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Iceland: a model for lheterodoxia? Iceland has suffered a financial and economiccrisis of enormous proportions since October 2008 would break almost all of itsbanking sector, which at that time was a colossal size, equivalent to almost eleven times the Icelandic GDP. The banking collapse marked the beginning of a period strongly contractionary for the economy and left Iceland with a huge privatedebt, much of which consisted of financial products indexed to inflation and /or denominated in foreign currency. The scene at the end of 2008, with a depreci

ation of almost 50% of the Icelandic krona against the euro over the previous year and an inflation rate close to 18% was a blow to the living conditions of thepopulation. The immediate trigger for this financial collapse is well known. The banks had, in September 2008, a liability denominated in foreign currencies worth more than seven times the GDP, which ultimately was shown to be a huge weakness for the whole economy. The banks had accumulated huge foreign exchange risksand liquidity moved to the Icelandic population. Once again, the bankers' insatiable appetite for growth at any cost and short-term profits risked a whole country, with the approval of financial supervisors, guests feast stone banks. The context of uncertainty and panic after the collapse of Lehman Brothers cut the funding of foreign exchange markets, and the Central Bank of Iceland could not assume the role of lender of last resort.

They are also known some of the factors that made possible the formation of a financial bubble as the Icelandic, characterized by massive capital inflows attracted by the very high returns that the Icelandic banks offered. The privatizationof the banking sector since the late nineties, it became rapidly so that the main public banks were formerly in the hands of the oligarchy notable Icelandic. Were evident in some cases, links to the new owners much with the traditional Conservative Party hegemony in Iceland, the Independent Party, as with his occasional partner of Government, the Centre Party of agrarian roots. This new banking sector, the heat of a rapid deregulation of financial activities, was not only limited by the regulatory authority, which effectively limited monitoring capacityhas been well captured in the documentary Inside Job. This model of financial expansion, we must not forget, received explicit support from both institutional

and academic fields.

However, little attention has been paid to all that has to do with public debt after the Icelandic banking collapse, and in this area, the Icelandic case has an undeniable interest. It happens that the profitability of Icelandic Treasury debt in the secondary market on which investors buy and sell debt securities,has fallen steadily in 2009 and 2010, from 15% in October 2008 for the bond tenyears to levels around 6% or 7% of those who move in 2011. This is somewhat higher yields than those of Spanish or Italian debt, but lower than the Irish debtand, above all, Portuguese or Greek, especially if one takes into account the highest rate of inflation in Iceland. Meanwhile, the Icelandic debt primary market, ie, auctions through which the Government launches new debt it issues, has fol

lowed a similar pattern, with yields also fall during the two years following the banking collapse.

The cost of debt has decreased while the volume has only increased. The bonds and Treasury bills have been the main means of additional state funding afterthe Icelandic banking collapse, and now represent a debt amounting to 47% of GDP, while in 2007 only amounted to 9% of GDP. But while debt was down to profitability and increase their volume, all agencies downgraded its credit rating, ranking it since early 2010 between seven and ten steps below the most favorable rating. Is not it strange that a government of satisfying a growing demand for financing by issuing debt with lower and lower returns during 2009 and 2010 while the confidence of the rating agencies on the credibility of Iceland does nothing but decrease in the same period of time?

The measures taken by the Government of Iceland and unorthodox support that

Government received from the International Monetary Fund help to understand thi

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s phenomenon. First, we have proceeded to a partial nationalization of the banking sector. The State stepped in and restructured the three failed banks, so thateach was separated into two. The original banks were left with the assets and liabilities owed to nonresidents and is currently still in bankruptcy and immersed in a liquidation of assets among its creditors. The new banks emerged from theformer assumed all assets and liabilities with Icelandic residents and were recapitalized so that they could continue operating normally. It is 100% guaranteed

deposits Icelandic citizens. Once done, the government sold to private investors of the three banks recapitalized. Currently the State owns 82% of the country's largest bank and a minority of the other two.

What is relevant with respect to debt is that these three banks bailed by the State and majority of them public and act as market makers for the issuance of public debt in the primary market. In fact they are the major market makers. That means they have signed agreements that pledge, in exchange for certain counterparties, to go to the Treasury auctions, to ensure the placement of public debt in the market, including what the banks themselves are in their portfolios . No doubt this so close to the banking sector is a major public sector lever thatallows the government to promote advantageous prices in the auctions of new debt

issued.But as it seems more relevant to understanding why the debt has increasingl

y come cheaper to the Government of Iceland is the establishment of capital controls still in place, taxes in late 2008 to try to prevent the Icelandic currencycontinue depreciating more after the banking collapse. Existing controls do notallow Icelanders to buy foreign currency to invest abroad, or that foreign investors withdraw from the Icelandic market selling and buying securities that havethe money obtained other currencies. This fact, coupled with the stock market crash that took place following the banking collapse in 2011 alone, there are four Icelandic companies whose shares are traded in ISK-, severely restricts investment options. For the Icelanders, and also for foreigners who can not withdraw their funds, investing primarily consists of buying government debt.

But do not forget that these two measures cutting unorthodox capital contro

ls and partial nationalization of banks, have been implemented with the approvalof the International Monetary Fund, an organization with which Iceland agreed to an assistance program in November 2008. With this agreement, Iceland was ableto obtain the foreign currency needed to strengthen the external position of theCentral Bank. The relevant part is that the Fund agreed to provide assistance even though Iceland established a measure such as capital controls, which until recently more than a decade was one of the tools that the IMF, as the guarantor of economic orthodoxy , advised against all countries that attended with all thepersuasiveness he was capable of, which was great. It is very striking is the behavior of the IMF in Iceland when compared with its action with the Greeks and the rest of the eurozone. It would be a topic of research trying to explain the ultimate reasons for this differential behavior.

Moreover, the IMF and Iceland agreed in late 2008 which was undertaken a plan of medium-term fiscal consolidation, but that would be deferred cuts in public spending as soon as 2010. Thus, while developing a medium term fiscal strategy, automatic stabilizers could operate freely in 2009 mitigating the consequencesfor the population would be the economic downturn was coming. While it may be attributed to measures taken by the government much of the responsibility that Iceland has been able to finance its public at a reasonable cost, it is also truethat the IMF, endorsing its assistance agreement with these policies, gave Iceland institutional support that was added to the financial support to form a favorable scenario indeed for the Government to undertake its task of stabilizing the

economy also mitigating the consequences it would mean for the population.

Thus, Iceland appears to be an example of which is sometimes possible to fi

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nd solutions other than economic policy orthodoxy that marks out of a crisis situation. While the euro area economies try to win the confidence of the markets so that they continue to fund the deficit without some interest charge for it toohigh, Iceland has withdrawn from the valuation of preventing capital markets and out of country freely. In a way, Iceland has gained room to maneuver, imposinga change to its citizens the obligation to fund the cost to the Government is assuming economic policy in the post-banking collapse.

The results so far appear to be differential with respect to situations lik

e the Greek. From the social point of view, but not forget the emigration that has left the island since 2008, the truth is that inequality in the distributionof income has declined, reversing the upward trend that had this indicator in previous years to collapse. From the economic perspective, government and the IMFhave a cautiously optimistic outlook for Iceland, and both make a positive assessment of collaboration that have maintained, that ended with the completion of the care plan in August 2011. Particularly striking is the analysis that the Fundhas exhibited at the conference that was held in Reykjavik in late October, wasvalued as a factor favoring the success of the plan the margin enjoyed by the Government in 2009, fiscal and political, to establish a sound strategy for restr

ucturing the financial system and fiscal consolidation. What made this room? Very simple controls and deferred capital expenditure adjustment until 2010. So, not only that margin appears to have allowed social crisis more bearable for the population, but even estimated a condition that has meant that the care plan to meet its objectives: to stabilize the economy and the establishment of new foundation for economic growth.

However, caution should be applied when considering that Iceland is an example of the triumph of politics over markets, as is sometimes argued. There are different elements in the Icelandic experience from the standpoint of democracy,a referendum as the agreement to return to the UK and the Netherlands the moneythese countries used to guarantee Icesave deposits, or the fact that after the crisis has drawn up a new constitution through a participatory process fairly.

But the democratic response may not be the only factor that helps explain w

hat happened in Iceland, and may not even be the most important. To give some examples, the Icelandic economy is so small that only capital controls are an obstacle in the global movement of financial markets, forcing to relativize the external resistance to Iceland has been facing to support this policy the Icelandicbank debts were so great when they collapsed it was impossible even to suggest that the Government would endorse in its entirety, making somewhat inevitable bankruptcy option with respect to transactions with the outside Iceland has its owncurrency, which has allowed him to devalue the exchange rate, and it is obviousthat this has to respond to an explicit request, prior to the crisis, to maintain monetary sovereignty, but rather that the process of moving closer to Europebut not fast enough to be crystallized and in joining the euro. Finally, the same President who refused to endorse by signing the return to the UK and the Netherlands attended the Icesave dispute undaunted by the financial bubble growth inprevious years, which makes us think that perhaps there are other factors besides desire to ensure democratic participation - for reasons of political struggle,for example-that help explain why this referendum. In addition, other elements,along with respect to the quality of democracy, which may help explain why Iceland has taken the measures it has taken, among which are the characteristics ofthe Icelandic economy, the political and, perhaps, certain amount of chance.

One last thought may be not only about the motivations that have led theseheterodox policies, but on the measures themselves. A partially nationalized banking sector and capital controls were able to give Iceland greater autonomy from

the outside. But it seems equally clear that the management of the crisis has prevailed a national perspective is perhaps understandable, but it remains questionable from the standpoint of equity. The Icelanders have safeguarded all his mo

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ney, 100% of deposits, while under the Icelandic Icesave dispute has not answered even by the 20,000 euros that the European economic area guarantee to any depositor. Failing that the liquidation of assets among the creditors of the failedbank Icesave owner can change the situation, the result of this measure is thatthe taxpayers in the UK and Holland who are taking the time returns to its depositors in Icesave. And taxpayers are again, this time in Iceland, who have provided their taxes for the security of one's large depositors have not seen Iceland

jeopardize their deposits, they were substantial.

In short, capital controls and the partial nationalization of the banking help greatly to understand why Iceland is making its public finance at a cost that has done nothing but decline in 2009 and 2010. Not forgetting the importance of supporting the IMF, which lent its assistance to strengthen foreign exchange reserves without imposing restrictions on the roadmap posed by the Government toaddress economic recovery. Thus, Iceland and the attitude towards it has maintained the International Monetary Fund are an important case because it shows thatpolicies that deviate even slightly, neoliberal pattern, may provide greater leeway to governments. A margin that, if used well, as would seem to be happening in Iceland, would expand the opportunities for a government will manage a crisis

approaches simultaneously addressing equity and macroeconomic stabilization, andboth areas of performance presented as mutually exclusive eyes of citizens.

However, it seems harsh to say that Iceland is the champion of democratic politics against markets, nor should one forget that the measures taken by Iceland have serious questions when considered from the point of view of equity between citizens of different countries. At a time when there is a need to find reference for public action in struggling economies, it is certainly appropriate to refer to Iceland as an example of economic policy alternative to the strictly orthodox, and so far it seems that successful-but should not seek to attribute to Iceland powers that are far from reality.