Posted by: gautithor | 12. February, 2009

Definition of “competence” in Iceland

It is absolutely brilliant to listen to the argument Iceland about whether or not the head of the central bank, David Oddson, should resign or not. David has a considerable fan base which he built up during is reign in Icelandic politics and this fan base seems to feel a duty to defend his persona. At the same time, many of those who want him to resign, did criticize him during his time as mayor in Reykjavik and later as prime minister . Therefore, the discussion has somehow deteriorated into a petty mud fight, where the supporters accuse everyone of wanting David out for political reasons.

Now, I could go and try to make a long list of the mistakes I believe have been done by the central bank in Iceland and try to motivate why I think the chairman should resign. But that won’t work, because I’m an Icelander and therefore my opinions must be tainted with politics, right?

I will therefore just point to three very recent blunders which the bank made, at the most critical time in Iceland’s financial history:

1. Oct 9, 2008, shortly after the nationalization most Icelandic banks and collapse of the financial system, the central bank announces a $4bn loan from Russia which would save the country. Later that day, David is forced to issue a statement admitting that it was a misunderstanding. The chairmans explanation was that he got a call from a Russian official very early in the morning and probably wasn’t fully awake and had misunderstood what was said. I fail to see how you could come up with a more pathetic news release from a central bank of a country. See http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3151148/Financial-Crisis-Iceland-gets-4bn-Russian-loan-as-banks-collapse.html

2. Evening of the same day, the chairman of the central bank goes on national television and states that Iceland will not “pay the debts”. At that point it was not obvious which debts he was talking about or whether or not Iceland was legally obligated to pay it. It would have been wise to go early to bed, stop making public statements given the blunder earlier that morning, and prepare to pick up the phone the morning after with a clear head. Needless to say, his statements receive huge amount of attention and call the motives of the Icelandic government into question abroad. This is at a time when Iceland was trying to secure financing to be able to continue foreign trade.

2. As all our foreign creditors were watching, investors shaking in their boots about Iceland’s stability and the whole nation hoping for some stability in leadership, the central bank announces a interest rate decrease in mid October, from about 15% down to 12% (if memory serves). A week later, they increase interest rates again, now up to 18%. As if to defend this unusual instability, David blames the IMF and says the IMF demanded it. Indeed, this interest rate increase was proposed by IMF after the rate cut, but it is likely that the central bank knew of this proposal at the time of the interest rate cut. Furthermore, the last thing you want during crisis is to have the chairman engage in a blame game with the IMF and completely expose himself as unable to make any decision or follow it through. Credibility is completely gone.

So, after all this, and there are more examples, it is not clear to me why the chairman hasn’t had the good sense to resign. Not clear at all.

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