Friday

23rd Feb 2018

Feature

Iceland to Cyprus: 'People should not pay for speculators'

  • Reykjavik: Iceland's banking crisis bears many parallels with Cyprus (Photo: Johannes Jansson/norden.org)

On the night of 6 October 2008, Thorfinnur Omarsson got a phone call. He had just quit his job at an Icelandic TV station and was looking forward to a "quiet time" as he was about to go back to study. It did not turn out that way.

"All banks in Iceland went bust over night. The economy ministry didn't even have a spokesperson at the time, so they called me to offer me a job, as some 200 foreign journalists were flying into the island," Omarsson recalls.

Thank you for reading EUobserver!

Subscribe now for a 30 day free trial.

  1. €150 per year
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

He became spokesman "on the spot", out of a sense of duty for his country, first for a month and then stayed on until May 2009.

Omarsson, who currently works in Brussels as a spokesman for the humanitarian NGO Caritas, sees many similarities between what happened in Iceland and the current situation in Cyprus.

"In Cyprus the size of the banking system was eight times the gross domestic product (GDP), in Iceland it was 14 times. It was absolutely impossible to try and save that," Omarsson told this website.

Capital controls were imposed immediately to prevent foreign investors from taking their money out of the country. Even with the restrictions in place, the kroner dropped by 100 percent against the euro.

With the pre-crash foreign investments still frozen on the island, Omarsson sees Iceland's recovery still "on thin ice" - as foreign investments represent half of the country's GDP.

"With elections coming up in three weeks, some parties are thinking about giving hedge funds and banks who still hold Icelandic bonds no other option than to write them off. The number one party in the polls is the most aggressive in this regard, advocating for writing these assets largely off and, in turn, lowering people's mortgages on households," Omarsson said.

One big difference between Cyprus and Iceland is that the Mediterranean island - as part of the eurozone - cannot devalue its currency as the Nordic island did.

"Our recovery is a typical case based on currency devaluation. Then the exports get more competitive on fish or aluminium sold abroad, also services and tourism got a boost as prices dropped in Iceland," the former spokesman said.

"But we can't forget who's paying for all that - it is the citizens in Iceland, because inflation doubled while salaries stayed the same. We don't pay with high unemployment, but with lower salaries," Omarsson added.

Long history of capital controls

Iceland's experience with capital controls goes back to long before the financial crisis of 2007-2008. The island imposed similar restrictions already in 1931 and kept them in place until 1994, Olafur Margeirsson, an economics student working on his PhD at the University of Exeter said.

"Up until 1960, there were also import controls, meaning that you needed permission from the government to buy apples or underwear from abroad. It was very cumbersome and absolutely disastrous for the economy," Margeirsson said.

Gylfi Magnusson, an economics professor brought in to serve as economy minister between 2009-2010, told EUobserver that the capital controls Iceland introduced are less "dramatic" than the ones in Cyprus.

"It will probably be easier for Cyprus to lift its capital controls, as it can rely on support from the European Central Bank. But the current restrictions in Cyprus are far more damaging on the domestic economy than the ones we had," Magnusson said.

Capital controls in Cyprus apply to daily transactions for local people and businesses alike - something that was not the case in Iceland - where restrictions applied only to foreign bondholders.

"It is a horrible situation for the people in Cyprus to have lost their confidence in the banking system. Keeping these capital controls is not something sustainable in the long run. You can't have a modern economy where businesses and depositors cannot freely use their money," the former minister said.

As an outside observer, Magnusson said the response of the eurozone to the Cyprus crisis "seems as if there was no plan and they just made it up as they went along. First a bad idea, then another - this is not going to help build confidence in the system."

Eurozone finance ministers, the European Commission, the ECB and the International Monetary Fund initially agreed with Cyprus to tax all deposits in order to come up with an own contribution of €5.8 billion in return for the €10bn EU-IMF bailout. The plan was rejected by the Cypriot parliament and later changed to have deposits below €100,000 protected from any levy.

Eurogroup chief Jeroen Dijsselbloem and ECB chief Mario Draghi both admitted the initial plan was a "bad idea" and defended the current deal which has one of the largest banks - Laiki - wiped out completely and its deposits under €100,000 transferred to the country's largest bank, which will also be restructured.

With tough years ahead and no possibility to devaluate its currency like Iceland, Cyprus may have been better off outside the eurozone, Magnusson said.

"I would not recommend Cyprus to leave the euro now, even you can wonder in hindsight if it was reasonable to join. Rather, get the capital controls lifted so domestic payments can work again properly, sit down and figure out what to do to shift the burden from locals who lost a lot in a very unfair manner to a more equitable solution," Magnusson said.

As for the offshore business model that Cyprus thrived on for decades, he predicted "it will certainly survive and move elsewhere."

"It will be fascinating to see what comes out of the Offshore leaks," Magnusson said, in reference to a trove of leaked names of individuals and banks with offshore accounts obtained by the International Consortium for Investigative Journalism.

"We can only hope this leads to a reduction in these activities, which are no benefit to society. It would be better for these tax havens to find other business models that are less damaging to the countries where all these tax revenues are fleeing from," he said.

Iceland capital controls to be lifted this year

The first major steps towards effectively lifting capital controls in Iceland, in place since the economic crisis hit the country in the autumn of 2008, will likely be taken later this month.

Cyprus economy to shrink 12.5% despite EU bailout

Cyprus' economy will shrink by 12.5 percent and its government needs to sell part of its gold reserves in order to meet the conditions of an EU-IMF bailout, a leaked paper says.

Opinion

Greek government's steady steps to exit bailout programme

Growth predictions are positive, exports increasing, unemployment dropping and credit-ratings up, says the head of Greece's Syriza delegation to the European Parliament. Now the government in Athens is looking to design its own reform programme.

Analysis

We are not (yet) one people

Talks on the next EU budget will start on Friday. Brussels wants to do much more than before – and needs a lot more money. But arguing about funds won't be enough.

News in Brief

  1. May to unveil EU departure strategy next week
  2. Pregnant workers may be dismissed, EU court rules
  3. Romanian minister demands anti-corruption prosecutor fired
  4. Luxembourg and Ireland pay highest minimum wages
  5. Freedom of expression under threat in Spain, warn MEPs
  6. Report: EU to increase sanctions on Myanmar
  7. Juncker 'worried' by Italian elections
  8. EU migration to UK at lowest since 2012

Stakeholders' Highlights

  1. EPSUMovie Premiere: 'Up to The Last Drop' - 22 February, Brussels
  2. Aid & Trade LondonJoin Thousands of Stakeholders of the Global Aid Industry at Aid & Trade London
  3. Macedonian Human Rights Movement Int.European Free Alliance Joins MHRMI to End the Anti-Macedonian Name Negotiations
  4. Mission of China to the EUChina-EU Tourism Year to Promote Business and Mutual Ties
  5. European Jewish CongressAt “An End to Antisemitism!” Conference, Dr. Kantor Calls for Ambitious Solutions
  6. UNESDAA Year Ago UNESDA Members Pledged to Reduce Added Sugars in Soft Drinks by 10%
  7. International Partnership for Human RightsUzbekistan: Investigate Torture of Journalist
  8. CESICESI@Noon on ‘Digitalisation & Future of Work: Social Protection For All?’ - March 7
  9. UNICEFExecutive Director's Committment to Tackling Sexual Exploitation and Abuse of Children
  10. Nordic Council of MinistersState of the Nordic Region 2018: Facts, Figures and Rankings of the 74 Regions
  11. Mission of China to the EUDigital Economy Shaping China's Future, Over 30% of GDP
  12. Macedonian Human Rights Movement Int.Suing the Governments of Macedonia and Greece for Changing Macedonia's Name

Latest News

  1. EU leaders put 'Spitzenkandidat' on summit menu
  2. European far-right political party risks collapse
  3. The key budget issues on EU leaders' table
  4. EU leaders to kick off post-Brexit budget debate
  5. Greek government's steady steps to exit bailout programme
  6. Frontex: Europe's new law enforcement agency?
  7. Poland and Greece broke EU environment laws, rules court
  8. Dutch MPs vote on ending 'Ukraine-type' referendums

Stakeholders' Highlights

  1. Dialogue PlatformBeyond the Errors in the War on Terror: How to Fight Global Militarism - 22 February
  2. Swedish EnterprisesHarnessing Globalization- at What Cost? Keynote Speaker Commissioner Malmström
  3. European Friends of ArmeniaSave The Date 28/02: “Nagorno-Karabakh & the EU: 1988-2018”
  4. European Heart NetworkSmart CAP is Triple Win for Economy, Environment and Health
  5. European Free AlllianceEFA Joined the Protest in Aiacciu to Solicit a Dialogue After the Elections
  6. EPSUDrinking Water Directive Step Forward but Human Right to Water Not Recognized
  7. European Gaming & Betting AssociationGambling Operators File Data Protection Complaint Against Payment Block in Norway
  8. European Jewish CongressEJC Expresses Deep Concern Over Proposed Holocaust Law in Poland
  9. CECEConstruction Industry Gets Together to Discuss the Digital Revolution @ the EU Industry Days
  10. Mission of China to the EUChina-EU Relations in the New Era
  11. European Free AlllianceEnd Discrimination of European Minorities - Sign the Minority Safepack Initiative
  12. Centre Maurits Coppieters“Diversity Shouldn’t Be Only a Slogan” Lorant Vincze (Fuen) Warns European Commission

Stakeholders' Highlights

  1. Dialogue PlatformWhat Can Christians Learn from a Global Islamic Movement?
  2. European Jewish CongressEJC President Warns Europe as Holocaust Memory Fades
  3. European Free AlllianceNo Justice From the Spanish Supreme Court Ruling
  4. Nordic Council of MinistersNordic Solutions for Sustainable Cities: New Grants Awarded for Branding Projects
  5. Mission of China to the EUTrade Between China, Belt and Road Countries up 15%
  6. Nordic Council of MinistersOresund Inspires Other EU Border Regions to Work Together to Generate Growth
  7. Mission of China to the EUTrade Between China, Belt and Road Countries up 15%
  8. AJC Transatlantic InstituteAJC Calls on EU to Sanction Iran’s Revolutionary Guards, Expel Ambassadors
  9. ILGA EuropeFreedom of Movement and Same-Sex Couples in Romania – Case Update!
  10. EU2017EEEstonia Completes First EU Presidency, Introduced New Topics to the Agenda
  11. Bio-Based IndustriesLeading the Transition Towards a Post-Petroleum Society