Haarde Cleared on Most Counts in Iceland Bank Meltdown Trial

Iceland’s Former Prime Minister Geir H. Haarde
Iceland’s Former Prime Minister Geir H. Haarde is seen in court awaiting a verdict for his role in the island's financial crisis in Reykjavik. Photographer: Arnaldur Halldorsson/Bloomberg

Iceland’s former Prime Minister Geir H. Haarde was acquitted on the major counts in a trial probing his responsibility for the country’s economic collapse in 2008.

The 61-year-old was found guilty of failing to keep his Cabinet apprised of key developments through formal meetings, according to a ruling today from the Reykjavik-based Landsdomur court. Haarde, who won’t be punished, was acquitted on three other charges, including failing to check the expansion of the country’s banks and neglecting to monitor financial stability.

“I don’t shy away from my responsibilities, but I have not committed criminal acts -- and that’s the important thing -- in the running of this country and in preparing things back in 2008,” Haarde said in an interview after the verdict. “This court outcome shows and confirms that even though there’s this formalistic detail for which I was found guilty of without punishment.”

Haarde in September 2010 became the first political leader to be indicted for economic mismanagement during the global financial crisis that started in 2007. Iceland’s biggest banks defaulted on $85 billion in October the following year, plunging the $13 billion economy into its worst recession in more than six decades and sending unemployment surging nine-fold.

Other Charges

The court last year also threw out charges that Haarde neglected his duties as prime minister and failed to ensure the government studied the risks facing the banks.

The island is emerging from its financial turmoil after receiving loans from its Nordic neighbors and the International Monetary Fund and thanks to capital controls that have protected the krona since the end of 2008.

Iceland completed a 33-month IMF program in August and is this year estimated to outgrow the 17-member euro area and post a smaller deficit. Haarde’s decision to impose emergency legislation at the end of 2008 and allow the banks to fail has won praise for speeding the island’s resurrection from economists including Nobel Laureate Paul Krugman.

Haarde, who became prime minister in 2006, was ousted during public protests in 2009. The parliamentary committee that in 2010 recommended his indictment said his actions from February 2008 to October that year exacerbated the island’s boom and subsequent bust. Haarde didn’t exert enough pressure on the banks after they amassed debts equivalent to 10 times the country’s economy, the committee said. He was also faulted for not pressuring Landsbanki Islands hf into establishing foreign subsidiaries for its U.K. and Dutch Icesave accounts.

Legal Escape

The European Free Trade Agreement’s Surveillance Authority is suing Iceland for failing to honor about $5.1 billion in depositor guarantees for U.K. and Dutch Landsbanki Icesave account holders. Iceland said in September that proceeds from the estate of Landsbanki will reach about $11 billion, about twice the amount owed under the guarantee directive.

The parliamentary committee found that former central bank Governor David Oddsson, as well as then head of the Financial Supervisory Authority Jonas Fr. Jonsson, also acted negligently in the years before the meltdown, according to an April 2010 report. Jonsson and Oddsson, who now runs the country’s second-biggest newspaper, Morgunbladid, escaped legal action when the state prosecutor said in June 2010 that a Special Investigation Commission’s findings didn’t warrant a criminal probe.

Oddsson was head of government from 1991 until 2004, making him Iceland’s longest-serving prime minister and the principal architect of the privatization of the island’s banks in the 1990s. Haarde was finance minister from 1998 until 2005.

Gas and Clubs

Haarde’s case marked the first time Landsdomur, a special court created in 1905 to hear such trials, convened.

He stepped down in January 2009 following weeks of protests in which police used tear gas and clubs to control demonstrators enraged by the banking failure and an 80 percent offshore krona slump against the euro. Haarde’s Independence Party had been in government since 1991 and ruled in a coalition with the Social Democrats from May 2007.

Prime Minister Johanna Sigurdardottir, who assumed the job in 2009, has opposed the trial. During her testimony in March she told the court she believed “Haarde did everything in his power to tackle this problem.” She also said there were already signs the banks posed a threat to the economy in 2006.

Iceland’s economy, which contracted 6.7 percent in 2009, will expand 2.4 percent this year and 2.6 percent next year, the IMF said in a report released this month. That compares with a 0.3 percent contraction in the 17-member euro area, the European Commission said Feb. 23.

Iceland’s economic resurrection has been achieved “with very heterodox policies -- debt repudiation, capital controls, and currency depreciation,” Krugman wrote in his New York Times blog on Sept. 1. “It was as close as you can get to the polar opposite of the gold standard. And it has worked.”

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