Iceland’s ex-PM on trial for failure to halt financial crash

Iceland’s top three banks all collapsed in late 2008 after years of debt-fuelled expansion. The country of just 320,000 people was forced to borrow around $10 billion from the International Monetary Fund and other lenders.

Parliament voted in 2010 to prosecute Haarde over the crisis at a special court of impeachment – the Landsdomur – being convened for the first time since its creation in 1905. He denies the charges.

“None of us realised at the time that there was something fishy within the banking system itself, as now appears to have been the case,” Haarde told the court in opening questions from a special prosecutor investigating crimes linked to the crisis.

Many Icelanders blame a small and closely connected group of businessmen, bankers and politicians for the crisis.

Haarde, prime minister from 2006 to early 2009, is charged with gross negligence for failing to take proper measures to prepare for an impending financial crash. He faces up to two years in prison if found guilty.

He is also accused of failing to rein in banks whose balance sheets grew to around nine times the size of the nation’s economy in the years before the crisis. He said: “I believe that we did everything possible to urge the banks to downsize their balance sheets.”

Iceland’s big banks were all taken over by the state in late 2008 after the credit crunch sparked by the collapse of Lehman Brothers. It ring-fenced the domestic operations and let the international arms go bankrupt.

“We believed until the end that saving one of the banks would be sufficient,” Haarde said. “It wasn’t until the last few days before the collapse that we, or certainly I, realised how interlinked they all were … By then, of course, it was too late.”

The economy nosedived and the country was forced to impose capital controls to prop up the value of its krona currency.

It also became embroiled in a damaging fight with Britain and the Netherlands over $5bn of losses suffered by foreign depositers in Iceland’s banks.

The country’s economy has since started to recover.

Prosecutors say the government had a duty to step in to prevent the banks becoming too big to save in the event of a crisis and handing the burden of their debts on to taxpayers.

In February, top executives at Kaupthing Bank were indicted on charges of fraud and market manipulation.

Haarde has pleaded not guilty and sought to have all charges dismissed, calling the proceedings “preposterous”.

He has insisted Icelanders’ interests were his “guiding light,” and he blamed the banks for the crisis, saying government officials and regulatory authorities tried their best to prevent the crisis and that his “conscience is clear”.

The trial is expected to last until mid-March, with the court taking another four to six weeks to deliver its verdict.