Yesterday the IMF published its fifth review of Iceland’s economy since the crisis began. The IMF declared Iceland’s economic progress “impressive” and disbursed a loan tranche of $225m (€136m).

Now if this sounds weird to you, it should do. This is the Iceland that defaulted on all its bank bondholders and this is the Iceland that the IMF warned would be cut off unless it paid all its foreign bondholders. Yet just two years later, the IMF declares that Iceland’s progress has been “impressive” and lends the country money!

Does this sound strange to you? Did not our establishment laugh at the Icelanders and warn that Iceland was a “basket case”? We were told that we were going to be “protected” by the euro in the crisis. Nothing could be further from the truth. The fact is that the euro is now a straitjacket and, without room to manoeuvre, our economy will not recover. Meanwhile Iceland has its own currency, gave two fingers to the bondholders and is moving ahead “impressively”.

Back in that period when the Irish establishment was smearing Iceland as a basket case, I decided to visit the country to see what exactly a “basket case” looked and felt like. The first thing I noticed in March 2009 — six months after the crisis — was that the only people who appeared to be really worried in Reykjavik were English bankers in the foyer of the Hilton who were looking for their money back.

I put this to the acting finance minister of Iceland and he retorted: “We have no money, it is all gone.” Then he paused and looked up at me and quipped without irony: “But we can give them fish, if they like.”

He wasn’t intending to be funny. Here was a man who had reached the point where he knew where his negotiating position was. The money was gone, they weren’t going to borrow any more to pay old debts and it was up to the creditors to realise that, in the future, Iceland was going to depend on its own resources, and the bondholders — who owned close to €60bn worth of debt — would have to line up in an orderly queue and wait to see what they would get. This is normal business practice and this is what they applied.

When they realised how disastrous the banks’ balance sheets were, the Icelanders decided that the thing to do with bankrupt banks was to put them into administration. In contrast, in Ireland and in Greece, under the delinquent governance of the ECB, this normal procedure has not been allowed to take place in order to “save” the euro.

So Ireland and Greece have tied themselves up in knots and condemned their people to deep recessions in order to save the currency that was supposed to give them protection.

Rather than allow capitalism take its route we, due to some sort of bizarre Euro-corporatism, are being penalised to save a currency. If the currency is made stronger by penalising its weaker members, how can such a currency be in the best interests of the whole European family?

But this is where we find ourselves. So what should we do?

Regular readers of this column will know that I have believed and written for over six years now that Ireland would be much better off outside the euro, but given that the establishment will never countenance such a move towards economic sovereignty, we must accept that we are locked into this currency arrangement until it blows apart, undermined by its own contradictions.

We must first accept that the Irish banks are bust. They might not function as proper banks ever again and we should stop propping them up.

There is guff being spread again by the establishment that a default on the banks’ debts would destroy the banks. But this is nonsense and yet another example of voodoo economics.

The banks are in this moribund position not because of what they are doing now but because of what they did between 2004 and 2008. The problem is still the mad lending which went on in the boom. A default on the bondholders is the consequence of the banks being already bust — not the thing which will cause the banks to go bust.

Not for the first time, the Irish mainstream has got its analysis back to front, spinning like mad in order to protect its own interests. In this sham, they are aided and abetted by the European elite.

But if we defaulted on the bondholders as Iceland did and let them fail, what might replace them?

Obviously new banks would replace the old banks. The new banks would have new capital, which would be safe and unencumbered by the mistakes of the past. If a new bank set up tomorrow, who wouldn’t put their deposits in it?

But — and now here’s the snag — a new bank must have a licence to set up. But how does it go about it? It applies to the Central Bank. However, the Central Bank is, at the moment, caught in the after-effects of its own failings. Having failed to regulate the banks in the boom, it is now in danger of over-regulating in the aftermath.

What I mean here is that it is over-compensating now for its previous failures by making capital requirements too high. This over-regulation is a mistake, the mirror image of its under-regulation mistake in the boom.

Over-regulation means that there are barriers to entry for new players, which are sufficient to deter them from coming in. But the over-regulation is unnecessary. It is a classic example of the generals fighting the last war. What we need now is to be open to business for new incumbents rather than saddling them with regulation, which is more about the Central Bank being prudent after the event.

This leaves us in the worst of all worlds: we had too little regulation when there were too many banks operating in Ireland and now we have too much regulation when there are too few!

Thus the credit crunch, to use a Bertieism, gets crunchier, amplifying the inappropriateness of the euro as our currency, weakening the economy and in so doing, from a political point of view, weakening the very European integration commitment our membership of the euro was supposed to enhance!

David McWilliams hosts the Dalkey Book Festival June 17 to 19.

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