So as of today, we have a new cabinet and a new coalition agreement.
I’ll spare you a listing of the actual personages appointed to each ministry, since I highly doubt there are any non-Icelandic speakers out there who give a hoot about whose sister, or neighbour, or uncle, or second-cousin twice-removed captured which chair. Suffice it to say that there are now 12 ministers instead of nine previously [this is the new job creation programme at work, I suppose] and – happily – the two extraparliamentary ministers who served in the interim government will continue in the new cabinet. This is important because most people were exceedingly pleased with their work and because they are non-partisan and generally extremely well-qualified for their jobs. Both continue at their former posts, as minister of judicial affairs [an actual lawyer was hired] and minister of business [an actual economist was hired], respectively.
As for the coalition agreement, I haven’t delved into it in detail, but the highlights are, of course, the current economic measures and what they plan to do about the EU. As most people know, we’ve got the Left-Greens and the Social Democratic Alliance making up this new coalition, the strongest left-wing government we’ve ever had in this country, and they differ completely in their position regarding the European Union. The Left-Greens have traditionally been opposed, the SDA unequivocally in favour.
The declaration of the two parties immediately following the elections that they planned to form a government together left all of us wondering just how they were going to settle the EU question. It’s now been decided that there will be a parliamentary bill on whether or not Iceland should enter into talks with the EU. If it’s passed in parliament, formal request for talks will be submitted in July. Most people seem to think it will be passed, since there is growing pressure in Icelandic society to at least enter into negotiations, just to find out what the actual terms will be. However, once the deal is on the table, it will be subjected to a national referendum – and when that happens, it could easily go either way. It’s a highly contentious issue, and both sides are vehement in their arguments.
Just a few words about the general climate: there is, once again, a great deal of dissent brewing in this society. The cauldron that started bubbling last October and which finally erupted in January is once again starting to boil. People are getting incredibly impatient and angry. Debts keep growing, interest rates are cripplingly high, and on top of the current rate of inflation [I haven't heard the actual figure for a while - my guess is it's around 18 percent] we have indexation of our loans and mortgages, meaning the principal increases along with the rate of inflation. At the same time, real estate prices are declining rapidly. On the news the other day was a disabled single mother of three who had managed to purchase her own flat for ISK 10 million a while back; her mortgage is now up to ISK 18 million, and she is no longer able to make payments. Sadly, those sorts of stories are becoming increasingly common.
In other words, what we kept hearing last fall when the kreppa first hit – that it would take time for the real effects to settle in – is now coming to pass. The devastation didn’t come down on us all at once – it happened slowly, gradually, insidiously. And it’s happening now.
AND IT’S STILL COLD
Today it started to rain again and we had this damp, nasty cold that just got inside your bones. Still, took a really good, refreshing, brisk stroll around the golf course. The migrating birds are all arriving now – guess nobody told them about the kreppa. Right now a wet 7°C [45F]. Sunrise was at 4:29 am and sunset at 10:21 pm.
PS – there were two EXCELLENT interviews in Silfur Egils today – one with a woman named Ann Pettifor who predicted the current crisis in a 2006 book, on which one of the chapters was on Iceland. Fascinating interview with a remarkably intelligent and articulate woman. The second is with a US academic, lawyer and former bank regulator named William Black, author of a book called The Best Way to Rob a Bank is to Own One, who has some fascinating things to say about the Icelandic meltdown, and more. I know some people outside Iceland have had trouble watching the videos on the RÚV site, so I recommend Lára Hanna’s blog. They’re the third and fourth videos down.
{ 12 comments… read them below or add one }
I have to agree that the interviews mentioned are excellent, and should be viewed by anyone concerned about the worldwide financial crisis. What is discussed is not necessarily Icelandic specific, and applies to the situation in any country.
Viewing these interviews will be time well spent in understanding what is going on with the wordwide financial situation today.
I have held the view that Iceland is the “canary in the mine”, in that what happens there will eventually happen elsewhere, in terms of people’s efforts in living out the economic crisis.
Alda’s words, and I quote her here; ” In other words, what we kept hearing last fall when the kreppa first hit – that it would take time for the real effects to settle in – is now coming to pass. The devastation didn’t come down on us all at once – it happened slowly, gradually, insidiously. And it’s happening now.” really worries me.
I see things happening here in Seattle, much like the story Alda relates concerning the single mom in Reykjavik.
There is a lot of “talk” in the US that the worst of the recesssion is behind us. I think that, much like Iceland, the difficult road is ahead of us. Time will tell. But people still have lives to live, bills to pay, and such. Yes, the stock market is up, but on the local level, I see things down. People continue to loose jobs, can’t pay bills; the essence of an economy downsliding. Perhaps much like Iceland.
Alda, thanks for those great links! I don’t post often, but I read everyday. Just keep doing what you are doing, as you are so very good at what you do.
Don
Is there anything tangible in the coalition agreement concerning the handling of indexed loans and measures to soften the impact of high inflation? I can’t imagine that people can stand for a long time paying interest on a principal, which is increasing by 10-20% every year, while facing pay cuts and skyrocketing prices at the same time. So, I would guess, if the government doesn’t tackle this problem now, they’ll have to deal with an increasing number of people filing for personal bankruptcy in the near future. As the controversial EU question is more likely to stalemate the government than to provide any short term solutions, those matters seem to be the most urgent.
Concerning the rainy weather – I have read that this april set new rainfall records in parts of Iceland. Hope that this kind of record hunting will come to an end soon.
Alda, the inflation (measured over the whole year) is (according to http://www.statice.is) is 11.9 %.
That means that we have deflation at the moment, if you measure the inflation on a monthly instead of a yearly basis.
Don – thanks for pointing out that the videos mentioned are not specific to the Icelandic situation – they provide fascinating insights into so much of what is currently happening in the global economy.
LDE – at a glance I can’t see anything in the new agreement concerning the indexing. It’s a crazy system that has been in place so long that it’s sort of ingrained into the national character as some sort of natural law. I don’t have enough understanding to know why they don’t just scrap it, but I’m sure there are arguments against it. Perhaps someone reading could enlighten us ….
Sigvaldi – takk!
The indexing was put into effect in the early 1990´s on both loans and the pension funds so if the system is abolished then it could mean danger for our pension funds.
“That means that we have deflation at the moment, if you measure the inflation on a monthly instead of a yearly basis”
If there’s annual deflation in Iceland, will the principal on indexed loans reduce correspondingly? If not, then Iceland’s indexed loans seem doubly unfair.
Lee, the principal on the indexed loans is already starting to go down but it has a long way to go to recover all the effects of the inflation of the last couple of years.
As I can see it, there are two (maybe three) problems to fixing the index-linked loans problems, although I don’t pretend to have the full answer!
Firstly, there is the constitutional protection of property: a loan is “property” to the lender, so it is difficult to change the conditions unilaterally. However, I think that idea has pretty much flown out the window already in the kreppa.
Secondly, it is difficult to fix the index-linked loans without fixing the foreign-currency loans at the same time. Last September, at least half the variation of the Icelandic CPI depended on the króna exchange rate, so index-linked borrowers and foreign-exchange borrowers are in a similar situation, even if not exactly equivalent.
Thirdly, and in my eyes the most important, the new banks have to begin functioning normally! That means that they have to know how much the old loans to Icelandic clients are really worth before they can ask for money to start writing them down. This is also linked with the various foreign claims on the three big (old) banks, as I blogged about here. The money needed to write down the loans will have to come from somewhere, either from the borrowers (ie, the loan conditions won’t be changed) or the general population over a longer period of time (if the government steps in).
A friend has just sent me a message saying that there is a clause in the coalition agreement stipulating that the Central Bank shall seek ways to reduce the impact of indexation. Whatever that means.
It means that the Central Bank is going to aim for 2.5% inflation… a bad joke! There’s another nice one: “An overall revision of the Act on Fisheries Management will be carried out, in accordance with the coalition parties’ platforms.” Given that fisheries will be a major EU negotiating point, and that they remain in the hands of the Left-Greens, that “objective” is surely just postponing the political arguments.
I don´t know why an inflation rate of 2,5% is such a bad joke in a country that is experiencing deflation at the moment?
The fisheries question is one where both coalition parties are in full agreement, and they intend to aim for their objectives without regard to the EU question
>I don´t know why an inflation rate of 2,5% is such a bad joke
I suspect that Physchim means that it’s a bad joke in the context of addressing the impact of indexation.
i.e. “So your debts have doubled? No problem, we’ll keep the future annual increase to 2.5%!”
Don’t forget that, irrespective of the behaviour of Icelanders regarding consumption, import costs will rise as the currency controls are relaxed. So saying they’ll keep to a low inflation target is a bit of a joke in itself.
BTW, Iceland is not experiencing deflation. The month of March itself saw deflation, but April is still higher than January and annual inflation is still 12%.
http://www.statice.is/Pages/444?NewsID=3728