The Icelandic 2008 bank collapse was self-inflicted in the sense that a precarious situation had been created by the very rapid growth of the three main Icelandic banks. But glass does not break because it is breakable, and a precarious situation does not become a collapse, unless something is done to it. This was what Dr. Hannes H. Gissurarson, Professor of Politics at the University of Iceland and RNH Academic Director, said in a well-attended lecture at the Institute of Economic Affairs, IEA, in London 27 November 2014. According to Professor Gissurarson, three decisions had entered into this precarious situation, transforming it from a recession in Iceland into a total collapse of the banking sector: First, the US Fed had refused to make the same dollar swap deals with the Central Bank of Iceland, CBI, as it had done with the central banks of the Nordic countries and even of Switzerland. Second, in the second week of October 2008 the British Labour government had refused to provide the same liquidity for the two British banks owned by Icelanders as it did for all other British banks. Third, by invoking an anti-terrorism law against Iceland (briefly against the CBI and the Icelandic Financial Supervisory Authority, and for a longer time against the Icelandic bank Landsbanki), the British Labour government had made all rescue attempts impossible. This sudden strike against an old friend, a nation without even a military, a fellow NATO member, recently standing behind the UK and the US in the Iraq War, was almost incomprehensible.
Professor Gissurarson rejected the thesis that the Icelandic banking sector had been too big. In fact, it was about as big relatively as the Swiss banking sector, whereas the Scottish banking sector was somewhat bigger, relative to Scotland itself. Why did the Swiss bank UBS and the Scottish bank RBS then not fail like the Icelandic banks? Because they were rescued, not least by dollar swap deals, provided by the US Fed, and in the case of RBS also by taxpayers’ money from England and Wales.
Professor Gissurarson agreed with the Icelandic Special Investigation Commission, SIC, on the bank collapse that there had been a hidden systemic risk in the Icelandic banking sector. This risk was mostly created by the Baugur Group as could be seen from the 2010 SIC report. The Icelandic banks had used the good reputation Iceland had earned in 1991–2004, when sound economic policies were pursued, to obtain foreign credit which they had then passed on to Baugur Group and to some other business groups. Some investments of Baugur Group had been sound, while others had been unwise: For example, the head of Baugur Group, Jon Asgeir Johannesson, had spent tens or even hundreds of millions of dollars on a private yacht, Heesen 4400, a private jet, Dassault Falcon-2000, luxury ski huts in Courchevel in France and an immense penthouse on Gramercy Park in Manhattan. By their extravagance and aggressive behaviour, in 2004–8 Johannesson and some of his business partners had destroyed, or at least blackened, Iceland’s good reputation and thus made it more difficult for the Icelandic authorities to obtain assistance when subsequently needed. However, the British Labour government had also been outright hostile to Iceland, as could be seen from the book by the former Chancellor of the Exchequer, Alistair Darling, Back from the Brink, published in 2011. It was hard to explain this hostility, but possibly Darling and former Prime Minister Gordon Brown, both coming from Scotland, had wanted to demonstrate to the Scots that independence was a risky endeavour.
After the lecture, Professor Gissurarson answered questions. A member of the audience expressed surprise at the 2013 EFTA Court judgement in the Icesave dispute between the UK and Iceland because surely the Icelandic government had discriminated between Icelandic and foreign depositors. Professor Gissurarson replied that this was indeed a common misunderstanding, shared by British ministers and even judges. By the Emergency Act of 6 October 2008, all deposits in Icelandic banks had been made priority claims, including deposits held by UK residents. However, at the same time, Icelandic government ministers had announced that they would guarantee all domestic deposits. This announcement had not had any legal significance or force, and it was in fact similar to public announcements made all over Europe at that time in order to prevent panic and a run on banks. Professor Gissurarson’s lecture formed a part of the joint project by RNH and AECR, the Alliance of European Conservatives and Reformists, on “Europe, Iceland and the Future of Capitalism”.