8 February 2009

Iceland: downfall of 'a foolish little nation'

Icelanders are not given to public demonstrations, but last month a mob pelted eggs at the car of the prime minister, Geir Haarde. Out came the tear gas and out went Haarde's Right-leaning coalition government. The Left-wing coalition now serving as a caretaker government, until elections in April, is headed by 66-year-old Johanna Sigurdardottir.

Respected rather than loved, she is a traditional Left-winger. Except for a few traditionalists in the backwoods, no one cares that she is a lesbian, having swapped the father of her children for her current partner. What matters is that she harks back to another world, before the rise of Iceland's mini-oligarchs, the group of 30 or so men and women who, from the mid-Nineties, took an isolated, conservative society and transformed it into a freewheeling outpost of capitalism. Some are well known in Britain. Jón Ásgeir Jóhannesson, 41, typified the new elite, the so-called Viking Conquerors. He set up a supermarket chain which blossomed into Baugur. As his wealth grew, so did his ambition. He acquired a yacht, a house with a bullet-proof panic room and a beautiful wife, Ingibjörg Pálmadóttir. Her customised Mercedes is known in Reykjavik as the "white pearl". A conviction for false accounting did him little harm, but the banking collapse did.

The other big Icelandic name in Britain is Björgólfur Gudmundsson, who snapped up West Ham United. His son Thor was the original Icelandic success story, making millions from a brewing venture in post-Soviet Russia.

The "Vikings" thrived because of the intimacy of society. The political and financial worlds in Reykjavik are intertwined – it is said in Iceland that by the age of 50 you will have met half of the 320,000-strong population. When the three main banks were privatised in 2002, the business elite assumed control, turning them from sober institutions into aggressive vehicles for venture capitalism. The banks were used to financing foreign acquisitions and the domestic companies of their main shareholders. Iceland's financial supervisory system was primitive and the media silent – most of it having been bought up by the Vikings. No one asked where the money was coming from. The seemingly unlimited amounts of cash led to suggestions that they were drawing on "funny money" from Russia. The allegations, so far, have not been substantiated.

'The madness started with privatisation of the banks in 2002 and their transfer to the cronies of the political parties," says Helgason. "The true worth of the banks and the companies they were feeding with loans became obscured. Anything and everything was used to boost balance sheets.

"There is a market for cod fishing quotas," adds Helgason. "A kilo of cod was sold for 4,000 krona in this market. If you went to a shop you could buy it for 1,200 krona. So the cod swimming in the sea was worth more than cod that had been caught – madness."

The madness threatened dire consequences for British savers when Landsbanki, one of the three big banks, set up the internet operation Icesave, offering very competitive interest rates to European savers, including many individuals, councils and charities. When it collapsed, Gordon Brown used anti-terror legislation to freeze the UK assets of Landsbanki and another Icelandic bank, Kaupthing.

For Icelanders, the classifying of their banks with organisations suspected of funding al-Qaeda was an insult too far.

Iceland's foreign minister Ossur Skarphedinsson is still shocked by Brown's actions. "Iceland has always looked on Britain as a helping hand, except during the cod wars. In your darkest hour in the Second World War, we offered you the use of our country. No one in Britain knows that Iceland lost proportionally the same number of people as America in the war. [Many lives were lost on Icelandic ships after its occupation by British and, later, American troops.] To suffer the humiliation of having a friendly country stigmatising you as terrorists was terrible. It was a disgusting thing to do."

A special prosecutor has been appointed to investigate the banking collapse. One of his jobs will be to discover the fate of assets thought to have been transferred to off-shore accounts by some businessmen shortly before the crisis. Rumours abound in the still chic bars of Reykjavik's small centre about billions salted away overseas.

Icelanders are a stoic lot, though, and the feeling in the hot pools where people congregate, is that the nation will, as always, pull through – helped by cheap geothermal energy, healthy fish stocks and a beautiful, if forbidding, landscape, attractive to tourists.

However, the days of hubris, of the Icelandic David taking on the Goliath of international finance, are over. "People don't want blood, but they want the truth," says Helgason. "In the end, we were a foolish little nation who thought we had found some new way of making money. We hadn't."


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