Iceland’s Big Trial, Travesty of Justice: Hannes H. Gissurarson

March 13 (Bloomberg) -- Everybody is polite and formal at the trial of former Icelandic Prime Minister Geir H. Haarde, which began last week inside a historic mansion in the capital, Reykjavik. Yet the atmosphere is tense, and the stakes are high.

In the fall of 2010, a narrow majority in Iceland’s parliament decided to charge Haarde with criminal negligence before and during the collapse of all three major Icelandic banks in early October 2008. The trial is politically driven -- the vote to hold it fell largely along party lines -- and a travesty of justice. It’s also a distraction from the vital business of restructuring Iceland’s financial sector and economy so that such a debacle -- which Haarde did not cause -- will not be repeated. He now faces a potential sentence of two years in prison.

From the outset, many Icelanders regarded the charges against Haarde as wrong, the product of anger and disappointment in a society that saw its economy go suddenly from boom to bust. In the year after the banks collapsed, Iceland’s gross domestic product contracted by about 10 percent. Now, the feeling that this was a political trial has only become stronger, as people see other countries experiencing similar problems.

Political Subtext

The question before the court in Reykjavik is whether there was anything that Haarde could and should have done to avert or mitigate the crisis, which initially hit Iceland so much harder than its neighbors. Although the charge is one of criminal neglect, a political subtext is clear. Many people, especially from the left side of the political spectrum, hold Haarde and former Prime Minister David Oddsson responsible for the transformation of the Icelandic economy in the 1990s and early 2000s, when the banks were privatized, taxes were cut and the economy was deregulated.

Initially, those reforms produced prosperity, but they also made the economy more vulnerable to disturbances in the rest of the world, especially after the rapid expansion of the Icelandic banks abroad in the early 2000s. It should be said, however, that the banks were regulated in precisely the same way as in the other members of the European Economic Area -- namely, Iceland, Liechtenstein, Norway and the 27 countries of the European Union.

In Haarde’s trial, politicians and high officials have given convincing testimony to the utter helplessness of the small Icelandic economy during the severe international financial disturbances of 2007-8. With balance sheets more than 10 times the size of Iceland’s GDP, the banks had become too big to fail. They were also far too big for Iceland’s central bank and finance ministry to sustain.

The government and Iceland’s regulatory institutions had no legal means of stopping the commercial banks’ expansion. The defect in the system was that the banks’ field of operation was the whole of Europe, as was their right under the European Economic Area agreement, but their insurance arrangements were confined to tiny Iceland. In his defense, Haarde points out that after the collapse he put through parliament a special emergency law that guaranteed bank deposits and re-established the failed banks’ domestic operations, while essentially leaving other creditors, mainly foreign financial institutions, out of pocket.

This emergency law meant that Iceland didn’t bail out its bankers. So unlike Ireland, for example, which in the crisis hastened to guarantee all bank obligations, Iceland doesn’t face a future burdened by heavy debts. The economy is now slowly recovering, and grew 3.1 percent last year. The reluctance of other nations to assist Iceland in the fateful latter half of 2008 may have been a blessing in disguise. Those who had recklessly lent or borrowed money in international markets lost, while the ordinary deposit holder kept what was his or hers.

Opportunity to Attack

But Iceland’s Social Democrat Party and Left-Green Movement used the opportunity provided by the fall of the banks to attack the long-dominant and pro-free market Conservative Party on all fronts. Their government, formed after the Conservatives were thrown out of a coalition government, fired Oddsson from his then post as governor of the central bank, even though he was among the few Icelanders in authority to have uttered warnings against the three commercial banks’ rapid expansion. Oddsson was retired from politics, but the two leftist parties still regarded him as their chief enemy. Most of the new government’s supporters in parliament then voted to charge Haarde. Some undoubtedly hoped it would turn into a dramatic trial of the Conservative Party in general.

It seems, though, that Haarde’s opponents will fail in their vendetta. Some parliamentarians who voted to try the former prime minister have recanted publicly, most notably the interior minister, Ogmundur Jonasson. He now asks why Haarde should be singled out. After all, the former leader of the Social Democrats, Ingibjorg Solrun Gisladottir, was foreign minister in the 2007-9 Haarde government.

From several trial testimonies, it has also become clear that there was very little Haarde could have done as prime minister during the 2008 financial debacle to prevent it. Most Icelanders agree that Haarde is a decent and well-meaning man, almost as far from being a criminal as one can imagine. Why should he, therefore, sit alone in the dock? Is it not sufficient that he has accepted his responsibility and retired from politics?

Public opinion in Iceland is becoming more balanced than immediately after the fall of the banks. Now, people see more clearly, not least from the examples of Greece, Ireland, Portugal and Spain, that this was not a unique event, solely attributable to Icelandic circumstances, but rather one of the many forms that the global downturn took. Finally, Icelanders are starting to discuss the general causes of the crisis. Why did banks all over the world take more risks than they should have? Could their faulty risk management be traced to some structural defects? Was government intervention not a cause rather than a cure of the instability of the international financial markets?

Iceland is learning all over again how futile it is to play only the blame game. It seems more rewarding to try to design institutions in such a way that human greed -- which certainly motivates most bankers -- can be directed into socially beneficial channels.

(Hannes H. Gissurarson is a professor of politics at the University of Iceland. He was on the board of Iceland’s central bank from 2001 to 2009 and an adviser to Prime Minister David Oddsson from 1991 to 2004. The opinions expressed are his own.)

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