Haarde's Free-Market Embrace May Prompt Backlash by Icelanders

By Tasneem Brogger

Oct. 21 (Bloomberg) -- More than any of its Nordic neighbors, Iceland's Prime Minister Geir Haarde imbibed the economic policies of Margaret Thatcher and Ronald Reagan -- state-asset sales, light regulation and corporate growth abroad through debt.

Now that the hangover has arrived, many of Haarde's countrymen want his Independence Party-led coalition to pay the price for turning one of the world's wealthiest countries per capita into a beggar state staving off depression.

``Many find that the government has mishandled the situation,'' said Thorvaldur Gylfason, a professor of economics at the University of Iceland and a former International Monetary Fund economist. ``A major political realignment will take place at the next election,'' which must be held by May 2011.

That's not soon enough for many of Iceland's 320,000 citizens, as may become clear when the first opinion poll since the country's three biggest banks collapsed into receivership this month is released on Nov. 1.

``We can never ever have a fresh beginning with the same people,'' said G. Birnir Asgeirsson, owner of car retailer Bill.is. ``This was such a big bust, they can't get around it. They can't just move on.''

Ingibjorg Elsa Bjornsdottir, a 42-year-old geologist from Selfoss near Reykjavik, said she will vote for the Left Greens, the biggest opposition party.

`Older Values'

``There's so much anger in the society now because of what has happened,'' she said. ``We're witnessing the death of Reaganism-Thatcherism. We have to go back to our older values. The free market is not doing what it's supposed to be doing.''

That may be an understatement. Iceland was ranked fifth- wealthiest in the world per capita in the UN 2007/2008 Human Development Index. Now, it's facing shortages of imports including food and clothing. Controls on foreign currency payments have been enforced to favor imports of fuel, medicine and food.

The value of Iceland's currency has evaporated and an economy that outgrew the U.S. and euro region every year since 2004 at the least faces a prolonged recession, if not a depression. The economy may shrink more than 10 percent with inflation reaching 75 percent in months, says Danske Bank A/S Chief Analyst Lars Christensen.

The country's main stock index has lost 90 percent of its value, most of it in the past week or so, more than double the decline in neighboring Nordic countries like Norway and Sweden.

In response, Haarde, 57, and central bank Governor David Oddsson, 60, have held out the begging bowl, seeking to borrow from Russia and the IMF, which hasn't had an aid request from a Western country since 1976, when the U.K. sought a bailout.

Election Call

While Haarde expressed a willingness to negotiate terms with the Washington-based fund two weeks ago, he said in an interview broadcast on RUV television yesterday that the terms haven't been finalized. The government said that day it was ``very close'' to reaching an agreement.

``The people at the IMF are the experts and they're available,'' said Beat Siegenthaler, a senior strategist at TD Securities in London. ``People are really struggling to understand why they're delaying it.''

Steingrimur Sigfusson, leader of the Left Greens, says islanders shouldn't have to wait for an election. The ruling coalition has 43 seats in the 63-seat parliament and Haarde's term is scheduled to end in 2011.

``First, we have to take the rescue measures,'' he said in a telephone interview. ``Then we have to stabilize things. And then there definitely should be an election.''

Sigfusson predicts a shift back to more government oversight and regulatory control.

`Greed a Virtue'

``The main enemy here is the neo-liberal privatization policies,'' he said. ``The big mistake was to make greed a virtue. The most important thing now is that we can shift the basic politics in more sensible and more socially just directions so that we can build a prosperous welfare society.''

Haarde and Oddsson led a cadre of free-marketeers who pushed Iceland in the opposite direction, espousing the ideology of smaller government in the 1980s and 1990s. Oddsson, a former mayor of Reykjavik and manager of the city's health insurance fund, was prime minister from 1991 to 1999. He was appointed central bank governor in 2004.

Haarde, who holds a master's degree in international relations from Johns Hopkins University, spent more than two decades climbing Iceland's political ladder. He entered parliament in 1987, became finance minister in 1998 and Independence Party chairman in 2005. He assumed the premiership in 2006.

When Oddsson was prime minister and Haarde was finance minister, the government began selling the biggest state-owned banks, cut taxes and otherwise sought to free the economy from ``the shackles of political intervention,'' as an October 2001 government report put it.

Eliminating Distortions

The government promoted asset sales to ``increase economic efficiency by eliminating the distortions inherent in state- ownership,'' Haarde said in February 2003.

This contrasted with the Scandinavian welfare-based, high-tax programs of Norway, Sweden and Denmark. The tax cuts reduced 2007 revenue -- about $7.8 billion -- to 41.4 percent of the economy, compared with 48.9 percent in Denmark and 48.2 percent in Sweden, according to the Organization for Economic Cooperation and Development.

Freed of government control, banks racked up debt that grew to 12 times the size of the economy, most of it in foreign currency loans they now can't afford to repay.

The banks in turn lent to entrepreneurs, including 40-year- old Jon Asgeir Johannesson, chairman of retail investor Baugur Group hf. His company bought stores including Hamleys toy shop and clothing retailer Karen Millen, and now Johannesson is trying to sell parts of his business to raise cash and offset some of the debt held in Iceland's collapsed banks.

`Scar on Our Souls'

Much of the Icelanders' anger is directed at Oddsson, a lawyer by training, who spearheaded the sale of the banks.

``The governors of the central bank have failed miserably, and there are vocal demands now from all directions for their removal,'' said Gylfason. ``Precious time has been lost.''

Sigfusson, the opposition leader, agrees the bank made mistakes, though says the ``overall responsibility'' lies with Haarde.

``It would be too cheap for the government just to point to one official and get rid of him,'' he said. ``It's going to be a scar on our souls for a long time.''

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;