Another Icelandic lesson

In 2008, Iceland was a default country as their banks went bankrupt due to debts totaling 100 billion euros, a figure equal to 10 times its national GDP. The government intervened with a suspension of the Krona, closing banks and imposing the cost of repayment of the debt to foreign creditors  as well as austerity measures to citizens. The plan seems to have worked better than the austerity programs imposed to Greece and Portugal. In 2011, Iceland had a positive growth rate (2,9%) which continued in subsequent years. Unemployment has decreased from 10% in 2009 to 5,7%. 

Four years after, the Progressive party (which is a centre right party) has unveiled a four year plan to  reimburse part of the price indexed mortgages contracted by households up to a maximum amount of 24 thousand euros. The devaluation of the currency caused by the banking crisis has led to a significant increase in prices (+37% between 2007 and 2010) and high borrowing costs. This operation will amount to around 900 million euros. But despite the protests of Wall Street and other international organisations , the government pushed ahead the plan whose cost will be borne by banks and hedge funds through tax increases and write offs of old debts held by speculative finance.  

The rating agency S &P  downgraded Iceland's long-term credit rating to negative from stable. Even the US government which helped Iceland with a loan of 4,6 billion dollars  warned that the recovery is still weak to give those gifts to the population. According to the IMF, Iceland has “little fiscal space for additional household debt relief” , while the OECD stated that Iceland should limit its mortgage relief to low-income households.  

In fact,  the impact on public finance will be minimal according to official sources. The plan also includes tax breaks to encourage Icelanders to use their pension funds to reduce their indebtedness. This  means a debt relief plan of 1,6 billion , more or less 15% of the national income. This would equal 300 billion euros in a country like Italy or 1,500 billion at the level of the whole euro area. If households pay less interests, this will stimulate demand and help boost economic growth. As a result, these measures will bring gradually  the deficit down and restore financial sustainability.  

If we want to build a viable alternative to financial capitalism, there are a lot of lessons to be learnt from Iceland on the way the crisis must be handled. The fact is that the recovery has been more successful here than in other countries depending on foreign borrowing such as Greece, Portugal or even Ireland or Latvia. If this is regarded as a case for instability, let's just do it rather than just surrender to stability programs.  Let's stop listening to the Cassandras  of  IMF and S &P.