Icelandic banking report reveals greed, ‘extreme negligence’

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A special commission put in place in Iceland to investigate the causes of the banking collapse that hit the country one and a half years ago exposed "extreme negligence" on the part of the former conservative prime minister and the former central bank governor.

On 12 April, Iceland's Special Investigative Commission (SIC) presented a 2,000-page, nine-volume report on the causes of the banking collapse of October 2008, pointing the finger of blame at former Conservative Prime Minister Geir Haarde and former central bank governor David Oddsson.

The commission, made up of independent experts, was established by the Icelandic parliament in December 2008. The report is the first comprehensive analysis of what caused the collapse of Iceland's three largest banks in the midst of the global financial crisis in October 2008.

The report, which traces the history of the collapse, analyses the weaknesses of the political system and reveals how Icelandic society had been lulled by an illusory dream of wealth.

The authors heard testimonies from 147 witnesses and benefited from the suspension of banking secrecy.

According to the report, the story began in 2003 with the privatisation of small Icelandic banks, whose assets multiplied by 20 in seven years. Their short-term debt quickly became fifteen times higher than the reserves of the central bank, headed by David Oddsson.

Banks, free of all constraints, invested in foreign countries, borrowing at low rates on the Asian market and lending to entrepreneurs at up to 11 times the amount of Iceland's GDP.

In the country, young couples can obtain a loan at 100% without any personal provision to buy their first home.

The crisis caused a surge in unemployment, an explosion of public debt and the collapse of Iceland's currency.

Since February 2009, Iceland has been led by a leftist government, headed by Jóhanna Sigurdardóttir, who believes the responsibility for the failure is collective and lies at the feet of politicians, bankers and the media. She is critical of free market ideology and believes she is healing a sick economy.

The Icelandic government has appointed a commission of independent experts to make further recommendations on how the government and governmental institutions should respond to the report.

The report is expected to be widely publicised: actors in Reykjavik theatre will read it to the public night and day, and the Bishop of Iceland has requested that it be discussed in all parishes.

''This important report will enable us to look forward by understanding what took place here in the months and years leading up to the banking collapse,'' said Prime Minister Jóhanna Sigurdardóttir in a statement from the Prime Minister's Office.

''We now need to acquaint ourselves with the report in its entirety […] I believe that this report, with its difficult and painful truths, is a crucial part of that process,'' she added.

''Mistakes were certainly made. The private banks failed, the supervisory system failed, the politics failed, the administration failed, the media failed, and the ideology of an unregulated free market utterly failed,'' the PM added.

''The banking collapse was not the fault of the Icelandic government, although some faults can be found concerning formalities within the government and the ministries,'' said former Prime Minister Geir Haarde, who stands accused of negligence by the Special Investigative Commission's crisis report.

He told Icelandic daily newspaper Morgunbladid that in 2008 his government had tried to save the banking system. ''But what people didn't know until later is that it was impossible and therefore, unfortunately, we failed.''

''People just didn't realise how shaky the foundations were on which the banks were standing and what kind of operations were taking place there, something which is now increasingly coming to light,'' Haarde said.

Iceland was hit badly by the economic and financial crises. Its troubles came to a head in September 2008 when all the three major Icelandic banks - Glitnir, Landsbanki and Kaupthing - were put under the control of the Icelandic Financial Supervisory Authorities. 

In the midst of the economic crisis, Iceland has been pushing for EU membership as a viable solution to its problems. The Nordic country, which is already a member of the European Economic Area (EEA), formally applied for EU membership on 16 July 2009 (see EURACTIV LinksDossier on EU-Iceland relations).

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