The “Panama Papers,” millions of documents released by a German newspaper, has uncovered major international financial misdealing. The papers were leaked from Mossack Fonseca, a Panamanian law firm, which has set up dozens of offshore tax havens.
The first casualty of the scandal was the conservative prime minister of Iceland, Sigmundur David Gunnlaugsson, who resigned on April 5. He and his wife had hidden their vast wealth in the British Virgin Islands. Their “shell” company Wintris, Inc. was set up by Mossack Fonseca.
Gunnlaugsson defended himself by saying that the transaction was legal, that his wife had paid Icelandic taxes on Wintris’ income, and that the company had lost $4.2 million during the financial crisis of 2008.
At the end of 2009, just before he took his parliamentary seat, Gunnlaugsson sold his share of Wintris to his wife for $1. Critics say that this did not satisfy the government’s rule requiring disclosure of all financial dealings.
During the financial crisis, which nearly destroyed the Icelandic economy, Gunnlaugsson called foreign companies, who held Icelandic bonds and who demanded immediate repayment, “vultures.” The delicious irony is that Wintris was one of those bond holders. Gunnlaugsson obviously had a serious conflict of interest.
Gunnlaugsson is a member of the Progressive Party, which has represented Iceland’s conservative, mostly rural interests since 1916. Over the decades it has governed in coalition with other parties, even the Social Democrats, who are responsible for Iceland’s generous social safety-net.
Iceland, along with the other Nordic countries, has ranked at the top for providing the highest quality of life for its citizens. Iceland’s wealthy are proud of this reputation and they are willing to pay high taxes to support universal health care, child care, and elder care.
The Progressives’ natural coalition partner is the Independence Party, Iceland’s largest, which draws its support primarily from the nation’s businesses. From 1995 to 2007 Iceland’s two conservative parties privatized two major banks, reduced taxes, and decreased the regulation of the economy.
Iceland’s three largest banks became so over leveraged that their debt exceeded the nation’s gross domestic product. As one Icelander quipped: “Iceland is not a country; it’s a hedge fund.” The value of Iceland’s stocks rose nine times and then crashed to only 10 percent of their original value.
A contributor to Wikipedia states that “relative to the size of its economy, Iceland’s banking collapse is the largest suffered by any country in economic history.” Iceland’s temporary financial madness will stand out in history right up there with Holland’s tulip mania of the mid-1600s.
The once frugal Icelanders indulged themselves in an economic boom fueled by easy credit. Their wealth, mainly in the form of inflated house prices, tripled. Finding the best interest rates from foreign banks (3 percent rather than 15 percent at home), many of them took out loans in currencies such as the Euro and the Swiss Franc. When the Icelandic Kronor lost its value (33 percent in 2009 alone), many people were forced to walk away from new luxury cars and homes.
During the winter of 2008-2009, Icelanders, led by a famous gay singer, turned out for the largest protests in their history. The conservative government was forced to resign, and a Social Democratic/Left-Green coalition was elected on April 25, 2009.
The first leftist government in Iceland’s history was faced with gigantic problems, and the people soon became impatient with austerity measures imposed by the International Monetary Fund. The government also made mistakes, the worst being a call for joining the European Union and replacing the Kronor with the Euro.
The fiercely nationalist Independence and Progressive Party leaders were able to woo back voters with promises of mortgage relief and rebuffing foreign creditors, whom the leftist government thought should be paid back. In the 2013 election Icelanders brought back a conservative majority with Gunnlaugsson as prime minister. Recall that one of those creditors was his own company Wintris.
Now, with both the traditional right and left discredited, new political parties are making gains. One is called Bright Future and its leader, the island’s most popular comedian, is the new mayor of the capital Reykjavik. The anarchic Pirate Party, which mixes, incongruently, egalitarian and libertarian policies, is now polling as the largest political force in the country.
Parallels to Southern European politics are instructive, especially in Spain and Greece. Traditional left and right parties have been pushed aside by new parties with big promises and untested leaders. Already it is clear that the future is still not very bright under these new kids on the political block.