? Or why should Swiss taxpayers be on the hook for every derivatives contract taken out by UBS? There is no real reason why they should.
The case against Iceland rests, fundamentally, on the idea that national governments should always ultimately stand behind the liabilities of banks that happen to be domiciled in their country. And that taxpayers should always ultimately pay for bankers mistakes.
And yet, when you think about it, that is precisely what we should be trying to change.
If Iceland said no, it would send a clear signal to bankers that they couldn’t always expect their governments to rescue them every time they got into trouble.
And it would send a clear signal to investors that before they put money into a bank, they should make very sure that it was a safe, well-managed institution – because they shouldn’t expect the government to bail them out if it went bust.
Both, surely, would be a good thing.
Which is why, if I was an Icelander, I’d be voting no in the referendum.