Iceland: a model for heterodoxy? Written by Pablo Aguirre and Angel Vilario Iceland: a model for heterodoxy?

Iceland has suffered a financial and economic c risis of enormous proportions since October 2008 would break almost all of its b anking sector, which at that time was a colossal size, equivalent to almost elev en times the Icelandic GDP. The banking collapse marked the beginning of a perio d strongly contractionary for the economy and left Iceland unaenorme private deb t, much of which consisted of financial products indexed to inflation and / or d enominated in foreign currency. The scene at the end of 2008, with a depreciatio n of almost 50% of the Icelandic krona against eurorespecto the previous year an d an inflation rate close to 18% was a blow to the living conditions of the imme diate trigger poblacin.El This financial collapse is well known. The banks had, i n September 2008, a liability denominated in foreign currencies worth more than seven times the GDP, which ultimately was shown to be a huge weakness for the wh ole economy. The banks had accumulated huge liquidity riesgosde change and moved to the Icelandic population. Once again, the bankers' insatiable appetite for g rowth at any cost and short-term profits risked a whole country, with the approv al of financial supervisors, guests feast stone banks. The context of uncertaint y and panic after the collapse of Lehman Brothers cut the funding models currenc y markets, and the Central Bank of Iceland papelde could not assume the lender o f last resort. They are also known some of the factors that made possible the fo rmation of a financial bubble as the Icelandic, characterized by massive capital inflows attracted by the very high returns that the Icelandic banks offered. Th e privatization of the banking sector since the late nineties, it became rapidly so that the major banks pblicosquedaron previously in the hands of the oligarchy notable Icelandic. Were evident in some cases, links to the new owners much wit h the traditional Conservative Party hegemony in Iceland, the Independent Party, comocon his occasional partner of Government, the Centre Party of agrarian root s. This new banking sector, the heat of a rapid deregulation of financial activi ties, was not only limited by the regulatory authority, which effectively limite d monitoring capacity has been well captured in the documentary Inside Job. This model of financial expansion, we must not forget, received explicit support fro m both institutional settings and acadmicos.Sin however, has paid little attentio n to everything that has to do with public debt after the Icelandic banking coll apse, and in this area Icelandic case has an undeniable interest. It happens tha t the profitability of Icelandic Treasury debt secondary market on which investo rs buy and sell debt securities, has fallen steadily in 2009 and 2010, from 15% in October 2008 for the ten bonus years to levels around 6% or 7% in those semue ve in 2011. This is somewhat higher yields than those of Spanish or Italian debt , but lower than the Irish debt and, above all, Portuguese or Greek, especially if one takes into account the higher inflation rate Islandia.Por hand The Icelan dic debt primary market, ie, auctions pormedio of which the Government launches new debt it issues, has followed a similar pattern, with yields too low for the years following the collapse losdos profitability bancario.La debt has decreased while the volume has only increased. The bonds and Treasury bills have been the main means of additional state funding after the Icelandic banking collapse, an d now represent a debt amounting to 47% of GDP, while in 2007 only amounted to 9 % of GDP. But while debt was down to profitability and volume increase men, all agencies downgraded its credit rating, ranking it since early 2010 betw een seven and ten steps below the most favorable rating. Is not it strange that a government of satisfying a growing demand for financing by issuing debt with l ower and lower returns during 2010 2009y while the confidence of the rating agen cies on the credibility of Iceland does nothing but decrease over the same perio d of time? The measures taken by the Government of Iceland, and the support that Government heterodox received from the International Monetary Fund help to unde rstand estefenmeno. First, we have proceeded to a partial nationalization of sect orbancario. The State stepped in and restructured the three failed banks in form aque each was separated into two. The original benches were made withthe assets and liabilities to nonresidents, and continue today to bankrupt and immersed in a liquidation of assets among its creditors. The new banks emerged from the form er assumed all assets and liabilities with Icelandic residents and were recapita

lized so that they could continue operating normally. It is 100% guaranteed depo sits losciudadanos Icelanders. Once done, the government sold to private investo rs of the three banks recapitalized. Currently the State owns 82% of the country 's largest bank and a minority of other relevant dos.Lo with respect to debt is that these three banks, reflotadospor the state and one of them mostly public an d act as creators of market for public debt issuance in the primary market. In f act they are the major market makers. That means they have signed agreements los que undertake, in exchange for certain counterparties, to go to the Treasury auc tions, to ensure the placement of public debt in the market, including what the banks themselves are in their portfolios. No doubt this so close to the banking sector is a major public sector lever that allows the government to promote adva ntageous prices in the auctions of new debt emitida.Pero as seems most relevant to understanding why debt has ever been cheaper the Government of Iceland is the establishment of controls decapitales, still in force, imposed in late 2008 to try to prevent Icelandic Lamoneda continue depreciating more after the banking c ollapse. Existing controls do not allow Icelanders to buy foreign currency to in vest abroad, or that foreign investors withdraw from the Icelandic market sellin g and buying securities that have the money obtained other currencies. This fact , coupled with the stock market crash that took place following the banking coll apse in 2011 alone, there are four Icelandic companies whose shares are traded i n ISK-, severely restricts investment options. For the Icelanders, and also for foreigners who can not withdraw their funds, investing primarily in buying debt is pblica.Pero not forget that these two measures of court heterodox decapitales controls and partial nationalization of banks, have been applied the beneplcitode l International Monetary Fund, an organization with which Iceland agreed to an a ssistance program in November 2008. With this agreement, Iceland was able to obt ain the foreign currency needed to strengthen the external position of the Centr al Bank. The relevant part is that the Fund agreed to provide assistance despite Iceland deque established as a measure of capital controls, which until hacepoc o more than a decade was one of the tools the IMF, as a guarantor of economic or thodoxy, discouraged all the countries that attended with all the persuasiveness he was capable of, which was great. It is very striking is the behavior of the IMF in Iceland when compared with losgriegos proceed with the rest of the eurozo ne. It would be a topic of research trying to explain the ultimate reasons for t his behavior diferencial.Adems, the IMF and Iceland agreed in late 2008 that a pl an should be undertaken fiscal consolidation over the medium term, but that would be deferred cuts in pu blic spending as soon as 2010. Thus, pending a term fiscal strategy Amedia, auto matic stabilizers could operate freely in 2009 mitigating the consequences for t he population would be the economic downturn was coming. While it may be attribu ted to measures taken by the government much of the responsibility that Iceland has been able to finance its public at a reasonable cost, it is also true that t he IMF, endorsing its assistance agreement with these policies, gave Iceland ins titutional support to the financial support adding cheese to form a favorable sc enario indeed for the Government to undertake its task of stabilizing the econom y also mitigating the consequences it would mean for the poblacin.As then, Iceland appears to be an example of it is sometimes possible to find solutions other th an economic policy orthodoxy parasalir marking a crisis situation. While the eur o area economies try deconquistar market confidence so that they continue to fun d the unpaid dficitpblico why some interests are too high, Iceland has withdrawn f rom the valuation of preventing capital markets come and go freely delpas . In a way, Iceland has gained room to maneuver, imposing a change to its citizens the obligation to fund the cost to the Government is assuming economic policy in the post-collapse bancario.Los results so far appear to be differential with respec t to situacionescomo Greek. From the social point of view, but not forget the em igration that has left the island since 2008, the truth is that inequality in th e distribution of income has declined, reversing the upward trend that had this indicator in previous years to collapse. From the economic perspective, governme nt and the IMF have a cautiously optimistic outlook for Iceland, and both make a positive assessment of collaboration that have maintained, that ended with the

completion of the care plan in August 2011. Particularly striking is the analysi s that the Fund has exhibited at the conference that was held in Reykjavik in la te October, was valued as a factor favoring the success of the plan the margin e njoyed by the Government in 2009, fiscal ypoltico to establish a strategy sound f inancial system restructuring and fiscal consolidation. What made this room? Ver y simple controls and deferred capital expenditure adjustment until 2010. So, no t only that margin appears to have allowed social crisis more bearable for the p opulation, but even estimated a condition that has meant that the care plan to m eet its objectives: to stabilize the economy andthe establishment of new bases e conmico.Sin for growth, however, caution should be applied when considering that Iceland is an example of the triumph of politics over markets, as is sometimes a rgumenta.Hay differential elements in the Icelandic experience from the standpoi nt of democracy, as submitted a referendum on the agreement to return to the UK and the Netherlands the money these countries used to guarantee Icesave deposits , or the fact that after the crisis has drafted a new constitution through a dem ocratic response procesobastante can participativo.Pero not the only factor that helps explain what happened in Iceland, and may not even be the most important. To give some examples, the Icelandic economy is so small that only capital cont rols are an obstacle in the global movement of financial markets, forcing to rel ativize the external resistance to Iceland has been facing to support this polic y the Icelandic bank debts were so great when they collapsed it was impossible e ven to suggest that the Government fully lasrespaldara, making somewhat inevitab le bankruptcy option with respect to transactions with the outside Iceland has i ts own currency , which has allowed him to devalue the exchange rate, and it is unclear and that this responds to an explicit request, prior to the crisis, to maintain monetary sovereignty, but rather that the process of moving closer to Europe but not so rapidly as to have crystallized as a aleuro incorporation. Finally, the same President who refused to endorse by signing the return to the UK and the Ne therlands attended the Icesave dispute undaunted by the financial bubble growth in previous years, which makes us think that perhaps there are other factors bes ides desire to ensure democratic participation - for reasons of political strugg le, for example-that help explain why this referendum. In addition, other elemen ts, along with respect to the quality of democracy, which may help explain why I celand has taken the measures it has taken, among which are the characteristics of the Icelandic economy, the political and, perhaps, certain amount of reflecti on can be azar.Una last no longer on the motivations that have led these heterod ox policies, but on the measures themselves. A partially nationalized banking se ctor and capital controls were able to give Iceland greater autonomy from the ou tside. But it seems equally clear that the management of the crisis has prevaile d a national perspective is perhaps understandable, peroque it remains questiona ble from the standpoint of equity. The Icelanders have safeguarded all his money , 100% of deposits, while under the Icelandic Icesave dispute has not responded even Porl 20,000 euros in the European Economic Area are guaranteed to any appli cant. Failing that the liquidation of assets among creditors Delbanco broken Ice save owner can change the situation, the outcome measure is that deesta are taxp ayers in the UK and Holland who are assuming for the moment returns to their dep ositors in Icesave . And taxpayers are again, this time in Iceland, who have the ir taxes proporcionadocon assurance for large depositors in Iceland itself have never seen endangering their deposits, they fuesen.En substantial sum, the capit al controls and partial nationalization bancaayudan largely understand why Icela nd is making its public finance at a cost that has done nothing but decline in 2 009 and 2010. This sinolvidar the importance of supporting the IMF, which lent i ts assistance to strengthen foreign exchange reserves without imposing restricti ons on the roadmap posed by the Government to address economic recovery. Thus, I celand and the attitude towards it has maintained the International Monetary Fun d Uncas are relevant because they show that policies that deviate even slightly, neoliberal pattern, may provide greater leeway to governments. A margin that, i f used well, as would seem to be happening in Iceland, would expand the opportun ities for a government will manage a crisis approaches simultaneously addressing

equity and macroeconomic stabilization, and both areas of performance presented as mutually excluyentesa the ciudadanos.Sin eyes does not seem harsh to say tha t Iceland is the champion of democratic politics against markets, nor should one forget that the measures taken by Iceland have serious questions when considere d from the point of view of equality between citizens of different countries. At a time when there is a need to find reference for public action in difficult ec onomies, is clearly relevant to refer to Iceland as an example of economic polic y alternative to the strictly orthodox, and so far it seems that successful-but should not Iceland to seek to attribute powers that are far from reality deserti on.