Iceland’s Ex-Premier Defends Innocence in 2008 Crisis

The Kaupthing Bank in Reykjavik, Iceland
Local properties are reflected in windows at the Kaupthing Bank in Reykjavik, Iceland, on Tuesday, Oct. 7, 2008. Photographer: Arnaldur Halldorsson/Bloomberg News

Iceland’s former Prime Minister Geir H. Haarde defended his role in the 2008 implosion of the island’s financial system after a parliamentary committee recommended he be indicted for “violations” of his duties.

The committee on Sept. 11 asked the Reykjavik-based legislature to indict Haarde, 59, along with former Foreign Minister Ingibjorg Solrun Gisladottir, former Finance Minister Arni M. Mathiesen and former Business Minister Bjorgvin G. Sigurdsson, according to a written motion delivered to lawmakers. Should parliament vote in favor of indictment, it will be the first time Landsdomur -- a special court created in 1905 to hear such cases -- will be convened.

“An innocent person isn’t afraid of having his affairs reviewed by an independent and impartial court,” Haarde said in an e-mailed statement yesterday. “My official acts as prime minister didn’t cause the banking collapse; it wasn’t in my power, or in the power of other ministers, to prevent it.”

The 2008 failure of Iceland’s biggest banks forced the island, the world’s fifth-richest nation per capita a year earlier, to turn to the International Monetary Fund for help and sent the krona plunging as much as 80 percent against the euro in the offshore market. Its debt is ranked junk by Fitch Ratings and the central bank has left capital controls in place for almost two years to protect the krona from a selloff.

‘Unknown Waters’

The government of Prime Minister Johanna Sigurdardottir, in office since January last year, is struggling to rebuild the economy as Icelanders come to terms with spiraling debt burdens and incomes reduced by 20 percent last year.

Parliament may decide whether to indict the four within days, Sigurdardottir told reporters on Sept. 11. That may take the country into “unknown waters,” according to Eirikur Bergmann, a political science professor at Bifrost University in Iceland.

“The risk is that we’re getting ourselves into matters that have unforeseen consequences and that this will create a rift in society that will be difficult to mend,” Bergmann said in an interview today. “According to the laws on Landsdomur, its rulings can’t be appealed to a higher court, which might violate Iceland’s international obligations.”

Intent, Gross Neglect

The recommendation to charge Haarde, who was prime minister from 2006 until the beginning of 2009, was based on “violations committed from February 2008 through the beginning of October of the same year, by intent or gross neglect, mostly violations against the laws of ministerial responsibility” as well as breaches of the Icelandic penal code, the committee said.

The committee of nine lawmakers was appointed in April after a separate commission investigating the causes of the 2008 crisis found that the government, central bank and financial regulator had all been “negligent” in their failure to address some of the factors that exacerbated the collapse.

The commission alleged that Haarde, Sigurdsson and Mathiesen didn’t exert enough pressure on the banks to shrink their balance sheets after they amassed debts equivalent to 10 times Iceland’s economic output, a development it said was key in fuelling the financial collapse.

Cross Ownership

The commission also criticized what it described as a widespread practice of cross ownership that obscured the full extent of the banks’ debts, often granted without collateral. Haarde blames the banks for misleading his government.

“I haven’t gotten used to being told outright lies about important matters, not to mention that respectable leaders of large companies are guilty of such behavior toward the prime minister,” he said in the e-mailed statement.

Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf, all based in the capital Reykjavik, failed within weeks of each other in October 2008 after they were unable to secure enough short-term funds to continue their operations. The state was forced to step in and take control of the domestic assets to create new local units. The banks’ failures left their creditors trying to recoup $86 billion.

A special prosecutor appointed to investigate the banking collapse is still probing the three lender’ records. Three Kaupthing executives were arrested in May and released after spending as long as 12 days in solitary confinement.

British Guarantee

The committee also found that Haarde should be indicted because he failed to ensure that Landsbanki created a U.K. subsidiary when selling its Internet Icesave accounts there -- a measure that would have forced the British government to cover depositor claims, it said.

Iceland’s government has yet to settle with the U.K. and Dutch over how to repay deposits worth $5.1 billion, almost half its 2009 gross domestic product, stemming from Landsbanki’s failure.

Bjarni Benediktsson, chairman of Haarde’s Independence Party and leader of the opposition bloc, told reporters his lawmakers will seek to block any charges brought against the four. The Independents, among five parties represented in the committee, recommended that none be indicted. The ruling Social Democrats wanted to indict only Haarde, Gisladottir and Mathiesen, while the Left Green Movement -- the junior coalition partner -- and the opposition Progressive and Movement parties insisted all four be indicted.

Haarde stepped down as prime minister on Feb. 1, 2009, following mass public protests as the full extent of the banking crisis became apparent. In his e-mailed statement, he said the decision to recommend his indictment “deeply disappoints” him.

“In the 11 consecutive years I was a member of the government I always tried to carry out my work with honesty, conscientiousness and to the best of my ability,” he said.

Since retiring as a member of parliament last year, Haarde has remained in Reykjavik together with his wife.

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