The fallout from Iceland’s financial crisis offers a conflict management case study in dealing with those who have suffered a significant blow to their self-esteem.
Back in late 2008, Iceland teetered on the edge of bankruptcy following the collapse of its three largest banks.
Since becoming independent of the government in 2002, the banks had pursued a strategy of borrowing money abroad and offering high-interest loans to online lenders—a strategy that failed spectacularly when the global credit crisis hit. Most notably, investors in the United Kingdom and the Netherlands lost 4 billion euros ($5.8 billion) in the Landsbanki’s “Icesave” Internet savings accounts.
After the government of Iceland failed to guarantee the Landsbanki deposits of foreigners, the British and Dutch governments reimbursed 400,000 of their citizens for the loss.
In negotiations abroad, the Icelandic government agreed to guarantee the liabilities in exchange for loans from Britain and the Netherlands, as well as from Germany. But that promise drew heat back at home, where taxpayers insisted they should not be responsible for Landsbanki’s losses.
Meanwhile, Iceland received a $4.6 billion bailout package from four Nordic countries and the International Monetary Fund.
Over the next several years, a series of negotiations unfolded—with the British and Dutch governments and within Iceland’s parliament—in search of a compromise solution to the question of loan repayment.
Conflict Management in Iceland
Twice, Icelanders voted on whether to enact repayment bills passed by their parliament. The government estimated that the sale of Landsbanki’s assets would cover 90% of repayment costs, leaving only a fraction for taxpayers to cover. Yet voters rejected both bills.
Upon the second rejection, the EFTA Surveillance Authority, an international court, moved forward with legal proceedings against Iceland to help Britain and the Netherlands regain their lost funds.
Iceland’s credit rating fell to new lows, and its pending application to join the European Union, which could be vetoed by Britain or the Netherlands, was jeopardized.
Why did Icelanders turn down a deal that, though odious and painful, offered a clear path toward helping their country recover from its economic nightmare? We consider several explanations, particularly the role of pride in negotiation.
Persistent Biases, Trying Times with Conflict Management in Iceland
Several common cognitive biases may have been behind the majority of Iceland voters’ decision to reject the foreign repayment plans.
First, as humans, we’re hardwired to focus on our own point of view.
We have more difficulty taking the perspective of others, especially those we do not know. Because of this egocentrism, Icelanders may have focused more on their own economic plight than on the hardship faced by British and Dutch investors and taxpayers who were
also victims of Landsbanki’s errors.
Second, when making decisions, we often allow short-term concerns to dominate long-term concerns that are equally or even more important.
The prospect of accepting higher taxes in the near future to cover foreign losses may have been more vivid to Icelanders than the thought of a lengthy legal battle that would keep their economy weak and isolated for years.
Third, when people refuse to negotiate as a matter of principle, impasse is likely. Many Icelanders categorically refused to cover the losses of irresponsible banks—a principle that overrode pragmatic reasons for accepting any of the agreements their government negotiated.
Though it’s admirable to stand by our beliefs, we must assess whether our principles are worth the sacrifices they could incur.
A Blow to National Pride
A fourth possible factor in Icelanders’ refusal to accept a negotiated agreement was their sense of national pride.
During the financial crisis, the island nation of 300,000 went from prosperity to near bankruptcy almost overnight. As their government turned to foreign governments and the International Monetary Fund for handouts, Icelanders’ sense of national pride was severely wounded.
A key decision then U.K. prime minister Gordon Brown made at the height of the crisis didn’t help matters. As Iceland’s banks crashed, Brown’s administration took the unprecedented step of invoking anti-terrorism legislation, created in the aftermath of September 11, 2001, to freeze Landsbanki’s U.K. assets.
By treating Iceland like a terrorist state, Brown deeply offended and antagonized its citizens.
The decision changed the debate “from a question of economics to a question of national identity and stymied any chance of a negotiated agreement from day one,” Eirikur Bergmann, a political scientist at Bifrost University in Iceland, told the Wall Street Journal.
By the time the second referendum finally took place, Brown was no longer in office. But the sting of his decision lingered, and the majority of Iceland’s voters took the opportunity to register their disapproval with the British and Dutch governments.
In his book Bargaining with the Devil: When to Negotiate, When to Fight (Simon & Schuster, 2010), Harvard Law School professor Robert Mnookin writes of tribalism as a common trap that prevents us from negotiating in cases where we probably should. He defines tribalism as the tendency to see one’s own side as “familiar and reliable,” and the other side as an out-group unworthy of trust.
Tribalism is likely to be especially strong on an island that has been largely self-sufficient for centuries.
Help Them Save Face
There is nothing wrong with feeling proud of our organization, group, or country.
But when pride causes us to pass up potentially beneficial negotiating opportunities, it deserves a second look.
In your own work, you may have dealt with counterparts whose pride has been wounded or is in jeopardy, such as a job candidate who has been unemployed for a long time or a company that has made an embarrassing mistake. In such cases, it will be worth your while to help that party save face during the negotiation—that is, to contribute to maintaining or rebuilding her sense of self-worth.
Though the British government had an obligation to protect its citizens from harm, Brown might have recognized that treating Iceland like a terrorist state could have repercussions for the country’s willingness to negotiate debt repayment.
Even if invoking the anti-terrorism legislation was the best option, Brown might have tried to soften the blow with conciliatory public language or private dialogues with Icelandic officials aimed at getting them on board with his decision.
You might also help a counterpart save face by offering her a “graceful retreat” from a tough stance, write Deborah M. Kolb and Judith Williams in their book Everyday Negotiation: Navigating the Hidden Agendas in Bargaining (Jossey-Bass, 2003).
When a negotiator realizes that staking a firm position was a mistake, the prospect of an embarrassing surrender could make him even more resistant to backing down. At this point, consider involving a third party to help smooth things over. In the Icesave story, the Dutch government might have stepped in to negotiate with the Icelandic government when talks with the U.K. grew tense.
What if a counterpart has offended your own sense of pride?
Before painting him as the devil, Mnookin recommends that you systematically examine the expected costs and benefits of dealing with him.
That means studying what might happen if you refuse to negotiate and looking at your alternatives to the current deal. According to Mnookin, because our vision may be blurred by biases such as tribalism in these situations, it is usually wise to err on the side of negotiating rather than avoiding negotiation.
Adapted from, “Negotiating When Pride is at Stake,” first published in the July 2011 issue of Negotiation.