Why Iceland reacted so fiercely to the Panama Papers

First published:  Wednesday 27 April 2016




Iceland's Sigmundur Davíð Gunnlaugsson wasn't the only world leader named in the Panama Papers, but he was the first to lose his job over it. Why is Iceland so intolerant of financial misbehaviour? Keri Phillips explains.

It took less than a week for Iceland's prime minister, Sigmundur Davíð Gunnlaugsson, to stand aside after the Panama Papers revealed details of his wife's offshore account.

His message to the country was more or less that we should all be together, we are all in the same boat, but at the same time he had taken a boat of his own, filled it up with gold and moved it abroad.

Guðni Jóhannesson, University of Iceland

The leaked documents revealed Sigmundur Davíð had been the co-owner of a company called Wintris Inc, set up in 2007 in the British Virgin Islands to hold and invest the inheritance of Anna Sigurlaug Pálsdóttir, the woman who would become his wife.

He had not disclosed his holding in Wintris when he entered parliament in 2009, and he sold his half of the shares to his wife for a dollar some months later. In the television interview in which his connection to Wintris was made public, Sigmundur Davíð initially denied any offshore holdings, but he was quickly forced to acknowledge the truth.

Ingo Sigfússon, a reporter at the Icelandic national broadcasting service, says the reaction was swift, with close to 10 per cent of the adult population turning out onto the streets to demand he step down.

'The prime minister wasn't particularly interested in stepping down, was very much adamant that he had done a fantastic job as PM, that his government had improved the lives of every Icelander and that there was still plenty to do,' Sigfússon says.

'Our government is a coalition government made up of two parties, and the leader of the other coalition party returned on Tuesday morning from his Easter holiday in Florida, went straight to a meeting with the PM and told him that he would very much like to continue with the coalition government but without the PM.'

All in the same boat

Guðni Jóhannesson, a historian at the University of Iceland, says that the prime minister and his wife did not break Icelandic law. But for the Icelandic public, that wasn't the point.

'The very existence of the company and the fact that he and his wife saw fit to keep their investments in an offshore account, which is always a dubious thing anyway, rather than investing the money here in Iceland, was a problem,' he says.

'Icelanders did not like the fact that they had stuck their money abroad in an offshore company when his message to the country was more or less that we should all be together, we are all in the same boat, but at the same time he had taken a boat of his own, filled it up with gold and moved it abroad.'

The boat the Icelanders were all in together was the leaky vessel left by the collapse of all three of Iceland's major privately owned commercial banks during the global financial crisis of 2008. Relative to the size of its economy, it was the biggest banking collapse in economic history.

'Following fairly massive liberations at the turn of the century where state banks were privatised, we had a generation of people who thought they were extremely clever in international capitalism, thought they had figured out how to make a lot of money and be quicker and more nimble than everyone else,' Sigfússon says.

'Three of the Icelandic banks which had been regular neighbourhood savings banks turned into international investment powerhouses, basically nine times the size of Iceland's GDP at the time when they went bust. They were associated with a class of what were called the business Vikings: Icelandic businessmen who were buying up shops and companies and famous brands all over Europe.

A man urinates on photos of bankers in the toilets of the Sodoma bar in central Reykjavik.Image: Urinals in Reykjavik were decorated with photos of bankers who had left the country. (Getty Images/AFP/Olivier Morin)

'We know by now that they were all in over their heads and some of the stuff that they were doing was fairly shady and even illegal—market manipulation and whatnot. And when the international banking crisis came knocking, basically all of the fairly shaky Icelandic infrastructure came tumbling down, with fairly dramatic consequences.'

Banks were nationalised in other countries, and Lehman Brothers in the US went bust, but Iceland was virtually alone in letting its banks fail. Sigfússon says the decision was later seen as being a deliberate moral choice, but in reality, there was no way Iceland could have saved them.

'They failed. The creditors had to take a hit,' he says. 'That does sound fair; the ones who were gambling were the ones who lost money. Every other business would work that way. Morally, it was probably the right thing to do, but it was done because of necessity. There was no other option.'

Following the banks' collapse, protests led to the resignation of the prime minister. A new left-wing government negotiated an emergency loan with the International Monetary Fund of more than $3 billion over two years.

A hit to the stock exchange and the middle class

Ólafur Ísleifsson, an economist in the School of Business at Bifröst University, says banks made up a very large portion of the capitalisation of Iceland's stock exchange, and following the loan, about 90 to 95 per cent of firms and individuals' equity holdings vanished.

'These assets were lost irrevocably. A large part of corporate bonds also were lost through the fall of the banks, and the associated companies, so the situation was quite bleak,' he says.

Although the standard of living in Iceland is high, which softened the blow somewhat, Ingo Sigfússon says the middle class was hit hard, and is yet to completely recover.

'Iceland has a very strange system of indexation,' he says. 'Let's say you buy a house, you have a mortgage and your regular interest rate in Iceland is somewhere between 4.5 per cent and 5.5 per cent, but it is indexed, and that means that if you have inflation that really gets added on top of your interest rate.

'Immediately following the collapse, we had the collapse of the króna which led to very high inflation. We had somewhere between 18 per cent and 20 per cent for six months to a year.'

He says that inflation added to mortgage and student loan interest rates sent consumer debt through the roof.

'At the same time, the cost of living goes up considerably, and you as a middle-class regular Joe who used to have a decent life are all of a sudden scraping by, and the percentage that you own of the house that you live in, it has gone down. The amount of money that you have to pay per month has gone up significantly. A lot of people just lost their property.'

Leaders face trial, bankers sent to jail

Iceland's former prime minister, Geir Haarde, became the first political leader to be tried over the 2008 financial crisis. By the time the trial began in 2012, the serious charges against him had been dropped. He was ultimately found guilty of one minor offence and the government was forced to pay his legal expenses. Nonetheless, in Iceland people were held accountable for their actions in the lead-up to the crisis.

Many top bank executives were jailed. But Sigfússon says they faced ostracism from the rest of Icelandic society long before they were charged.

'If they were to walk into a restaurant in Reykjavik in, say, 2009 or 2010—and we had repeated incidences like this—they would sit down with their families and other guests would stand up and leave,' he says.

'If you are somebody who takes themselves seriously and thinks you are somebody, like these people certainly did, that may to an extent hurt even more than being thrown into jail, the complete loss of face and being a persona non grata in society at large.'

The entrance to Kviabryggja Prison in western Iceland sits between the Atlantic Ocean and lava fields.Image: The entrance to Kviabryggja Prison, where a number of bankers and executives were jailed. (Getty Images/Spencer Platt)

Although Iceland took a big hit after the collapse of the banks, Sigfússon says that over the past eight years its economy has come back strongly. He credits two factors: climate change pushing new breeds of fish into Icelandic waters, and the name recognition that accompanied the GFC and the famous eruption of Eyjafjallajökull in 2010.

'The lesson of those two events is that there is no such thing as bad publicity,' he says. 'One of the things that has happened here in the last few years is a completely crazy tourism boom. The number of tourists has gone up by around a quarter per year for the last few years to the extent that we are almost being flooded by them by now.'

Pirates on the rise as trust in politics declines

Although the economy has been revived, faith in the political system has not fared so well, according to Guðni Jóhannesson.

'Parliament, the Althing, is bereft of trust. Nobody trusts the parliament and the political process in general. And when the Panama Papers revelations became public, it was just like pouring oil on that dormant fire, as it were, and all hell broke loose again.'

One political party whose fortunes are improving is the Pirate Party, which is polling at almost 35 per cent. Jóhannesson says the Pirates' idealistic hopes of a new constitution and a new spirit of governance are appealing, but they have never been in power before.

'Let's say they receive 25 per cent, 30 per cent of the votes and we have a system of proportional representation, so they would get an equal number of seats in Parliament, roughly say 30 per cent. You cannot govern with that, you need to seek a partner and you need to make compromises,' he says.

'It remains to be seen how good the Pirates are at playing politics. It's one thing to be idealistic in opposition, and completely different to actually run the country.'

·         Iceland's Prime Minister forced to resign over offshore holdings


Sunday 24 April 2016

Rear Vision investigates Iceland's intolerance of financial misbehaviour.