5 Mar 2012

Iceland’s former PM on trial for role in financial crisis

The former prime minister of Iceland appears in court as the first world leader charged over the 2008 financial crisis – but the country remains undecided on whether he should be held accountable.

Former Iceland PM stands trial for role in financial crisis

Geir Haarde is charged with negligence in failing to prevent the financial crisis and faces up to two years in prison if found guilty.

The trial in Reykjavik is thought to be the first of its kind where a world leader is held accountable for presiding over a country’s economic collapse.

Mr Haarde, who was prime minister from 2006 to 2009, pleaded not guilty in his court appearance on Monday, and has previously called the charges “political persecution”.

Iceland’s parliament voted for the trial to take place in 2010, arguing that public accountability is an essential requirement of the recovery process. Mr Haarde’s lawyers appealed the charges, which include failing to inform parliament of the inflated size of the banking system in relation to the economy, but were denied.

The former prime minister has said that the interests of Icelandic citizens were his “guiding light” and that his “conscience is clear”. He blamed the banks for the crisis, saying that the government and regulatory bodies tried their best to prevent the crisis.

‘Gross negligence’

Prior to the collapse of Iceland‘s three biggest banks in October 2008, their combined debt was more than six times the nation’s GDP of 14bn euros.

A 2010 parliament-commissioned report into the financial crisis accused the political leaders at the time of “gross negligence” and found that officials “lacked both the power and the courage to set reasonable limits to the financial system”.

Unlike Greece and Ireland, Mr Haarde and his Independence party allowed Iceland’s banks to fail, rather than accepting massive loans to keep them afloat. But a slight growth in the country’s GDP over the last year, as well as the recent upgrade of the country’s debt by Fitch Ratings and the IMF estimate of a 1.1 per cent expansion of domestic growth in 2012, is proof of his policy’s success, Mr Haarde argues.

Critics also say that despite the 2010 report, the charges against the former prime minister are too broad to be legally pinned to one person.

UK accounts in Icelandic banks
During the country’s boom years, Iceland’s three biggest banks – Glitnir, Landsbanki and Kaupthing – had expanded rapidly and had a growing number of customers in the UK, as well as in the Netherlands, under the name of Icesave.

When the banks collapsed, investors lost £3.5bn and the UK and Dutch governments had to reimburse 400,000 citizens who had lost money. It was presumed the money would be paid back to the UK by the Icelandic government. But Icelanders rejected the repayment deal in an April 2011 referendum, leading Gordon Brown, prime minister at the time, to accuse Mr Haarde of “illegal” behaviour.

The matter of repayment of funds to the UK government has now been referred to the European Free Trade Association (EFTA), but the Treasury says it is “assuming” a full recovery of funds.

Iceland divided

Although the trial was approved by parliament, there has since been cross-party criticism of holding one person solely to account, while charges against other ministers serving at the time were rejected.

“I think there are mixed feelings, but there is no-one really crying out that he be found guilty,” Grétar Þór Eyþórsson, law professor at University of Akureyri in north Iceland, told Channel 4 News.

There is a lot of valuable information about the economic collapse that is coming forward and some would say that people will be more aware about what happened once it becomes public. Grétar Þór Eyþórsson, law professor

Just as bankers’ bonuses and banking culture have been scrutinised in the UK in the aftermath of the financial crisis, Iceland is also looking into how parliament and the banking system operate, and the trial is being seen by some as a way of learning from past mistakes.

“Most people think the trial is interesting in itself,” said Mr Eyþórsson. “There is a lot of valuable information about the economic collapse that is coming forward and some would say that people will be more aware about what happened once it becomes public.”

Mr Haarde’s case is the first to be heard at the Landsdomur court, despite being set up in 1905 specifically for trials of cabinet ministers. The “seminal” trial will be a test of the country’s judicial system, said Robert Spano, eminent law professor at the University of Iceland. “This whole scenario has demonstrated that we need to change the system,” he added.

The trial is expected to last for a few weeks, with a verdict expected in around six weeks’ time.