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Eva Joly: Iceland is being blackmailed

In all the furor surrounding the Kaupthing loan book this past week, the following article by Eva Joly – published in several newspapers across Europe – went virtually unnoticed. The only English-language version I know to have been published was in The Telegraph this past weekend, and it was heavily edited. Below is the full version, only slightly edited [i.e. some line breaks and section headings are mine].


In the wake of the failure of the Icelandic banks Messrs Brown, Barroso and Strauss-Kahn prove that they have understood nothing.

By Eva Joly

eva_jolyFrom G8 to G20, many heads of state and government seem to delight in repeating that nothing will ever be the same again. The world is changing, to the point of being turned on its head by the crisis; the way we think and act in terms of financial regulation, international relations and development aid must therefore, according to them, change too.

However, numerous examples contradict all this big talk. The situation in which Iceland now finds itself following the implosion of its banking system and the emergency nationalisation of its three main banks (Kaupthing, Landsbanki and Glitnir) is undoubtedly one of the most significant of these examples. This small country of 320,000 inhabitants is now reeling under the weight of billions of Euros of debt, which has absolutely nothing to do with the vast majority of its population and which Iceland cannot afford to pay.

I became interested in Iceland through my role as an adviser to the criminal investigation into the causes of the failure of its banks, which is at the root of its difficulties. However, I am not going to talk about that investigation, but something that goes far beyond it. In any case, I am by no means a spokesperson for the Icelandic authorities, whose responsibility in all this is clearly not insignificant. The previous government was even dissolved due to public dissent over cronyism and the clannish running of institutions, which were seen as the cause of all of its problems.

Moved by the fate of Iceland’s deserving and likeable people, and the complete absence of discussion in the European media about what the future holds for them, I simply want to draw the attention of public opinion to the issues at stake in this case – major challenges that are not confined to the shores of this island. The irresponsible attitude of certain countries, the EU and the IMF to the collapse of the Icelandic economy demonstrates their inability to learn from the dramatic undermining of the model that it embodied: one of excessive deregulation of markets, particularly financial markets, that the majority of those same key players contributed to shaping.

The UK, Holland, and the IMF

Let us look, first of all, at the demands of the UK and the Netherlands. These countries are concerned by the failure of the Icelandic banks because they had welcomed their subsidiaries and branches with open arms, even though their authorities had been at least partially alerted to the risks hanging over those banks. They are now demanding that Iceland pay them astronomical sums (more than €2.7 billion to the UK and over €1.3 billion to the Netherlands), plus interest at 5.5%. They consider that Iceland was responsible for guaranteeing the funds deposited with Icesave, the internet arm of Landsbanki that was offering unbeatable rates. The British and the Dutch decided to set that guarantee not at around €20,000 per deposit, as provided for in European and Icelandic legislation – which would already have been impossible for the Icelandic government, who quickly announced after nationalising its banks that it could only guarantee deposits made in Iceland itself – but at €50,000 to €100,000 per deposit, or even higher.

Moreover, the measures that they are taking to get their way are scandalous. Indeed, at the very start of October, the UK began with a measure of extreme retaliation: freezing of the assets of not only Landsbanki but also Kaupthing Bank, which was totally unconnected to Icesave, using its anti-terrorism legislation. In doing so, the UK lumped the Icelandic people, their allies in NATO, together with organisations such as al-Qaeda… And since then, it seems to be using all of its influence to ensure that no international aid is really given to Iceland until its demands have been met. Indeed, Gordon Brown told his parliament that he is working “with the IMF” to establish how much it considered the UK was entitled to claim from Iceland.

The IMF itself, meanwhile, not content with putting off making its loans available to Iceland, attached conditions to them that would seem outrageous, even in fiction. One example of this is the objective of bringing Iceland’s public deficit down to zero by 2013, a target that is impossible to achieve but that will nevertheless lead to huge cuts in the most essential areas of spending such as education, public health, social security, etc.

Finally, on the whole, the attitude of the EU and other European countries has hardly been more commendable. The European Commission has clearly sided with the UK, as its President announced in November that there would be no European aid until the Icesave case had been resolved. It is true that Mr [Jose Manuel] Barroso [President of the European Commission] – too busy with his own campaign and terrified of upsetting his main source of support, London – is, as is often the case, in over his head. Even the Scandinavian countries, which heralded international solidarity, are conspicuous by their lack of reaction to the blackmailing of Iceland – which certainly puts the generosity of the loans they have promised into perspective.

Brown’s responsibility

Mr Brown is wrong when he says that he and his government have no responsibility in the matter. Firstly, Mr Brown has a moral responsibility, having been one of the main proponents of this model which we can now see has gone up the spout. But he also has a responsibility in the sense that he cannot really hide behind the legal status of Icesave – which made it formally dependent on the Icelandic banking authorities – and say that the UK had neither the means nor the legitimacy to supervise its activities. Could anyone realistically think that a handful of people in Reykjavik could effectively control the activities of a bank in the heart of the City [of London]?

Moreover, it should be noted that the European directives concerning financial conglomerates seem to suggest that EU member states that allow such establishments into their territories from third countries must ensure that they are subject to the same level of control by the authorities of the country of origin as that provided for by European legislation. So, was there perhaps a failure on the part of the British authorities on this point, which would not be particularly surprising considering the “performance” of other English banks (which were in no way related to Iceland) during the financial crisis? If so, Mr Brown’s activism in relation to this small country might be motivated by a wish to appear powerful in the eyes of his electorate and taxpayers, whose own losses cannot be played down.

Of course, the Icelandic institutions have a great deal of responsibility in this matter. But does that necessarily mean that the – also considerable – responsibility of the British authorities should be overlooked, dumping it all on the Icelandic people alone?

Iceland, whose only remaining source of income is its exports, will certainly not be able to pay off those debts. The Icesave agreement, that the Icelandic parliament is expected to vote on soon, would burden Iceland with a debt equivalent to £700 billion for the UK or $5.6 trillion for the US. Nor will Iceland be able to clear its deficit in less than five years, when national deficits are rising more quickly than ever, even for the great powers – with the UK and the US once again providing two very good examples.

Unless a radical new approach is adopted, Europe and the IMF are about to perform a major feat: reducing a country whose HDI had, in just a few decades, reached the highest level in the world, to the rank of a poor country… The consequence of this is that the Icelandic people, the majority of whom are highly qualified and multilingual and have strong work relationships with the Nordic countries where they can assimilate easily, are already starting to emigrate. In the end, neither the IMF, nor England or the Netherlands will be able to be reimbursed. Just a few tens of thousands of retired fishermen will be left in Iceland, along with its natural resources and a key geostrategic position at the mercy of the highest bidder – Russia, for example, might well find it attractive.

Possible alternatives

Even so, there are alternative solutions. Indeed, the countries of the European Union could have devised a mechanism that would allow them to consider their own responsibilities in this situation, to improve the regulation of financial markets and even take on at least part of the debt – which European legislation in no way prohibits – for having failed in their banking supervision role.

They could have offered to help Iceland, which obviously has no experience in the matter, with the investigation that it is seeking to conduct to try to understand what really happened and to thoroughly analyse the causes of this disaster. They could even have taken the opportunity to start their own debate about a European public prosecution service in charge of matters concerning transnational crime, particularly financial crime, which, once again, European legislation in no way precludes. The IMF and its Managing Director could also have taken this opportunity to thoroughly review the nature of the conditions that they attach to their loans. They could have made them more realistic, more focused on the long term, and made it possible to incorporate at least some social considerations. That would have been a first step towards true reform of multilateral institutions of this type and international solidarity procedures – and for Mr [Dominique] Strauss-Kahn [Managing Director of the IMF] himself, a chance to finally make his mark at the head of the IMF.

Engaging in this debate would obviously require a lot of time and energy, and a great deal of vigilance, particularly in the European Parliament, where discussions should be organised over the coming months. However, the Swedish presidency of the EU does not seem to be in a hurry to improve regulation of the financial sectors, and the committees with an economic focus in the Parliament are, more than ever, dominated by liberals, particularly British liberals. Yet the tools and levers for real progress are there; a catastrophe like that in Iceland could finally raise a meaningful international response, instead of the irresponsible and cynical pressures that we can still see today.

Eva Joly is a Norwegian-French investigating magistrate and judge. She was hired by the Icelandic government last spring to act as an advisor to the special investigator into the bank collapse. We ran an interview with her in this space a few weeks ago. This article is published by permission.



Comments on this entry are closed.

  • Bashar Teg August 12, 2009, 9:42 pm

    Excellent Mdm Joly! At least someone is telling the story like it is! The IMF has a disastrous record in Africa of economic policies that were enforced to terrorise the population (as an EU “controlled” entity) and assuage its terror with Aid. Africans were somehow to blame for the failure of the free market system – but now we see that financialised monopoly capitalism (as different from competitive productive capitalism) is a failure in its own terms. The theories of Paul Samuelson on Factor Price Equalisation exist but only in textbooks! And this is the theory that the IMF and World Bank rely on. If it is not a real theory but academic fiction and hubris, why is the IMF so gung-ho about it all? Perhaps Iceland should look at the African experience to get to know better what Africans have experienced. It can get much much worse. Peace, and hope that a solution that is humane is worked out – and perhaps reforming the IMF completely (not just paper promises as the EU is wont to do)… and have a debt restructuring mechanism for states… because even just making the interests payments results in exponential debt growth – look at Africa!

  • Bromley86 August 12, 2009, 11:24 pm

    >Having been well governed for centuries

    If we’re talking centuries, then that’s because they weren’t ruling themselves. The one thing that has come out of this whole mess is just how corrupt/nepotistic the ruling class in Iceland is.

    Anyway, just because it’s small doesn’t make it any less a country. Therefore, Iceland is just as responsible as everyone else is for their own personal misfortunes.

    National bankruptcy isn’t really an option, as the vast majority of the banks’ debts are private and so are not falling on Iceland. Defaulting on all international commitments is not desirable in an import-dependent country with low foreign reserves and a large current account deficit.

    That is, of course, a separate issue from whether they should back the Icesave guarantee or not.

    Not sure where morality comes into it. Ignoring for the moment any ability to pay, it seems to me pretty immoral to allow a corrupt political and business culture off the hook at the expense of taxpayers in another country.

    @Bashar. I’ve not seen the terms of the IMF loan to Iceland, but a pretty knowledgeable Icelander has said that it’s likely 1%-2%. If true then whatever else the IMF may be, it’s not trying to trap Iceland in a debt spiral.

  • carl coryell-martin August 13, 2009, 8:57 am

    “There is, in the case of default, a clause that allows the UK & NL to go after Icelandic government assets in any jurisdiction that they can.”

    A clause in what contract?

    My question is will the international community go along with NL and the UK forcibly taking Iceland’s fishing rights as debt service? Defaulting would suck, but Iceland won’t starve as long as they can fish (Though, those that can will likely emigrate).

  • Bashar Teg August 13, 2009, 1:53 pm

    @ Browmley86 The terms of the loan may be fine, it is the blind side conditionalities that kill a country just as much as the debt burden. Look across the waters at Latvia – at a time it needs to expand spending, it is being “forced” to cut back spending – the pro-cyclical IMF conditionalities surface (more on IMF google Michael Hudson). Ofcourse Poland got the Platinum Card deal with the IMF with limited conditionalities – but that is only for those who are more equal than others… The situation is sick sick sick. what a great project the IMF is of the grand European traditions of the enlightenment – but from the outside, at best it is mediocre. And these terror laws are so great. Not only does it allow breaking the Magna Carta – you can use it against anyone you don’t like. Perhaps that is why it eludes definition. The nice thing is that if this is a precedent the US and Wall Street will be the biggest terrorists! Icelanders, welcome to being the Africans in the North!

  • Pablo August 13, 2009, 10:43 pm

    There were €6.7B deposited by private individuals from the UK and the Netherlands in an Icelandic bank. When it collapsed, why is it unreasonable for these two companies to try and recover a large proportion of this money. Isn’t it the obligation of these two countries to do that? Where did the money go? Who benefitted and who let it happen? The UK and Netherlands governments are using every means, including the dirty under-handed ones, to get this money back.

    Maybe somebody in Iceland should be redirecting these requests to the individuals responsible and the people within the Icelandic banking sector that misplaced this money. In the UK, the Bank of England underwrites the industry and the Treasury underwrites the Bank of England. If the situation was reversed and 320,000 Icelanders lost their money overseas would you be happy losing your money. Your banks shouldn’t have been playing the ‘game’ if it couldn’t afford to lose.

  • junkDog August 14, 2009, 3:37 am

    Strange…corporations always have a way to limit damage awards. Why can’t they?

    Also, shouldn’t this be looked at as a case of criminal activity? Confiscate the money until the defendents can prove that the money isn’t a result of criminal activity including fraud, and money laundering

    this just goes to show you are only a sovereign nation if you can close your borders and prosper. Remember the “bambo curtain”? That put china in the drivers seat for international trade

  • Smithers August 14, 2009, 5:46 am

    Iceland’s banks wanted to go big game hunting, their uber-smart teams of savvy risk managers, financial advisors and quants were obviously aware of the risks, ergo, they should have been prepared for all eventualities.

    They just chose to ignore what could happen and spent billions that was not theirs. They built a tower of cards, the storm came, the tower flew apart, and now they want absolution for their stupidity? What? Did they think this was the United Socialist States of America?

  • Bromley86 August 14, 2009, 10:04 am


    The Icesave Agreements with the UK and NL that the Althingi is currently debating. Largely the same (clause 17.2.3 in the first one):

    Foreigners cannot make use of those fishing rights, so they’re only worth what the Icelandic market will pay for them. That said, the ownership of those assets is (currently) not disputed. They’re largely owned by the banks (as they were used to secure loans) which, ultimately, are owned by the foreign creditors. But that’s not the UK & NL governments and is totally separate to the Icesave business.

  • Mrs_B August 15, 2009, 7:21 am

    Wonderful blog! My heart breaks for your beautiful country being destroyed by the New World Order. This is a classic IMF takedown complete with impossible debt mounting exponentially. You will become a third-world nation, it certainly seems to be the plan. All the rest of us will follow suit shortly using the data procured from your demise.

    I hope Icelanders quit blaming their banks, their government, London, the EU and most of all, themselves. It’s obvious from out here that you were a marked nation and nothing could’ve stopped this. It was planned long before by a powerful international elite who don’t care about human life. Your nation’s finances are as tied to the global mafia as the rest of us. There is no escaping; there is only finding a way to exist without feeding the global warmongering beast any longer. (See Catherine Austin Fitts site Solari.com. I found your site through her blog.)

    How sad that the solution for thousands will be to emigrate– exactly as planned. Do you think those powerful enough to orchestrate such destruction haven’t thought through what your response will be?

    Are gun rights part of your constitution? Will any of you fight to keep your country? Frankly, it seems your only option. Because obviously Iceland’s days as a populated prosperous nation have come to an end, for whatever purposes the elite have determined. My guesses are someone wants unhindered access to your natural resources or your strategic location, whether to keep them as a vacation spot or for other purposes. They thrive on showing the world how capable they are of reducing a first-world nation to a shackled, shrinking debtor state.

    One thing: Are there any artifacts hidden away in Iceland that would be of esoteric value? When the US invaded Iraq the first place to be looted was the Museum of Natural History in Baghdad. It was totally cleaned out while under armed guard. Ancient vials and scrolls were taken, things that elitist religious cults use in cabalistic rites. Just a guess.

    Thanks for the marvelous translation. I will visit this blog often.

  • herb August 18, 2009, 3:24 pm

    The world system now is dominated by organized crime syndicates. Under these conditions expect nothing but confusion and obfuscation as these are ideal conditions for looting. The primary challenge for nearly every country is to reestablish the rule of just laws. Only after meeting this challenge can the nations begin to try to save themselves from the consequences of out of control technology and its love child, climate catastrophe. Looks like a long shot for everyone.

  • Arthur Borges December 23, 2009, 7:48 am

    Eva Joly is one of the finest folks that ever graced any nation’s courtroom or chaired any criminal investigation.

  • Brenton Eccles January 13, 2010, 12:24 pm

    Testimony like this of Eva Jolly’s is just what people need to see more of. Shame it has received minimalistic press attention.

  • Jos Verspaget April 11, 2011, 8:18 pm

    I fully support your ideas concerning UK-Holland-Iceland