Panama Papers: Iceland PM’s resignation heralds importance of popular reaction

Panama Papers: Iceland PM’s resignation heralds importance of popular reaction

Only days after the Panama Papers leak revealed a trove of confidential and incriminating financial documents, a head of state has resigned.

In a powerful show of popular protest, Icelanders have taken to the streets to show dissatisfaction and disappointment in their Prime Minister, Sigmundur Davíð Gunnlaugsson. His resignation shows the impact of such protest. Whether public outcry will spark similar regime changes elsewhere remains to be seen.

When the news of the Panama Papers broke, and Gunnlaugsson’s name appeared in them, his first reaction was to deny wrongdoing and evade questions about the case. He abruptly ended an interview with a journalist inquiring about the PM’s link to an offshore firm, Wintris. Gunnlaugsson had “sold” his 50% stake in Wintris in 2009 for $1 to his wife, but retained managing authority. She is formally the owner of the firm.

Gunnlaugsson’s involvement with Mossack Fonseca — the massive offshore law firm from which the Panama Papers leaked — allegedly began in 2007, when he and his wife set up Wintris as a vehicle for inherited wealth. The existence of the offshore firm has since become quite a conflict of interest, seeing as it held stakes in three major Icelandic banks that went bankrupt during the financial crisis. Gunnlaugsson, the Prime Minister since 2013, has been able to influence the value of the bank bonds held by his shell company, as he was part of the post-bankruptcy negotiations.

Source: AFP

Source: AFP

Iceland’s social and financial landscape

As the political head of a nation that felt the full force of the financial crisis, it was an especially high risk for Gunnlaugsson to stash away assets in a tax haven.

Iceland did not merely weather a recession; what happened in Iceland was more like a depression. The Icelandic stock market fell by 90%, unemployment increased by a factor of nine, and inflation rose by a more than 18%. Furthermore, the country’s biggest banks — Kaupthing, Glitnir and Lansbanki — all went belly-up. Iceland has certainly endured tough financial times as of late.

Iceland is unique in another aspect as well; it has jailed 26 bankers involved in the failed banks to a total of 74 years in prison. They were charged for crimes such as insider trading, fraud, money laundering, misleading markets, breach of duties and lying to the authorities.

This has sparked interest and attention in Iceland internationally, due to the lack of similar trials in Europe and the United States. In contrast, other countries responded to the financial meltdown by simply doling out a few fines — a cost which is passed on to the shareholders, arguably with limited disciplinary effect.

This perhaps explains part of the reason why the news of Gunnlaugsson featuring in the Panama Papers caused such anger among ordinary Icelanders. The popular attitude favours justice, as well as clean conduct in business and in government. Iceland ranks as number 13 on Transparency International’s Corruption Perception Index, behind the other Nordics, but not by much.

Political unrest leads to Gunnlaugsson’s downfall

On Tuesday evening, a crowd of 22,000 people demonstrated outside Parliament, calling for Gunnlaugsson’s resignation. Keeping in mind the size of Iceland’s population – 323,000 – the fact that 22,000 turned up is quite significant, and demonstrates the scale of unrest felt nationally.

Although Gunnlaugsson at first seemed to dither about whether to step down or not, the Icelandic government has indicated that the Prime Minister has indeed resigned.

The position as Prime Minister is to be filled by the deputy chairman of the Progressive Party, Sigmundur Ingi Johannsson, who is currently Minister of Fisheries and Agriculture. Elections previously scheduled for Spring 2017 will now be held this fall.

With Mr. Johannson as Prime Minister, the two governing centre-right parties, the Progressive Party and the Independence Party, can stay in power. They each hold 19 seats in Parliament, consisting of 63 seats in total.

The case of Gunnlaugsson has proven that the risk of popular protest and head-of-state resignation has increased for nations with powerful figures tied to the Panama Papers.

The tolerance of shady tax arrangements is certainly quite low in Iceland, not least in the light of events after 2008. Still, such a swift and powerful reaction to the leak is unlikely to go unnoticed, and it may inspire similar demands elsewhere.

Categories: Europe, Politics

About Author

Mikala Sorenson

Mikala Sorensen is an Economist with regional expertise in Europe. She holds a first class honours degree in Philosophy, Politics and Economics from the University of York and a Masters in Economics from the University of Copenhagen. Having interned at the Danish OECD-delegation in Paris and currently working at the Danish Ministry of Finance, she specialises in politics and macroeconomics. Analysis for GRI is an expression of her own views.