Iceland's Conservatives Try to Rewrite History

Hannes H. Gissurarson wrote a letter in yesterday's Wall Street Journal decrying the new government's desire to remove former conservative Independence Party Prime Minister David Oddsson from his position as governor of the Central Bank.

Although Mr. Gissurarson sees this development as part of a left-wing conspiracy to lead Iceland down the path of damnation, the truth of the matter is that Oddsson and Hannes were the main architects of Iceland's banks' privatization and chief apostles of the lax regulatory system that resulted in the worst financial failure of any country in modern times.

Icelandic police use teargas and pepperspray on protesters in Reykjavik, Iceland. Photo credit: Johannes G. Skulason

In 2002, Mr. Gissurarson published How Can Iceland Become the Richest Country in the World?, in which he outlined the opportunities that Iceland would have as an international financial center. Oddsson believed that it was the government's ownership of the banks that was preventing this from happening. "The crucial factor," he said in a 2004 speech, "was the iron grip that the Icelandic state had on all business activity through its ownership of the commercial banks."

Accordingly, the country's banks were privatized in 2003. However, in keeping with their libertarian philosophy, no effective regulatory and supervisory bodies were created. Instead, Iceland's political patronage system decided who was going to own the banks and what their reporting requirements would be.

Mr. Gissurarson is himself one of the prime beneficiaries of this patronage system. He was appointed to the political science faculty of the University of Iceland in 1988 by Iceland's Education Minister, despite vociferous protests from the faculty and the university that he had no expertise in the area of politics. He was appointed to the Central Bank's board, despite his lack of expertise in finance. He was recently found by the Icelandic Supreme Court to have breached the copyright in the memoirs of Halldor Laxness, Iceland's only Nobel Prize winner.

The Central Bank was instrumental in Iceland's rise. It maintained high interest rates, which led to an overvalued krona, which led to cheap imported goods and vast sums of foreign capital. In 2006, Danske Bank published a paper titled "Geyser Crisis" that indicated that Iceland's banks had grown too much, and that the country was overly dependent on foreign investors to keep sending money.

When the banks were unable to repay bonds in euros, as predicted, the house of cards collapsed. Glitnir, Iceland's third largest bank, approached Oddsson in late September 2008 for the euros it desperately needed to maintain liquidity. Oddsson led Glitnir to believe that he had them covered, but in fact he had not stockpiled enough foreign currency reserves to back more than 4% of the banks' foreign debts. Ultimately, he informed Glitnir officials that the bank would be nationalized, which rapidly led to bank runs in Europe, the collapse of all three of Iceland's large commercial banks, and a precipitous decline of the krona.

Mr. Gissurarson attempts to place the blame for Iceland's fall on everyone but Mr. Oddsson and himself. He ignores the facts that Mr. Oddsson maintained control of the Independence Party after he took his post with the Central Bank, that the deregulation of the banks went according to the plan that he and Oddsson had drafted years earlier, and that England seized Iceland's banks only after the Icelandic government notified British authorities that it would not back its banks' foreign accounts.

Another Chinese curse is "May your dreams all come true." Your dreams did come true, Mr. Gissurarson, and our country has been cursed.