Interview: Iceland finance minister Steingrimur Sigfusson


It is a year since Iceland's banks collapsed, leaving a trail of debts, sparking an international row and striking fear into UK savers.

Steingrimur Sigfusson

Hard choices: Steingrimur Sigfusson Icelandic Finance Minister

Financial Mail's Simon Watkins travelled to Reykjavik, and met up with Iceland's Minister of Finance Steingrimur Sigfusson to find out how a country rebuilds itself after financial meltdown.

Sigfusson took his job on February 1 2009, in the aftermath of the Icelandic collapse, as part of a left-leaning coalition government.

Born on a farm in North Iceland on August 4 1955, he became a member of the Icelandic Parliament or Althingi in 1983m, as a member of the People's Alliance Party and helped found the Left-Green Alliance movement in 1999.

He now plays a key role in trying to rebuild his nation amid ordinary citizens' anger at Iceland's bankers and the destruction they wrought.

Why did Iceland's financial system fail so badly?

Obviously there are general reasons that relate to the overall financial crisis but there are internal reason as well that explain why Iceland was so badly hit. Obviously the rapid and little regulated growth of the banks there were a lot of economic mismanagement issues in looking back. Things should have been done differently more cautiously

The warning signs should have been taken seriously. When we were seeing the rapid growth of foreign debt saw inflation going up and we saw a huge trade deficit these should have been taken seriously.

The biggest single factor was the oversize of the banking sector which grew out of all proportion to the relatively small size of the Icelandic economy. It should have been noticed much earlier that this was moving in a dangerous direction.

It is always easy to be wise when we look back and sat we should have done this or that. But it collapsed with catastrophic consequences for the Icelandic economy. There are obviously some political and ideological factors here as well. I have been very outspoken on that. The neoliberal privatisation philosophies were taken to extremes in Iceland and were introduced in a very hasty way. It became an experiment in neoliberal philosophy.

Iceland the warning signs

Simon Watkins and This is Money highlighted the dangers facing Iceland's banks in March 2008 - six months before the collapse

- Iceland's banks top riskiness league

Did Britain's actions make things worse? The use of anti-terror legislation to seize Icelandic banks assets for example.

It can't be overlooked that the drastic actions of the UK authorities on October 8 2008 were very harmful to Iceland. Obviously when Singer & Friedlander was taken over that marked the end for the biggest bank Kaupthing which at that time our authorities here were hoping would be saved. We knew the other two banks were in big trouble, but I think everyone hoped the biggest one would be saved and it had a much bigger chance to do that.

But when its UK bank, the Singer & Friedlander bank was taken over - which was by the way a UK bank that happened to be in foreign ownership - why was not Singer & Friedlander assisted in the same way other UK banks were assisted in the days after.

That is not to mention the harmful impact of the use of anti-terrorist law and the remarks made by the highest officials in UK sent out very negative signals about the state Iceland was in. Be it remarks by Alistair Darling or Gordon Brown, they were not helpful at all.

I am not trying to blame anyone specifically obviously the main responsibility for what happened lies inside Iceland but there were external factors as well. The actions of the UK authorities had a very harmful impact. That is fact regardless of what reason they felt they had to do that.

Ordinary Icelanders are very angry about the Icesave agreement to pay back Britain and the Netherlands. How are you balancing the demands of the Icelandic people and Iceland's international position?

This is a similar situation that lot of authorities face. Ordinary people, the taxpayers are unhappy that they will have to shoulder a burden caused by the irresponsible behaviour of private bankers. But this is not only happening in Iceland, it is happening in a lot of countries. The UK taxpayers the US taxpayers are all bearing a burden because of things that are not their fault.

People are unhappy and they are asking in Reykjavik in London and everywhere why should we pay? But this is a consequence of the collapse of the banking system and that relates to the harmful practices and ideologies that were executed there. It was very irresponsible and greedy behaviour. But in Iceland this is on a bigger scale than elsewhere.

There are a lot of bills to pay to recapitalise the financial system and so on, but out of those bills Icesave is the most difficult. It is the most politically sensitive; it is the one that is hurting the most - that it is perfectly understandable. At the same time we need to solve this and get away from it and we need to move on. We cannot live with the situation that this is unsolved and blocking everything. We are not happy with how this has interfered with other things like the IMF programme. (The IMF has made solving the Icesave issue a condition of its bail-out of Iceland.)

How close is Iceland to agreeing things with the UK and Netherlands?

We need to do this and I think that is the spirit on both sides. We need to get this out of the way but there are outstanding and difficult issues?

How bad are the cuts that Iceland must impose on itself?

It is difficult and it is going to hurt on both sides, both tax raises and cuts. There was a very dramatic turnaround in the state budget. In 2007, we had a handsome surplus of 89 billion kronur (£445 million): it's collapsed to a minus 216 billion kronur in 2008. This is unprecedented.

The outlook for 2009 is something like a 180 billion deficit. We have seen nothing like this in our history. We cannot live with that for long, we need to narrow this gap in steps. We need to turn this around in three or four years. It needs to be attacked on both sides we need to increase taxes and we need to cut down spending alot.

The real value of the public spending will go back to levels in 2005-2006 so that does not sound too bad but we had been increasing those levels alot in 2007 2008. It is always hard to move back, but we are moving back from a very high levels. Public services in Iceland have been very strong in international comparisons, but this will be a set back, of course we have to do this in circumstances that are not good.

Is EU membership the answer? (Iceland's Parliament has voted to begin negotiations over joining the EU and the single currency, but some of the parties in government including Sigfusson's Left-Green Alliance are opposed to joining.)

We as a party are not supportive but we supported going into the negotiations. In this government there are enthusiastic supporters of joining and also critics and people who are quite convinced EU membership is not the right choice for Iceland. But since Parliament has decided to apply and go into negotiations, It will be up to the Icelandic people in the end. If the negotiations come to it then the decision will be up to the Icelandic people in the referendum.

Interview: Iceland finance minister Steingrimur Sigfusson

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