Can Iceland and Latvia pay the foreign debts run up by a fairly narrow layer of their population? The European Union and International Monetary Fund have told them to replace private debts with public obligations, and to pay by raising taxes, slashing public spending and obliging citizens to deplete their savings.
Resentment is growing not only towards those who ran up the debts - Iceland's bankrupt Kaupthing and Landsbanki, with its Icesave accounts, and heavily geared property owners in the Baltics and central Europe - but also towards the foreign advisers and creditors who put pressure on these governments to sell off the banks and public companies to insiders. Support in Iceland for joining the EU has fallen to just over a third of the population, while Latvia's Harmony Centre party, the first since independence to include a large segment of the Russian-speaking population, has gained a majority in Riga and is becoming the most popular national party. Popular protests in both countries have triggered rising political pressure to limit the debt burden to a reasonable ability to pay.
This political pressure came to a head over the weekend in Reykjavik's parliament. The Althing agreed a deal, expected to be formalised today, which would severely restrict payments to the UK and Netherlands in compensation for the cost of bailing out their Icesave depositors.
This agreement is, so far as I am aware, the first since the 1920s to subordinate foreign debt to the country's ability to pay. Iceland's payments will be limited to 6 per cent of growth above 2008's gross domestic product. If creditors thrust austerity on the Icelandic economy there will be no growth and they will not get paid.
A similar problem was debated 80 years ago over Germany's first world war reparations. But many policymakers remain confused over the distinction between squeezing out a domestic fiscal surplus and the ability to pay foreign debts. No matter how much a government may tax its economy, there is a problem turning the money into foreign currency. As John Maynard Keynes explained, unless debtor countries can export more, they must pay either by borrowing or by selling off domestic assets. Iceland today has rejected these self-destructive policies.
There is a limit to how much foreign payment an economy can make. Higher domestic taxes do not mean a government can translate this revenue into foreign exchange. This reality is reflected in Iceland's position on its Icesave debt - estimated to amount to half its entire GDP.
In taking this stand, Iceland promises to lead the pendulum swing away from the ideology that debt repayments are sacred.
In the post-Soviet economies the problem is that independence in 1991 did not bring the hoped-for western living standards. Like Iceland, they remain dependent on imports. Their trade deficits have been financed by the global property bubble - borrowing in foreign currency against property that was free of debt at independence. Now the bubble has burst and it is payback time. No more credit is flowing to the Baltics from Swedish banks, to Hungary from Austrian banks or to Iceland from Britain and the Netherlands. Unemployment is rising and governments are slashing healthcare and education budgets. The resulting economic shrinkage is leaving large swathes of property in negative equity.
Austerity programmes were common in developing countries from the 1970s to the 1990s, but European democracies have little tolerance for such an approach. As matters stand, families are losing their homes and emigration is accelerating. This is not what capitalism promised.
Populations are asking not only whether debts should be paid, but - as in Iceland - whether they can be paid. If they cannot be, then trying to pay will only shrink economies further, stopping them becoming viable.
Will Britain and the Netherlands accept Iceland's condition? Trying to squeeze out more debt service than a country could pay requires an oppressive and extractive fiscal and financial regime, Keynes warned, which in turn would inspire a nationalistic political reaction to break free of creditor-nation demands. This is what happened in the 1920s when Germany's economy was wrecked by the rigid ideology of the sanctity of debt.
A pragmatic economic principle is at work: a debt that cannot be paid, will not be. What remains an open question is just how these debts will not be paid. Will many be written off? Or will Iceland, Latvia and other debtors be plunged into austerity in an attempt to squeeze out an economic surplus to avoid default?
The latter option may drive debt-laden countries in a new direction. Eva Joly, the French prosecutor brought in to sort out Iceland's banking crisis, warned this month that Iceland would have little left but its natural resources and strategic position: "Russia, for example, might well find it attractive." The post-Soviet countries are already seeing voters shift away from Europe in reaction to the destructive policies the EU supported.
Something has to give. Will rigid ideology give way to economic reality, or the other way round?
The writer is professor of economics at the University of Missouri
http://www.ft.com/cms/s/0/610316c4-8ac4-11de-ad08-00144feabdc0.html?nclick_check=1
Showing posts with label iceland. Show all posts
Showing posts with label iceland. Show all posts
21 August 2009
12 May 2009
Gordon Brown Spills the Beans on the IMF
Michael Hudson tells us more about Icland, the UK the IMF and the bailouts.
This shows how urgently Iceland needs to straighten out its banking mess and restructure the economy to free the population from the unique debt squeeze its laws and a decade of neoliberal mismanagement have created. Now that the banks have been de-privatized and taken back into the public domain, credit needs to be turned back into what it was before – a public utility. But this cannot be organized without knowing how much can be recovered from the failed banks to back domestic depositors. And the reports from the British accounting consultancy firms still have not been made public. Only the major creditors have received copies!
Remarkably, the government said last week that they might not be released at all. The inference is that the crooked dealing has been so damning to vested Icelandic interests that it would cause a new political crisis to resolve the deepening economic crisis. The fear is that a sweetheart deal has been made with the kleptocrats whose reckless behavior (and it seems probable, illegitimate bank maneuverings with offshore accounts) plunged the economy into negative equity in the first place. The better the financial health of the failed banks appears on paper, the more presumably will be left over to pay foreigners – including the offshore accounts of the banks’ former owners in their own dealings with the banks. So from the vantage point of Icelandic depositors and debtors to these banks, a realistic pessimistic estimate of the banks’ position would protect them, while an unrealistic optimism would enable foreigners to siphon off much more money, leaving less for Iceland.
In fact, the IMF has failed to oblige Iceland’s government to conform to the Letter of Intent it signed on November 15, 2008. This letter obliged Iceland to “bring loan values in line with expected market values” (#4), and to “include an assessment of whether or not managers and major shareholders have mismanaged or abused the banks” (#6). No such assessment has been made, and as described above, loan values are exceeding market values by a rising degree as property, businesses and households fall into negative equity status.
The Icelandic government’s agreement with the IMF promised to make the bank assessments public upon their completion “by end-march 2009” (#10). This has not been done – perhaps (one worries) because the next sentence says that the government “will discuss in advance with IMF staff any changes to the adopted strategy.” In view of the secrecy that now shrouds the events that pushed the banks under, one can only wonder at what developments have prompted the government and IMF to change strategy.
What the IMF did demand – as it always does – is that once the government bails out the bankers for their bad loans, the whole privatization process is to start all over again, paving the groundwork for yet new rip-offs. In view of the fact that “the banking crisis will significantly constrain the public sector and burden the public for years to come” as the government pays off bad loans (#12), the agreement pledges (#14) that “A significant reduction in government debt through the sale of the government’s stake in the new banks could help reduce the needed fiscal adjustment over the medium term.”
Belatedly, the population is now up in arms – two weeks after the election! To stabilize the currency, Iceland has agreed to IMF conditionalities that prevent the government from pursuing the counter-cyclical Keynesian fiscal policy that Mr. Obama is leading in the United States. Unless the debt pressure is alleviated, Icelandic homeowners and businesses will be obliged to run down their savings each month until they are depleted – at which time they will lose their homes and forfeit their businesses to foreclosing creditors.
So on Saturday afternoon, May 9, a “pots and pans” protest was conducted outside of Iceland’s Parliament in Reykjavik. The scenario is much like that of the color revolutions staged by U.S. neoliberals throughout the post-Soviet states. But Iceland’s kitchen-utensil revolution is organized as a protest against neoliberal policies. The protesters have picked up the thread where it left off last October a similar set of protests dislodged the Independence Party from power. The National Labor Association has broken from the new Social Democratic coalition government, reflecting the growing anger among Icelanders at their debt squeeze.
Mr. Brown’s statement that he intends to use IMF leverage to deepen Iceland’s debt position by forcing its government to bail out British depositors has rubbed salt in this wound – precisely by demanding for his country what Icelanders are not receiving from their government! Its citizens want to know what pressure the country is responding to if it intends to put the interest of foreigners before their own. This double standard has motivated the population to act in a more confrontational way than would have occurred had the problem been merely domestic. Icelanders want to be told the magnitude of the financial problem – and apparent dishonesty and crony dealings – that the government is keeping secret. The answer may at long last move Iceland out of its post-feudal oligarchy. Its neoliberal privatizations and pro-financial policies may turn out not to be as entrenched and irreversible as the kleptocrats had hoped would be the case.
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
http://www.counterpunch.org/hudson05112009.html
This shows how urgently Iceland needs to straighten out its banking mess and restructure the economy to free the population from the unique debt squeeze its laws and a decade of neoliberal mismanagement have created. Now that the banks have been de-privatized and taken back into the public domain, credit needs to be turned back into what it was before – a public utility. But this cannot be organized without knowing how much can be recovered from the failed banks to back domestic depositors. And the reports from the British accounting consultancy firms still have not been made public. Only the major creditors have received copies!
Remarkably, the government said last week that they might not be released at all. The inference is that the crooked dealing has been so damning to vested Icelandic interests that it would cause a new political crisis to resolve the deepening economic crisis. The fear is that a sweetheart deal has been made with the kleptocrats whose reckless behavior (and it seems probable, illegitimate bank maneuverings with offshore accounts) plunged the economy into negative equity in the first place. The better the financial health of the failed banks appears on paper, the more presumably will be left over to pay foreigners – including the offshore accounts of the banks’ former owners in their own dealings with the banks. So from the vantage point of Icelandic depositors and debtors to these banks, a realistic pessimistic estimate of the banks’ position would protect them, while an unrealistic optimism would enable foreigners to siphon off much more money, leaving less for Iceland.
In fact, the IMF has failed to oblige Iceland’s government to conform to the Letter of Intent it signed on November 15, 2008. This letter obliged Iceland to “bring loan values in line with expected market values” (#4), and to “include an assessment of whether or not managers and major shareholders have mismanaged or abused the banks” (#6). No such assessment has been made, and as described above, loan values are exceeding market values by a rising degree as property, businesses and households fall into negative equity status.
The Icelandic government’s agreement with the IMF promised to make the bank assessments public upon their completion “by end-march 2009” (#10). This has not been done – perhaps (one worries) because the next sentence says that the government “will discuss in advance with IMF staff any changes to the adopted strategy.” In view of the secrecy that now shrouds the events that pushed the banks under, one can only wonder at what developments have prompted the government and IMF to change strategy.
What the IMF did demand – as it always does – is that once the government bails out the bankers for their bad loans, the whole privatization process is to start all over again, paving the groundwork for yet new rip-offs. In view of the fact that “the banking crisis will significantly constrain the public sector and burden the public for years to come” as the government pays off bad loans (#12), the agreement pledges (#14) that “A significant reduction in government debt through the sale of the government’s stake in the new banks could help reduce the needed fiscal adjustment over the medium term.”
Belatedly, the population is now up in arms – two weeks after the election! To stabilize the currency, Iceland has agreed to IMF conditionalities that prevent the government from pursuing the counter-cyclical Keynesian fiscal policy that Mr. Obama is leading in the United States. Unless the debt pressure is alleviated, Icelandic homeowners and businesses will be obliged to run down their savings each month until they are depleted – at which time they will lose their homes and forfeit their businesses to foreclosing creditors.
So on Saturday afternoon, May 9, a “pots and pans” protest was conducted outside of Iceland’s Parliament in Reykjavik. The scenario is much like that of the color revolutions staged by U.S. neoliberals throughout the post-Soviet states. But Iceland’s kitchen-utensil revolution is organized as a protest against neoliberal policies. The protesters have picked up the thread where it left off last October a similar set of protests dislodged the Independence Party from power. The National Labor Association has broken from the new Social Democratic coalition government, reflecting the growing anger among Icelanders at their debt squeeze.
Mr. Brown’s statement that he intends to use IMF leverage to deepen Iceland’s debt position by forcing its government to bail out British depositors has rubbed salt in this wound – precisely by demanding for his country what Icelanders are not receiving from their government! Its citizens want to know what pressure the country is responding to if it intends to put the interest of foreigners before their own. This double standard has motivated the population to act in a more confrontational way than would have occurred had the problem been merely domestic. Icelanders want to be told the magnitude of the financial problem – and apparent dishonesty and crony dealings – that the government is keeping secret. The answer may at long last move Iceland out of its post-feudal oligarchy. Its neoliberal privatizations and pro-financial policies may turn out not to be as entrenched and irreversible as the kleptocrats had hoped would be the case.
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
http://www.counterpunch.org/hudson05112009.html
11 April 2009
Iceland, Hudson and debt peonage ~ Take it to the bankers
First, Iceland needs to take a census of the magnitude of debts owed at home and abroad, and of the institutions to which these debts are owed. Second, it needs to assess the economy’s ability to pay these debts. This was the principle on which the world’s creditor nations founded the Bank for International Settlements in 1931, to assess Germany’s capacity to pay. Reference must be made both to the magnitude of debt relative to current price trends for the collateral supposedly backing this debt, and to the economy’s ability to produce a domestic-currency and foreign-exchange surplus over and above basic needs, including capital replenishment to grow at historical rates over time.
By insisting on a fully transparent financial analysis of who owes how much to whom, Iceland can toss the ball back into the creditors’ court and ask the bankers to explain just how they propose that Iceland should pay – and what they anticipate will be the economy-wide effect of such payment. How much can Iceland afford to pay in the next few years without losing its democratic home ownership and property ownership patterns and without abandoning its social democratic public policies? How can Iceland pay its debts without bankrupting itself, abandoning its social democracy and polarizing its hitherto homogeneous population between a tiny creditor oligarchy and the rest of the population? The island is in danger of creating a new ruling class that will control its destiny for the next century. Again, Adam Smith warned that financial oligarchies act with concern only for how much they can extract, not what they can help produce. They are not good forward planners and do not act responsibly because it is easier for creditors to strip assets than to create new capital.
In taking this position Iceland will simply be following the moral philosophy laid down by every major religion and every body of ancient and modern law as a core principle: the idea that credit must be kept within the ability to pay. It is obvious enough that global lenders have extended credit far beyond Iceland’s ability to pay. For over two centuries the United States has an excellent tradition in how to deal with this problem. Already in the colonial period New York State enacted the Fraudulent Conveyance law, which has remained on the books ever since New York joined the new nation. The problem it faced was British creditors and speculators coming to upstate New York to cheat local farmers out of their rich, well-situated land. The ploy was to extend a loan to a needy farmer, and then call it in just before harvest-time when the debtor lacked the money to pay. Alternatively, the speculator might simply lend more than the farmer could afford to pay even under normal conditions. So New York blocked this predatory practice by passing a law saying that if a bank or other creditor made a loan without knowing just how the debtor was to repay it, the loan would be declared null and void. It would be wiped off the books.
This law received considerable attention in the 1980s when Drexel Burnham and its emulators began providing junk-bond credit to corporate raiders. Companies defended themselves by pointing out that the only way that these high-interest bonds could be paid was by breaking up the target company and downsizing its labor force. But most of all, the law has international relevance. Most U.S. bank consortia have a New York City lead bank negotiate with Third World governments and other foreign borrowers. So far, none of these debtors have sought to annul their loans on the ground that the only way they can pay is to sell off their public enterprises and other government assets. But the enabling legislation is there, and provides an excellent model for Iceland to emulate. By pursuing this policy Iceland would achieve the kind of economic freedom defined by the classical economists – a market free of technologically unnecessary overhead charges, headed by surplus extraction by a vested oligarchy.
For financial interests, by contrast, their idea free market is one that leaves them free to do the economic planning “free” from government regulation and democratic constraint on their extractive, predatory credit and foreclosure practices. Wherever they have gained sway they have shrunk economies. Since the 1960s their proxies at the IMF and World Bank have imposed austerity programs on Third World countries, extending foreign-currency loans whose effect has been to make these countries more dependent and driven them even deeper into debt. In the post-Soviet economies since 1991, financial strategists have focused on prying away public enterprise, selling it off or using it as collateral for loans. The result of “financializing” these economies has been to provide a free field for predatory vested interests in league with globalized domestic financial oligarchies. In sum, the neoliberal model victimizes debtors, preventing them from paying their debts. Instead of funding new capital formation, it strips economies of their assets and empties them out. Ultimately this drags down the creditor economies themselves, as occurred in ancient Rome, medieval Spain, and the United States and Britain in the Great Depression (not to mention what is unfolding today).
Iceland is facing a bold con job. Should it feel obliged to pay countries that have no intention of ever paying their own debts? To get paid, creditors must convince their prey to accept the falsehood that debts can and indeed should be paid. The lie is that they can be paid without dismantling social democracy, selling off the public domain and polarizing society between creditors and debtors.
The point of reference should be Iceland’s broad long-term picture – the economy’s survival and growth prospects for the future. Foreign-currency loans should be denominated in domestic currency at written-down (and de-indexed) interest rates, or repudiated outright. The guiding principle should be to annul debts taken out under terms that are destructive and extractive.
As for the nitty-gritty of negotiating a resolution to Iceland’s debt crisis, the nation needs to re-frame the terms of the debate by removing fictitious assumptions that have no basis in reality. The first trammel of the mind is the assumption that Iceland needs to negotiate in a way that wins the creditors’ approval in a compromise. It is not possible for any fair agreement to be reached in this way. Any negotiation between creditors and debtors is adversarial, and creditors have spent many decades refining demagogic public relations ploys to divert attention to abstractions about “fairness.” A typical ploy is to ask whether it is fair for some debtors to receive larger write-offs than others. Is it fair for the most highly indebted individuals to gain the most – more than people who were more responsible? The aim here is to inflame popular resentment that some debtors will get a bigger write-off than others (and some debtors are indeed as as guilty as the perpetrators who sold them on the idea that home prices only go up), so as to blame the poor and most highly indebted rather than reckless creditors.
The real issue is the health of the overall economy. The parties seeking the most are not the most indebted individuals, but the largest creditors. Their aim is to increase their dominion over the rest of society. Above all, their aim is to maximize the power of debt over labor. The worse the economy does, the stronger the creditor position will grow. This is a recipe for economic suicide that will lead to outright debt peonage as domestic depression intensifies. Creditors everywhere else in the world are writing down their claims for payment to reflect plunging property values. Iceland has an opportunity to make itself a model test case for economic justice. What better time to post the basic principle of what is to be saved – an unsupportable debt burden that must collapse in the end, or a society’s survival? Will the government defend its citizens from financial predators, or turn the economy over to them? That is the question.
http://www.globalresearch.ca/index.php?context=va&aid=13055
By insisting on a fully transparent financial analysis of who owes how much to whom, Iceland can toss the ball back into the creditors’ court and ask the bankers to explain just how they propose that Iceland should pay – and what they anticipate will be the economy-wide effect of such payment. How much can Iceland afford to pay in the next few years without losing its democratic home ownership and property ownership patterns and without abandoning its social democratic public policies? How can Iceland pay its debts without bankrupting itself, abandoning its social democracy and polarizing its hitherto homogeneous population between a tiny creditor oligarchy and the rest of the population? The island is in danger of creating a new ruling class that will control its destiny for the next century. Again, Adam Smith warned that financial oligarchies act with concern only for how much they can extract, not what they can help produce. They are not good forward planners and do not act responsibly because it is easier for creditors to strip assets than to create new capital.
In taking this position Iceland will simply be following the moral philosophy laid down by every major religion and every body of ancient and modern law as a core principle: the idea that credit must be kept within the ability to pay. It is obvious enough that global lenders have extended credit far beyond Iceland’s ability to pay. For over two centuries the United States has an excellent tradition in how to deal with this problem. Already in the colonial period New York State enacted the Fraudulent Conveyance law, which has remained on the books ever since New York joined the new nation. The problem it faced was British creditors and speculators coming to upstate New York to cheat local farmers out of their rich, well-situated land. The ploy was to extend a loan to a needy farmer, and then call it in just before harvest-time when the debtor lacked the money to pay. Alternatively, the speculator might simply lend more than the farmer could afford to pay even under normal conditions. So New York blocked this predatory practice by passing a law saying that if a bank or other creditor made a loan without knowing just how the debtor was to repay it, the loan would be declared null and void. It would be wiped off the books.
This law received considerable attention in the 1980s when Drexel Burnham and its emulators began providing junk-bond credit to corporate raiders. Companies defended themselves by pointing out that the only way that these high-interest bonds could be paid was by breaking up the target company and downsizing its labor force. But most of all, the law has international relevance. Most U.S. bank consortia have a New York City lead bank negotiate with Third World governments and other foreign borrowers. So far, none of these debtors have sought to annul their loans on the ground that the only way they can pay is to sell off their public enterprises and other government assets. But the enabling legislation is there, and provides an excellent model for Iceland to emulate. By pursuing this policy Iceland would achieve the kind of economic freedom defined by the classical economists – a market free of technologically unnecessary overhead charges, headed by surplus extraction by a vested oligarchy.
For financial interests, by contrast, their idea free market is one that leaves them free to do the economic planning “free” from government regulation and democratic constraint on their extractive, predatory credit and foreclosure practices. Wherever they have gained sway they have shrunk economies. Since the 1960s their proxies at the IMF and World Bank have imposed austerity programs on Third World countries, extending foreign-currency loans whose effect has been to make these countries more dependent and driven them even deeper into debt. In the post-Soviet economies since 1991, financial strategists have focused on prying away public enterprise, selling it off or using it as collateral for loans. The result of “financializing” these economies has been to provide a free field for predatory vested interests in league with globalized domestic financial oligarchies. In sum, the neoliberal model victimizes debtors, preventing them from paying their debts. Instead of funding new capital formation, it strips economies of their assets and empties them out. Ultimately this drags down the creditor economies themselves, as occurred in ancient Rome, medieval Spain, and the United States and Britain in the Great Depression (not to mention what is unfolding today).
Iceland is facing a bold con job. Should it feel obliged to pay countries that have no intention of ever paying their own debts? To get paid, creditors must convince their prey to accept the falsehood that debts can and indeed should be paid. The lie is that they can be paid without dismantling social democracy, selling off the public domain and polarizing society between creditors and debtors.
The point of reference should be Iceland’s broad long-term picture – the economy’s survival and growth prospects for the future. Foreign-currency loans should be denominated in domestic currency at written-down (and de-indexed) interest rates, or repudiated outright. The guiding principle should be to annul debts taken out under terms that are destructive and extractive.
As for the nitty-gritty of negotiating a resolution to Iceland’s debt crisis, the nation needs to re-frame the terms of the debate by removing fictitious assumptions that have no basis in reality. The first trammel of the mind is the assumption that Iceland needs to negotiate in a way that wins the creditors’ approval in a compromise. It is not possible for any fair agreement to be reached in this way. Any negotiation between creditors and debtors is adversarial, and creditors have spent many decades refining demagogic public relations ploys to divert attention to abstractions about “fairness.” A typical ploy is to ask whether it is fair for some debtors to receive larger write-offs than others. Is it fair for the most highly indebted individuals to gain the most – more than people who were more responsible? The aim here is to inflame popular resentment that some debtors will get a bigger write-off than others (and some debtors are indeed as as guilty as the perpetrators who sold them on the idea that home prices only go up), so as to blame the poor and most highly indebted rather than reckless creditors.
The real issue is the health of the overall economy. The parties seeking the most are not the most indebted individuals, but the largest creditors. Their aim is to increase their dominion over the rest of society. Above all, their aim is to maximize the power of debt over labor. The worse the economy does, the stronger the creditor position will grow. This is a recipe for economic suicide that will lead to outright debt peonage as domestic depression intensifies. Creditors everywhere else in the world are writing down their claims for payment to reflect plunging property values. Iceland has an opportunity to make itself a model test case for economic justice. What better time to post the basic principle of what is to be saved – an unsupportable debt burden that must collapse in the end, or a society’s survival? Will the government defend its citizens from financial predators, or turn the economy over to them? That is the question.
http://www.globalresearch.ca/index.php?context=va&aid=13055
1 April 2009
Wall Street on the Tundra
Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance— resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown.
by
Michael Lewis
April 2009
Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to Reykjavík to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He’d never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’ 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. “You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”
How did the economy get into this mess? Visit our archive “Charting the Road to Ruin.” Plus: A Q&A with Michael Lewis. Illustration by Brad Holland.
An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “We can do that.” For a brief moment it appeared that they could. In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, “the most rapid expansion of a banking system in the history of mankind.”
At the same time, in part because the banks were also lending Icelanders money to buy stocks and real estate, the value of Icelandic stocks and real estate went through the roof. From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. Reykjavík real-estate prices tripled. By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry. “Everyone was learning Black-Scholes” (the option-pricing model), says Ragnar Arnason, a professor of fishing economics at the University of Iceland, who watched students flee the economics of fishing for the economics of money. “The schools of engineering and math were offering courses on financial engineering. We had hundreds and hundreds of people studying finance.” This in a country the size of Kentucky, but with fewer citizens than greater Peoria, Illinois. Peoria, Illinois, doesn’t have global financial institutions, or a university devoting itself to training many hundreds of financiers, or its own currency. And yet the world was taking Iceland seriously. (March 2006 Bloomberg News headline: iceland’s billionaire tycoon “thor” braves u.s. with hedge fund.)
Global financial ambition turned out to have a downside. When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market. The exact dollar amount of Iceland’s financial hole was essentially unknowable, as it depended on the value of the generally stable Icelandic krona, which had also crashed and was removed from the market by the Icelandic government. But it was a lot.
Iceland instantly became the only nation on earth that Americans could point to and say, “Well, at least we didn’t do that.” In the end, Icelanders amassed debts amounting to 850 percent of their G.D.P. (The debt-drowned United States has reached just 350 percent.) As absurdly big and important as Wall Street became in the U.S. economy, it never grew so large that the rest of the population could not, in a pinch, bail it out. Any one of the three Icelandic banks suffered losses too large for the nation to bear; taken together they were so ridiculously out of proportion that, within weeks of the collapse, a third of the population told pollsters that they were considering emigration.
In just three or four years an entirely new way of economic life had been grafted onto the side of this stable, collectivist society, and the graft had overwhelmed the host. “It was just a group of young kids,” said the man from the I.M.F. “In this egalitarian society, they came in, dressed in black, and started doing business.”
F
ive hundred miles northwest of Scotland the Icelandair flight lands and taxis to a terminal still painted with Landsbanki logos—Landsbanki being one of Iceland’s three bankrupt banks, along with Kaupthing and Glitnir. I try to think up a metaphor for the world’s expanding reservoir of defunct financial corporate sponsorships—water left in the garden hose after you’ve switched off the pressure?—but before I can finish, the man in the seat behind me reaches for his bag in the overhead bin and knocks the crap out of me. I will soon learn that Icelandic males, like moose, rams, and other horned mammals, see these collisions as necessary in their struggle for survival. I will also learn that this particular Icelandic male is a senior official at the Icelandic stock exchange. At this moment, however, all I know is that a middle-aged man in an expensive suit has gone out of his way to bash bodies without apology or explanation. I stew on this apparently wanton act of hostility all the way to passport control.
You can tell a lot about a country by how much better they treat themselves than foreigners at the point of entry. Let it be known that Icelanders make no distinction at all. Over the control booth they’ve hung a charming sign that reads simply, all citizens, and what they mean by that is not “All Icelandic Citizens” but “All Citizens of Anywhere.” Everyone is from somewhere, and so we all wind up in the same line, leading to the guy behind the glass. Before you can say, “Land of contradictions,” he has pretended to examine your passport and waved you on through.
Next, through a dark landscape of snow-spackled black volcanic rock that may or may not be lunar, but that looks so much as you would expect the moon to look that nasa scientists used it to acclimate the astronauts before the first moon mission. An hour later we arrive at the 101 Hotel, owned by the wife of one of Iceland’s most famous failed bankers. It’s cryptically named (101 is the city’s richest postal code), but instantly recognizable: hip Manhattan hotel. Staff dressed in black, incomprehensible art on the walls, unread books about fashion on unused coffee tables—everything to heighten the social anxiety of a rube from the sticks but the latest edition of The New York Observer. It’s the sort of place bankers stay because they think it’s where the artists stay. Bear Stearns convened a meeting of British and American hedge-fund managers here, in January 2008, to figure out how much money there was to be made betting on Iceland’s collapse. (A lot.) The hotel, once jammed, is now empty, with only 6 of its 38 rooms occupied. The restaurant is empty, too, and so are the small tables and little nooks that once led the people who weren’t in them to marvel at those who were. A bankrupt Holiday Inn is just depressing; a bankrupt Ian Schrager hotel is tragic.
With the financiers who once paid a lot to stay here gone for good, I’m given a big room on the top floor with a view of the old city for half-price. I curl up in silky white sheets and reach for a book about the Icelandic economy—written in 1995, before the banking craze, when the country had little to sell to the outside world but fresh fish—and read this remarkable sentence: “Icelanders are rather suspicious of the market system as a cornerstone of economic organization, especially its distributive implications.”
That’s when the strange noises commence.
Stefan Alfsson: A fisherman turned banker, who was laid off from his trading job in October and now might return to fishing.
First comes a screeching from the far side of the room. I leave the bed to examine the situation. It’s the heat, sounding like a teakettle left on the stove for too long, straining to control itself. Iceland’s heat isn’t heat as we know it, but heat drawn directly from the earth. The default temperature of the water is scalding. Every year workers engaged in street repairs shut down the cold-water intake used to temper the hot water and some poor Icelander is essentially boiled alive in his shower. So powerful is the heat being released from the earth into my room that some great grinding, wheezing engine must be employed to prevent it from cooking me.
Then, from outside, comes an explosion.
Boom!
Then another.
Boom!
A
s it is mid-December, the sun rises, barely, at 10:50 a.m. and sets with enthusiasm at 3:44 p.m. This is obviously better than no sun at all, but subtly worse, as it tempts you to believe you can simulate a normal life. And whatever else this place is, it isn’t normal. The point is reinforced by a 26-year-old Icelander I’ll call Magnus Olafsson, who, just a few weeks earlier, had been earning close to a million dollars a year trading currencies for one of the banks. Tall, white-blond, and handsome, Olafsson looks exactly as you’d expect an Icelander to look—which is to say that he looks not at all like most Icelanders, who are mousy-haired and lumpy. “My mother has enough food hoarded to open a grocery store,” he says, then adds that ever since the crash Reykjavík has felt tense and uneasy.
Two months earlier, in early October, as the market for Icelandic kronur dried up, he’d sneaked away from his trading desk and gone down to the teller, where he’d extracted as much foreign cash as they’d give him and stuffed it into a sack. “All over downtown that day you saw people walking around with bags,” he says. “No one ever carries bags around downtown.” After work he’d gone home with his sack of cash and hidden roughly 30 grand in yen, dollars, euros, and pounds sterling inside a board game.
Before October the big-name bankers were heroes; now they are abroad, or laying low. Before October Magnus thought of Iceland as essentially free of danger; now he imagines hordes of muggers en route from foreign nations to pillage his board-game safe—and thus refuses to allow me to use his real name. “You’d figure New York would hear about this and send over planeloads of muggers,” he theorizes. “Most everyone has their savings at home.” As he is already unsettled, I tell him about the unsettling explosions outside my hotel room. “Yes,” he says with a smile, “there’s been a lot of Range Rovers catching fire lately.” Then he explains.
For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn’t afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. “The fishing guys pretty much discovered the trade and made it huge,” says Magnus. “But they made so much money on it that the financial stuff eventually overwhelmed the fish.” They made so much money on it that the trade spread from the fishing guys to their friends.
It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders—especially young Icelanders—own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is set it on fire and collect the insurance: Boom!
The rocks beneath Reykjavík may be igneous, but the city feels sedimentary: on top of several thick strata of architecture that should be called Nordic Pragmatic lies a thin layer that will almost certainly one day be known as Asshole Capitalist. The hobbit-size buildings that house the Icelandic government are charming and scaled to the city. The half-built oceanfront glass towers meant to house newly rich financiers and, in the bargain, block everyone else’s view of the white bluffs across the harbor are not.
T
he best way to see any city is to walk it, but everywhere I walk Icelandic men plow into me without so much as a by-your-leave. Just for fun I march up and down the main shopping drag, playing chicken, to see if any Icelandic male would rather divert his stride than bang shoulders. Nope. On party nights—Thursday, Friday, and Saturday—when half the country appears to take it as a professional obligation to drink themselves into oblivion and wander the streets until what should be sunrise, the problem is especially acute. The bars stay open until five a.m., and the frantic energy with which the people hit them seems more like work than work. Within minutes of entering a nightclub called Boston I get walloped, first by a bearded troll who, I’m told, ran an Icelandic hedge fund. Just as I’m recovering I get plowed over by a drunken senior staffer at the Central Bank. Perhaps because he is drunk, or perhaps because we had actually met a few hours earlier, he stops to tell me, “Vee try to tell them dat our problem was not a solfency problem but a likvitity problem, but they did not agree,” then stumbles off. It’s exactly what Lehman Brothers and Citigroup said: If only you’d give us the money to tide us over, we’ll survive this little hiccup.
A nation so tiny and homogeneous that everyone in it knows pretty much everyone else is so fundamentally different from what one thinks of when one hears the word “nation” that it almost requires a new classification. Really, it’s less a nation than one big extended family. For instance, most Icelanders are by default members of the Lutheran Church. If they want to stop being Lutherans they must write to the government and quit; on the other hand, if they fill out a form, they can start their own cult and receive a subsidy. Another example: the Reykjavík phone book lists everyone by his first name, as there are only about nine surnames in Iceland, and they are derived by prefixing the father’s name to “son” or “dottir.” It’s hard to see how this clarifies matters, as there seem to be only about nine first names in Iceland, too. But if you wish to reveal how little you know about Iceland, you need merely refer to someone named Siggor Sigfusson as “Mr. Sigfusson,” or Kristin Petursdottir as “Ms. Petursdottir.” At any rate, everyone in a conversation is just meant to know whomever you’re talking about, so you never hear anyone ask, “Which Siggor do you mean?”
Because Iceland is really just one big family, it’s simply annoying to go around asking Icelanders if they’ve met Björk. Of course they’ve met Björk; who hasn’t met Björk? Who, for that matter, didn’t know Björk when she was two? “Yes, I know Björk,” a professor of finance at the University of Iceland says in reply to my question, in a weary tone. “She can’t sing, and I know her mother from childhood, and they were both crazy. That she is so well known outside of Iceland tells me more about the world than it does about Björk.”
One benefit of life inside a nation masking an extended family is that nothing needs to be explained; everyone already knows everything that needs to be known. I quickly find that it is an even greater than usual waste of time to ask directions, for instance. Just as you are meant to know which Bjornjolfer is being spoken of at any particular moment, you are meant to know where you are on the map. Two grown-ups—one a banker whose office is three blocks away—cannot tell me where to find the prime minister’s office. Three more grown-ups, all within three blocks of the National Gallery of Iceland, have no idea where to find the place. When I tell the sweet middle-aged lady behind the counter at the National Museum that no Icelander seems to know how to find it, she says, “No one actually knows anything about our country. Last week we had Icelandic high-school students here and their teacher asked them to name an Icelandic 19th-century painter. None of them could. Not a single one! One said, ‘Halldor Laxness?’!” (Laxness won the 1955 Nobel Prize in Literature, the greatest global honor for an Icelander until the 1980s, when two Icelandic women captured Miss World titles in rapid succession.)
T
he world is now pocked with cities that feel as if they are perched on top of bombs. The bombs have yet to explode, but the fuses have been lit, and there’s nothing anyone can do to extinguish them. Walk around Manhattan and you see empty stores, empty streets, and, even when it’s raining, empty taxis: people have fled before the bomb explodes. When I was there Reykjavík had the same feel of incipient doom, but the fuse burned strangely. The government mandates three months’ severance pay, and so the many laid-off bankers were paid until early February, when the government promptly fell. Against a basket of foreign currencies the krona is worth less than a third of its boom-time value. As Iceland imports everything but heat and fish, the price of just about everything is, in mid-December, about to skyrocket. A new friend who works for the government tells me that she went into a store to buy a lamp. The clerk told her he had sold the last of the lamps she was after, but offered to order it for her, from Sweden—at nearly three times the old price.
Bjarni Brynjolfsson: A fishing guide, who is back to hosting fly-fishermen instead of bankers.
Still, a society that has been ruined overnight doesn’t look much different from how it did the day before, when it believed itself to be richer than ever. The Central Bank of Iceland is a case in point. Almost certainly Iceland will adopt the euro as its currency, and the krona will cease to exist. Without it there is no need for a central bank to maintain the stability of the local currency and control interest rates. Inside the place stews David Oddsson, the architect of Iceland’s rise and fall. Back in the 1980s, Oddsson had fallen under the spell of Milton Friedman, the brilliant economist who was able to persuade even those who spent their lives working for the government that government was a waste of life. So Oddsson went on a quest to give Icelandic people their freedom—by which he meant freedom from government controls of any sort. As prime minister he lowered taxes, privatized industry, freed up trade, and, finally, in 2002, privatized the banks. At length, weary of prime-ministering, he got himself appointed governor of the Central Bank—even though he was a poet without banking experience.
After the collapse he holed up in his office inside the bank, declining all requests for interviews. Senior government officials tell me, seriously, that they assume he spends most of his time writing poetry. (In February he would be asked by a new government to leave.) On the outside, however, the Central Bank of Iceland is still an elegant black temple set against the snowy bluffs across the harbor. Sober-looking men still enter and exit. Small boys on sleds rocket down the slope beside it, giving not a rat’s ass that they are playing at ground zero of the global calamity. It all looks the same as it did before the crash, even though it couldn’t be more different. The fuse is burning its way toward the bomb.
When Neil Armstrong took his small step from Apollo 11 and looked around, he probably thought, Wow, sort of like Iceland—even though the moon was nothing like Iceland. But then, he was a tourist, and a tourist can’t help but have a distorted opinion of a place: he meets unrepresentative people, has unrepresentative experiences, and runs around imposing upon the place the fantastic mental pictures he had in his head when he got there. When Iceland became a tourist in global high finance it had the same problem as Neil Armstrong. Icelanders are among the most inbred human beings on earth—geneticists often use them for research. They inhabited their remote island for 1,100 years without so much as dabbling in leveraged buyouts, hostile takeovers, derivatives trading, or even small-scale financial fraud. When, in 2003, they sat down at the same table with Goldman Sachs and Morgan Stanley, they had only the roughest idea of what an investment banker did and how he behaved—most of it gleaned from young Icelanders’ experiences at various American business schools. And so what they did with money probably says as much about the American soul, circa 2003, as it does about Icelanders. They understood instantly, for instance, that finance had less to do with productive enterprise than trading bits of paper among themselves. And when they lent money they didn’t simply facilitate enterprise but bankrolled friends and family, so that they might buy and own things, like real investment bankers: Beverly Hills condos, British soccer teams and department stores, Danish airlines and media companies, Norwegian banks, Indian power plants.
That was the biggest American financial lesson the Icelanders took to heart: the importance of buying as many assets as possible with borrowed money, as asset prices only rose. By 2007, Icelanders owned roughly 50 times more foreign assets than they had in 2002. They bought private jets and third homes in London and Copenhagen. They paid vast sums of money for services no one in Iceland had theretofore ever imagined wanting. “A guy had a birthday party, and he flew in Elton John for a million dollars to sing two songs,” the head of the Left-Green Movement, Steingrimur Sigfusson, tells me with fresh incredulity. “And apparently not very well.” They bought stakes in businesses they knew nothing about and told the people running them what to do—just like real American investment bankers! For instance, an investment company called FL Group—a major shareholder in Glitnir bank—bought an 8.25 percent stake in American Airlines’ parent corporation. No one inside FL Group had ever actually run an airline; no one in FL Group even had meaningful work experience at an airline. That didn’t stop FL Group from telling American Airlines how to run an airline. “After taking a close look at the company over an extended period of time,” FL Group C.E.O. Hannes Smarason, graduate of M.I.T.’s Sloan School, got himself quoted saying, in his press release, not long after he bought his shares, “our suggestions include monetizing assets … that can be used to reduce debt or return capital to shareholders.”
Nor were the Icelanders particularly choosy about what they bought. I spoke with a hedge fund in New York that, in late 2006, spotted what it took to be an easy mark: a weak Scandinavian bank getting weaker. It established a short position, and then, out of nowhere, came Kaupthing to take a 10 percent stake in this soon-to-be defunct enterprise—driving up the share price to absurd levels. I spoke to another hedge fund in London so perplexed by the many bad LBOs Icelandic banks were financing that it hired private investigators to figure out what was going on in the Icelandic financial system. The investigators produced a chart detailing a byzantine web of interlinked entities that boiled down to this: A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets—the banks, soccer teams, etc. Since the entire world’s assets were rising—thanks in part to people like these Icelandic lunatics paying crazy prices for them—they appeared to be making money. Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge-fund manager. “This was how the banks and investment companies grew and grew. But they were lightweights in the international markets.”
O
n February 3, Tony Shearer, the former C.E.O. of a British merchant bank called Singer and Friedlander, offered a glimpse of the inside, when he appeared before a House of Commons committee to describe his bizarre experience of being acquired by an Icelandic bank.
Singer and Friedlander had been around since 1907 and was famous for, among other things, giving George Soros his start. In November 2003, Shearer learned that Kaupthing, of whose existence he was totally unaware, had just taken a 9.5 percent stake in his bank. Normally, when a bank tries to buy another bank, it seeks to learn something about it. Shearer offered to meet with Kaupthing’s chairman, Sigurdur Einarsson; Einarsson had no interest. (Einarsson declined to be interviewed by Vanity Fair.) When Kaupthing raised its stake to 19.5 percent, Shearer finally flew to Reykjavík to see who on earth these Icelanders were. “They were very different,” he told the House of Commons committee. “They ran their business in a very strange way. Everyone there was incredibly young. They were all from the same community in Reykjavík. And they had no idea what they were doing.”
Hordur Torfason: An activist and a protest organizer.
He examined Kaupthing’s annual reports and discovered some amazing facts: This giant international bank had only one board member who was not Icelandic, for instance. Its directors all had four-year contracts, and the bank had lent them £19 million to buy shares in Kaupthing, along with options to sell those shares back to the bank at a guaranteed profit. Virtually the entire bank’s stated profits were caused by its marking up assets it had bought at inflated prices. “The actual amount of profits that were coming from what I’d call banking was less than 10 percent,” said Shearer.
In a sane world the British regulators would have stopped the new Icelandic financiers from devouring the ancient British merchant bank. Instead, the regulators ignored a letter Shearer wrote to them. A year later, in January 2005, he received a phone call from the British takeover panel. “They wanted to know,” says Shearer, “why our share price had risen so rapidly over the past couple of days. So I laughed and said, ‘I think you’ll find the reason is that Mr. Einarsson, the chairman of Kaupthing, said two days ago, like an idiot, that he was going to make a bid for Singer and Friedlander.’” In August 2005, Singer and Friedlander became Kaupthing Singer and Friedlander, and Shearer quit, he said, out of fear of what might happen to his reputation if he stayed. In October 2008, Kaupthing Singer and Friedlander went bust.
In spite of all this, when Tony Shearer was pressed by the House of Commons to characterize the Icelanders as mere street hustlers, he refused. “They were all highly educated people,” he said in a tone of amazement.
H
ere is yet another way in which Iceland echoed the American model: all sorts of people, none of them Icelandic, tried to tell them they had a problem. In early 2006, for instance, an analyst named Lars Christensen and three of his colleagues at Denmark’s biggest bank, Danske Bank, wrote a report that said Iceland’s financial system was growing at a mad pace, and was on a collision course with disaster. “We actually wrote the report because we were worried our clients were getting too interested in Iceland,” he tells me. “Iceland was the most extreme of everything.” Christensen then flew to Iceland and gave a speech to reinforce his point, only to be greeted with anger. “The Icelandic banks took it personally,” he says. “We were being threatened with lawsuits. I was told, ‘You’re Danish, and you are angry with Iceland because Iceland is doing so well.’ Basically it all had to do with what happened in 1944,” when Iceland declared its independence from Denmark. “The reaction wasn’t ‘These guys might be right.’ It was ‘No! It’s a conspiracy. They have bad motives.’” The Danish were just jealous!
The Danske Bank report alerted hedge funds in London to an opportunity: shorting Iceland. They investigated and found this incredible web of cronyism: bankers buying stuff from one another at inflated prices, borrowing tens of billions of dollars and re-lending it to the members of their little Icelandic tribe, who then used it to buy up a messy pile of foreign assets. “Like any new kid on the block,” says Theo Phanos of Trafalgar Funds in London, “they were picked off by various people who sold them the lowest-quality assets—second-tier airlines, sub-scale retailers. They were in all the worst LBOs.”
But from the prime minister on down, Iceland’s leaders attacked the messenger. “The attacks … give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system,” said Central Bank chairman Oddsson in March of last year. The chairman of Kaupthing publicly fingered four hedge funds that he said were deliberately seeking to undermine Iceland’s financial miracle. “I don’t know where the Icelanders get this notion,” says Paul Ruddock, of Lansdowne Partners, one of those fingered. “We only once traded in an Icelandic stock and it was a very short-term trade. We started to take legal action against the chairman of Kaupthing after he made public accusations against us that had no truth, and then he withdrew them.”
One of the hidden causes of the current global financial crisis is that the people who saw it coming had more to gain from it by taking short positions than they did by trying to publicize the problem. Plus, most of the people who could credibly charge Iceland—or, for that matter, Lehman Brothers—with financial crimes could be dismissed as crass profiteers, talking their own book. Back in April 2006, however, an emeritus professor of economics at the University of Chicago named Bob Aliber took an interest in Iceland. Aliber found himself at the London Business School, listening to a talk on Iceland, about which he knew nothing. He recognized instantly the signs. Digging into the data, he found in Iceland the outlines of what was so clearly a historic act of financial madness that it belonged in a textbook. “The Perfect Bubble,” Aliber calls Iceland’s financial rise, and he has the textbook in the works: an updated version of Charles Kindleberger’s 1978 classic, Manias, Panics, and Crashes, a new edition of which he’s currently editing. In it, Iceland, he decided back in 2006, would now have its own little box, along with the South Sea Bubble and the Tulip Craze—even though Iceland had yet to crash. For him the actual crash was a mere formality.
W
ord spread in Icelandic economic circles that this distinguished professor at Chicago had taken a special interest in Iceland. In May 2008, Aliber was invited by the University of Iceland’s economics department to give a speech. To an audience of students, bankers, and journalists, he explained that Iceland, far from having an innate talent for high finance, had all the markings of a giant bubble, but he spoke the technical language of academic economists. (“Monetary Turbulence and the Icelandic Economy,” he called his speech.) In the following Q&A session someone asked him to predict the future, and he lapsed into plain English. As an audience member recalls, Aliber said, “I give you nine months. Your banks are dead. Your bankers are either stupid or greedy. And I’ll bet they are on planes trying to sell their assets right now.”
The Icelandic bankers in the audience sought to prevent newspapers from reporting the speech. Several academics suggested that Aliber deliver his alarming analysis to Iceland’s Central Bank. Somehow that never happened. “The Central Bank said they were too busy to see him,” says one of the professors who tried to arrange the meeting, “because they were preparing the Report on Financial Stability.” For his part Aliber left Iceland thinking that he’d caused such a stir he might not be allowed back into the country. “I got the feeling,” he told me, “that the only reason they brought me in was that they needed an outsider to say these things—that an insider wouldn’t say these things, because he’d be afraid of getting into trouble.” And yet he remains extremely fond of his hosts. “They are a very curious people,” he says, laughing. “I guess that’s the point, isn’t it?”
Icelanders—or at any rate Icelandic men—had their own explanations for why, when they leapt into global finance, they broke world records: the natural superiority of Icelanders. Because they were small and isolated it had taken 1,100 years for them—and the world—to understand and exploit their natural gifts, but now that the world was flat and money flowed freely, unfair disadvantages had vanished. Iceland’s president, Olafur Ragnar Grimsson, gave speeches abroad in which he explained why Icelanders were banking prodigies. “Our heritage and training, our culture and home market, have provided a valuable advantage,” he said, then went on to list nine of these advantages, ending with how unthreatening to others Icelanders are. (“Some people even see us as fascinating eccentrics who can do no harm.”) There were many, many expressions of this same sentiment, most of them in Icelandic. “There were research projects at the university to explain why the Icelandic business model was superior,” says Gylfi Zoega, chairman of the economics department. “It was all about our informal channels of communication and ability to make quick decisions and so forth.”
“We were always told that the Icelandic businessmen were so clever,” says university finance professor and former banker Vilhjalmur Bjarnason. “They were very quick. And when they bought something they did it very quickly. Why was that? That is usually because the seller is very satisfied with the price.”
You didn’t need to be Icelandic to join the cult of the Icelandic banker. German banks put $21 billion into Icelandic banks. The Netherlands gave them $305 million, and Sweden kicked in $400 million. U.K. investors, lured by the eye-popping 14 percent annual returns, forked over $30 billion—$28 billion from companies and individuals and the rest from pension funds, hospitals, universities, and other public institutions. Oxford University alone lost $50 million.
Geir Haarde: The former prime minister, on January 28, one of his last days in office.
Maybe because there are so few Icelanders in the world, we know next to nothing about them. We assume they are more or less Scandinavian—a gentle people who just want everyone to have the same amount of everything. They are not. They have a feral streak in them, like a horse that’s just pretending to be broken.
A
fter three days in Reykjavík, I receive, more or less out of the blue, two phone calls. The first is from a producer of a leading current-events TV show. All of Iceland watches her show, she says, then asks if I’d come on and be interviewed. “About what?” I ask. “We’d like you to explain our financial crisis,” she says. “I’ve only been here three days!” I say. It doesn’t matter, she says, as no one in Iceland understands what’s happened. They’d enjoy hearing someone try to explain it, even if that person didn’t have any idea what he was talking about—which goes to show, I suppose, that not everything in Iceland is different from other places. As I demur, another call comes, from the prime minister’s office.
Iceland’s then prime minister, Geir Haarde, is also the head of the Independence Party, which has governed the country since 1991. It ruled in loose coalition with the Social Democrats and the Progressive Party. (Iceland’s fourth major party is the Left-Green Movement.) That a nation of 300,000 people, all of whom are related by blood, needs four major political parties suggests either a talent for disagreement or an unwillingness to listen to one another. In any case, of the four parties, the Independents express the greatest faith in free markets. The Independence Party is the party of the fishermen. It is also, as an old schoolmate of the prime minister’s puts it to me, “all men, men, men. Not a woman in it.”
Walking into the P.M.’s minute headquarters, I expect to be stopped and searched, or at least asked for photo identification. Instead I find a single policeman sitting behind a reception desk, feet up on the table, reading a newspaper. He glances up, bored. “I’m here to see the prime minister,” I say for the first time in my life. He’s unimpressed. Anyone here can see the prime minister. Half a dozen people will tell me that one of the reasons Icelanders thought they would be taken seriously as global financiers is that all Icelanders feel important. One reason they all feel important is that they all can go see the prime minister anytime they like.
What he might say to them about their collapse is an open question. There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde, though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student. As a group, the Independence Party’s leaders have a reputation for not knowing much about finance and for refusing to avail themselves of experts who do. An Icelandic professor at the London School of Economics named Jon Danielsson, who specializes in financial panics, has had his offer to help spurned; so have several well-known financial economists at the University of Iceland. Even the advice of really smart central bankers from seriously big countries went ignored. It’s not hard to see why the Independence Party and its prime minister fail to appeal to Icelandic women: they are the guy driving his family around in search of some familiar landmark and refusing, over his wife’s complaints, to stop and ask directions.
“Why is Vanity Fair interested in Iceland?” he asks as he strides into the room, with the force and authority of the leader of a much larger nation. And it’s a good question.
As it turns out, he’s not actually stupid, but political leaders seldom are, no matter how much the people who elected them insist that it must be so. He does indeed say things that could not possibly be true, but they are only the sorts of fibs that prime ministers are hired to tell. He claims that the krona is once again an essentially stable currency, for instance, when the truth is it doesn’t currently trade in international markets—it is assigned an arbitrary value by the government for select purposes. Icelanders abroad have already figured out not to use their Visa cards, for fear of being charged the real exchange rate, whatever that might be.
The prime minister would like me to believe that he saw Iceland’s financial crisis taking shape but could do little about it. (“We could not say publicly our fears about the banks, because you create the very thing you are seeking to avoid: a panic.”) By implication it was not politicians like him but financiers who were to blame. On some level the people agree: the guy who ran the Baugur investment group had snowballs chucked at him as he dashed from the 101 Hotel, which his wife owns, to his limo; the guy who ran Kaupthing Bank turned up at the National Theater and, as he took his seat, was booed. But, for the most part, the big shots have fled Iceland for London, or are lying low, leaving the poor prime minister to shoulder the blame and face the angry demonstrators, led by folksinging activist Hordur Torfason, who assemble every weekend outside Parliament. Haarde has his story, and he’s sticking to it: foreigners entrusted their capital to Iceland, and Iceland put it to good use, but then, last September 15, Lehman Brothers failed and foreigners panicked and demanded their capital back. Iceland was ruined not by its own recklessness but by a global tsunami. The problem with this story is that it fails to explain why the tsunami struck Iceland, as opposed to, say, Tonga.
But I didn’t come to Iceland to argue. I came to understand. “There’s something I really want to ask you,” I say.
“Yes?”
“Is it true that you’ve been telling people that it’s time to stop banking and go fishing?”
A great line, I thought. Succinct, true, and to the point. But I’d heard about it thirdhand, from a New York hedge-fund manager. The prime minister fixes me with a self-consciously stern gaze. “That’s a gross exaggeration,” he says.
“I thought it made sense,” I say uneasily.
“I never said that!”
Obviously, I’ve hit some kind of nerve, but which kind I cannot tell. Is he worried that to have said such a thing would make him seem a fool? Or does he still think that fishing, as a profession, is somehow less dignified than banking?
A
t length, I return to the hotel to find, for the first time in four nights, no empty champagne bottles outside my neighbors’ door. The Icelandic couple whom I had envisioned as being on one last blowout have packed and gone home. For four nights I have endured their Orc shrieks from the other side of the hotel wall; now all is silent. It’s now possible to curl up in bed with “The Economic Theory of a Common-Property Resource: The Fishery.” One way or another, the wealth in Iceland comes from the fish, and if you want to understand what Icelanders did with their money you had better understand how they came into it in the first place.
The brilliant paper was written back in 1954 by H. Scott Gordon, a University of Indiana economist. It describes the plight of the fisherman—and seeks to explain “why fishermen are not wealthy, despite the fact that fishery resources of the sea are the richest and most indestructible available to man.” The problem is that, because the fish are everybody’s property, they are nobody’s property. Anyone can catch as many fish as they like, so they fish right up to the point where fishing becomes unprofitable—for everybody. “There is in the spirit of every fisherman the hope of the ‘lucky catch,’” wrote Gordon. “As those who know fishermen well have often testified, they are gamblers and incurably optimistic.”
Fishermen, in other words, are a lot like American investment bankers. Their overconfidence leads them to impoverish not just themselves but also their fishing grounds. Simply limiting the number of fish caught won’t solve the problem; it will just heighten the competition for the fish and drive down profits. The goal isn’t to get fishermen to overspend on more nets or bigger boats. The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention.
Johanna Sigurdardottir: The new prime minister, the modern world’s first openly gay head of state.
This insight is what led Iceland to go from being one of the poorest countries in Europe circa 1900 to being one of the richest circa 2000. Iceland’s big change began in the early 1970s, after a couple of years when the fish catch was terrible. The best fishermen returned for a second year in a row without their usual haul of cod and haddock, so the Icelandic government took radical action: they privatized the fish. Each fisherman was assigned a quota, based roughly on his historical catches. If you were a big-time Icelandic fisherman you got this piece of paper that entitled you to, say, 1 percent of the total catch allowed to be pulled from Iceland’s waters that season. Before each season the scientists at the Marine Research Institute would determine the total number of cod or haddock that could be caught without damaging the long-term health of the fish population; from year to year, the numbers of fish you could catch changed. But your percentage of the annual haul was fixed, and this piece of paper entitled you to it in perpetuity.
Even better, if you didn’t want to fish you could sell your quota to someone who did. The quotas thus drifted into the hands of the people to whom they were of the greatest value, the best fishermen, who could extract the fish from the sea with maximum efficiency. You could also take your quota to the bank and borrow against it, and the bank had no trouble assigning a dollar value to your share of the cod pulled, without competition, from the richest cod-fishing grounds on earth. The fish had not only been privatized, they had been securitized.
I
t was horribly unfair: a public resource—all the fish in the Icelandic sea—was simply turned over to a handful of lucky Icelanders. Overnight, Iceland had its first billionaires, and they were all fishermen. But as social policy it was ingenious: in a single stroke the fish became a source of real, sustainable wealth rather than shaky sustenance. Fewer people were spending less effort catching more or less precisely the right number of fish to maximize the long-term value of Iceland’s fishing grounds. The new wealth transformed Iceland—and turned it from the backwater it had been for 1,100 years to the place that spawned Björk. If Iceland has become famous for its musicians it’s because Icelanders now have time to play music, and much else. Iceland’s youth are paid to study abroad, for instance, and encouraged to cultivate themselves in all sorts of interesting ways. Since its fishing policy transformed Iceland, the place has become, in effect, a machine for turning cod into Ph.D.’s.
But this, of course, creates a new problem: people with Ph.D.’s don’t want to fish for a living. They need something else to do.
And that something is probably not working in the industry that exploits Iceland’s other main natural resource: energy. The waterfalls and boiling lava generate vast amounts of cheap power, but, unlike oil, it cannot be profitably exported. Iceland’s power is trapped in Iceland, and if there is something poetic about the idea of trapped power, there is also something prosaic in how the Icelanders have come to terms with the problem. They asked themselves: What can we do that other people will pay money for that requires huge amounts of power? The answer was: smelt aluminum.
Notice that no one asked, What might Icelanders want to do? Or even: What might Icelanders be especially suited to do? No one thought that Icelanders might have some natural gift for smelting aluminum, and, if anything, the opposite proved true. Alcoa, the biggest aluminum company in the country, encountered two problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the so-called “hidden people”—or, to put it more plainly, elves—in whom some large number of Icelanders, steeped long and thoroughly in their rich folkloric culture, sincerely believe. Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free but, as he put it, “we couldn’t as a company be in a position of acknowledging the existence of hidden people.” The other, more serious problem was the Icelandic male: he took more safety risks than aluminum workers in other nations did. “In manufacturing,” says the spokesman, “you want people who follow the rules and fall in line. You don’t want them to be heroes. You don’t want them to try to fix something it’s not their job to fix, because they might blow up the place.” The Icelandic male had a propensity to try to fix something it wasn’t his job to fix.
Back away from the Icelandic economy and you can’t help but notice something really strange about it: the people have cultivated themselves to the point where they are unsuited for the work available to them. All these exquisitely schooled, sophisticated people, each and every one of whom feels special, are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting. There are, of course, a few jobs in Iceland that any refined, educated person might like to do. Certifying the nonexistence of elves, for instance. (“This will take at least six months—it can be very tricky.”) But not nearly so many as the place needs, given its talent for turning cod into Ph.D.’s. At the dawn of the 21st century, Icelanders were still waiting for some task more suited to their filigreed minds to turn up inside their economy so they might do it.
Enter investment banking.
F
or the fifth time in as many days I note a slight tension at any table where Icelandic men and Icelandic women are both present. The male exhibits the global male tendency not to talk to the females—or, rather, not to include them in the conversation—unless there is some obvious sexual motive. But that’s not the problem, exactly. Watching Icelandic men and women together is like watching toddlers. They don’t play together but in parallel; they overlap even less organically than men and women in other developed countries, which is really saying something. It isn’t that the women are oppressed, exactly. On paper, by historical global standards, they have it about as good as women anywhere: good public health care, high participation in the workforce, equal rights. What Icelandic women appear to lack—at least to a tourist who has watched them for all of 10 days—is a genuine connection to Icelandic men. The Independence Party is mostly male; the Social Democrats, mostly female. (On February 1, when the reviled Geir Haarde finally stepped aside, he was replaced by Johanna Sigurdardottir, a Social Democrat, and Iceland got not just a lady prime minister but the modern world’s first openly gay head of state—she lives with another woman.) Everyone knows everyone else, but when I ask Icelanders for leads, the men always refer me to other men, and the women to other women. It was a man, for instance, who suggested I speak to Stefan Alfsson.
Lean and hungry-looking, wearing genuine rather than designer stubble, Alfsson still looks more like a trawler captain than a financier. He went to sea at 16, and, in the off-season, to school to study fishing. He was made captain of an Icelandic fishing trawler at the shockingly young age of 23 and was regarded, I learned from other men, as something of a fishing prodigy—which is to say he had a gift for catching his quota of cod and haddock in the least amount of time. And yet, in January 2005, at 30, he up and quit fishing to join the currency-trading department of Landsbanki. He speculated in the financial markets for nearly two years, until the great bloodbath of October 2008, when he was sacked, along with every other Icelander who called himself a “trader.” His job, he says, was to sell people, mainly his fellow fishermen, on what he took to be a can’t-miss speculation: borrow yen at 3 percent, use them to buy Icelandic kronur, and then invest those kronur at 16 percent. “I think it is easier to take someone in the fishing industry and teach him about currency trading,” he says, “than to take someone from the banking industry and teach them how to fish.”
He then explained why fishing wasn’t as simple as I thought. It’s risky, for a start, especially as practiced by the Icelandic male. “You don’t want to have some sissy boys on your crew,” he says, especially as Icelandic captains are famously manic in their fishing styles. “I had a crew of Russians once,” he says, “and it wasn’t that they were lazy, but the Russians are always at the same pace.” When a storm struck, the Russians would stop fishing, because it was too dangerous. “The Icelanders would fish in all conditions,” says Stefan, “fish until it is impossible to fish. They like to take the risks. If you go overboard, the probabilities are not in your favor. I’m 33, and I already have two friends who have died at sea.”
It took years of training for him to become a captain, and even then it happened only by a stroke of luck. When he was 23 and a first mate, the captain of his fishing boat up and quit. The boat owner went looking for a replacement and found an older fellow, retired, who was something of an Icelandic fishing legend, the wonderfully named Snorri Snorrasson. “I took two trips with this guy,” Stefan says. “I have never in my life slept so little, because I was so eager to learn. I slept two or three hours a night because I was sitting beside him, talking to him. I gave him all the respect in the world—it’s difficult to describe all he taught me. The reach of the trawler. The most efficient angle of the net. How do you act on the sea. If you have a bad day, what do you do? If you’re fishing at this depth, what do you do? If it’s not working, do you move in depth or space? In the end it’s just so much feel. In this time I learned infinitely more than I learned in school. Because how do you learn to fish in school?”
This marvelous training was as fresh in his mind as if he’d received it yesterday, and the thought of it makes his eyes mist.
“You spent seven years learning every little nuance of the fishing trade before you were granted the gift of learning from this great captain?” I ask.
“Yes.”
“And even then you had to sit at the feet of this great master for many months before you felt as if you knew what you were doing?”
“Yes.”
“Then why did you think you could become a banker and speculate in financial markets, without a day of training?”
“That’s a very good question,” he says. He thinks for a minute. “For the first time this evening I lack a word.” As I often think I know exactly what I am doing even when I don’t, I find myself oddly sympathetic.
“What, exactly, was your job?” I ask, to let him off the hook, catch and release being the current humane policy in Iceland.
“I started as a … “—now he begins to laugh—“an adviser to companies on currency risk hedging. But given my aggressive nature I went more and more into plain speculative trading.” Many of his clients were other fishermen, and fishing companies, and they, like him, had learned that if you don’t take risks you don’t catch the fish. “The clients were only interested in ‘hedging’ if it meant making money,” he says.
I
n retrospect, there are some obvious questions an Icelander living through the past five years might have asked himself. For example: Why should Iceland suddenly be so seemingly essential to global finance? Or: Why do giant countries that invented modern banking suddenly need Icelandic banks to stand between their depositors and their borrowers—to decide who gets capital and who does not? And: If Icelanders have this incredible natural gift for finance, how did they keep it so well hidden for 1,100 years? At the very least, in a place where everyone knows everyone else, or his sister, you might have thought that the moment Stefan Alfsson walked into Landsbanki 10 people would have said, “Stefan, you’re a fisherman!” But they didn’t. To a shocking degree, they still don’t. “If I went back to banking,” he says, with an entirely straight face, “I would be a private-banking guy.”
B
ack in 2001, as the Internet boom turned into a bust, M.I.T.’s Quarterly Journal of Economics published an intriguing paper called “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” The authors, Brad Barber and Terrance Odean, gained access to the trading activity in over 35,000 households, and used it to compare the habits of men and women. What they found, in a nutshell, is that men not only trade more often than women but do so from a false faith in their own financial judgment. Single men traded less sensibly than married men, and married men traded less sensibly than single women: the less the female presence, the less rational the approach to trading in the markets.
One of the distinctive traits about Iceland’s disaster, and Wall Street’s, is how little women had to do with it. Women worked in the banks, but not in the risktaking jobs. As far as I can tell, during Iceland’s boom, there was just one woman in a senior position inside an Icelandic bank. Her name is Kristin Petursdottir, and by 2005 she had risen to become deputy C.E.O. for Kaupthing in London. “The financial culture is very male-dominated,” she says. “The culture is quite extreme. It is a pool of sharks. Women just despise the culture.” Petursdottir still enjoyed finance. She just didn’t like the way Icelandic men did it, and so, in 2006, she quit her job. “People said I was crazy,” she says, but she wanted to create a financial-services business run entirely by women. To bring, as she puts it, “more feminine values to the world of finance.”
Today her firm is, among other things, one of the very few profitable financial businesses left in Iceland. After the stock exchange collapsed, the money flooded in. A few days before we met, for instance, she heard banging on the front door early one morning and opened it to discover a little old man. “I’m so fed up with this whole system,” he said. “I just want some women to take care of my money.”
It was with that in mind that I walked, on my last afternoon in Iceland, into the Saga Museum. Its goal is to glorify the Sagas, the great 12th- and 13th-century Icelandic prose epics, but the effect of its life-size dioramas is more like modern reality TV. Not statues carved from silicon but actual ancient Icelanders, or actors posing as ancient Icelanders, as shrieks and bloodcurdling screams issue from the P.A. system: a Catholic bishop named Jon Arason having his head chopped off; a heretic named Sister Katrin being burned at the stake; a battle scene in which a blood-drenched Viking plunges his sword toward the heart of a prone enemy. The goal was verisimilitude, and to achieve it no expense was spared. Passing one tableau of blood and guts and moving on to the next, I caught myself glancing over my shoulder to make sure some Viking wasn’t following me with a battle-ax. The effect was so disorienting that when I reached the end and found a Japanese woman immobile and reading on a bench, I had to poke her on the shoulder to make sure she was real. This is the past Icelanders supposedly cherish: a history of conflict and heroism. Of seeing who is willing to bump into whom with the most force. There are plenty of women, but this is a men’s history.
When you borrow a lot of money to create a false prosperity, you import the future into the present. It isn’t the actual future so much as some grotesque silicon version of it. Leverage buys you a glimpse of a prosperity you haven’t really earned. The striking thing about the future the Icelandic male briefly imported was how much it resembled the past that he celebrates. I’m betting now they’ve seen their false future the Icelandic female will have a great deal more to say about the actual one.
Author Michael Lewis is a contributor to The New York Times Magazine.
by
Michael Lewis
April 2009
Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to Reykjavík to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He’d never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’ 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. “You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”
How did the economy get into this mess? Visit our archive “Charting the Road to Ruin.” Plus: A Q&A with Michael Lewis. Illustration by Brad Holland.
An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “We can do that.” For a brief moment it appeared that they could. In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, “the most rapid expansion of a banking system in the history of mankind.”
At the same time, in part because the banks were also lending Icelanders money to buy stocks and real estate, the value of Icelandic stocks and real estate went through the roof. From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. Reykjavík real-estate prices tripled. By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry. “Everyone was learning Black-Scholes” (the option-pricing model), says Ragnar Arnason, a professor of fishing economics at the University of Iceland, who watched students flee the economics of fishing for the economics of money. “The schools of engineering and math were offering courses on financial engineering. We had hundreds and hundreds of people studying finance.” This in a country the size of Kentucky, but with fewer citizens than greater Peoria, Illinois. Peoria, Illinois, doesn’t have global financial institutions, or a university devoting itself to training many hundreds of financiers, or its own currency. And yet the world was taking Iceland seriously. (March 2006 Bloomberg News headline: iceland’s billionaire tycoon “thor” braves u.s. with hedge fund.)
Global financial ambition turned out to have a downside. When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market. The exact dollar amount of Iceland’s financial hole was essentially unknowable, as it depended on the value of the generally stable Icelandic krona, which had also crashed and was removed from the market by the Icelandic government. But it was a lot.
Iceland instantly became the only nation on earth that Americans could point to and say, “Well, at least we didn’t do that.” In the end, Icelanders amassed debts amounting to 850 percent of their G.D.P. (The debt-drowned United States has reached just 350 percent.) As absurdly big and important as Wall Street became in the U.S. economy, it never grew so large that the rest of the population could not, in a pinch, bail it out. Any one of the three Icelandic banks suffered losses too large for the nation to bear; taken together they were so ridiculously out of proportion that, within weeks of the collapse, a third of the population told pollsters that they were considering emigration.
In just three or four years an entirely new way of economic life had been grafted onto the side of this stable, collectivist society, and the graft had overwhelmed the host. “It was just a group of young kids,” said the man from the I.M.F. “In this egalitarian society, they came in, dressed in black, and started doing business.”
F
ive hundred miles northwest of Scotland the Icelandair flight lands and taxis to a terminal still painted with Landsbanki logos—Landsbanki being one of Iceland’s three bankrupt banks, along with Kaupthing and Glitnir. I try to think up a metaphor for the world’s expanding reservoir of defunct financial corporate sponsorships—water left in the garden hose after you’ve switched off the pressure?—but before I can finish, the man in the seat behind me reaches for his bag in the overhead bin and knocks the crap out of me. I will soon learn that Icelandic males, like moose, rams, and other horned mammals, see these collisions as necessary in their struggle for survival. I will also learn that this particular Icelandic male is a senior official at the Icelandic stock exchange. At this moment, however, all I know is that a middle-aged man in an expensive suit has gone out of his way to bash bodies without apology or explanation. I stew on this apparently wanton act of hostility all the way to passport control.
You can tell a lot about a country by how much better they treat themselves than foreigners at the point of entry. Let it be known that Icelanders make no distinction at all. Over the control booth they’ve hung a charming sign that reads simply, all citizens, and what they mean by that is not “All Icelandic Citizens” but “All Citizens of Anywhere.” Everyone is from somewhere, and so we all wind up in the same line, leading to the guy behind the glass. Before you can say, “Land of contradictions,” he has pretended to examine your passport and waved you on through.
Next, through a dark landscape of snow-spackled black volcanic rock that may or may not be lunar, but that looks so much as you would expect the moon to look that nasa scientists used it to acclimate the astronauts before the first moon mission. An hour later we arrive at the 101 Hotel, owned by the wife of one of Iceland’s most famous failed bankers. It’s cryptically named (101 is the city’s richest postal code), but instantly recognizable: hip Manhattan hotel. Staff dressed in black, incomprehensible art on the walls, unread books about fashion on unused coffee tables—everything to heighten the social anxiety of a rube from the sticks but the latest edition of The New York Observer. It’s the sort of place bankers stay because they think it’s where the artists stay. Bear Stearns convened a meeting of British and American hedge-fund managers here, in January 2008, to figure out how much money there was to be made betting on Iceland’s collapse. (A lot.) The hotel, once jammed, is now empty, with only 6 of its 38 rooms occupied. The restaurant is empty, too, and so are the small tables and little nooks that once led the people who weren’t in them to marvel at those who were. A bankrupt Holiday Inn is just depressing; a bankrupt Ian Schrager hotel is tragic.
With the financiers who once paid a lot to stay here gone for good, I’m given a big room on the top floor with a view of the old city for half-price. I curl up in silky white sheets and reach for a book about the Icelandic economy—written in 1995, before the banking craze, when the country had little to sell to the outside world but fresh fish—and read this remarkable sentence: “Icelanders are rather suspicious of the market system as a cornerstone of economic organization, especially its distributive implications.”
That’s when the strange noises commence.
Stefan Alfsson: A fisherman turned banker, who was laid off from his trading job in October and now might return to fishing.
First comes a screeching from the far side of the room. I leave the bed to examine the situation. It’s the heat, sounding like a teakettle left on the stove for too long, straining to control itself. Iceland’s heat isn’t heat as we know it, but heat drawn directly from the earth. The default temperature of the water is scalding. Every year workers engaged in street repairs shut down the cold-water intake used to temper the hot water and some poor Icelander is essentially boiled alive in his shower. So powerful is the heat being released from the earth into my room that some great grinding, wheezing engine must be employed to prevent it from cooking me.
Then, from outside, comes an explosion.
Boom!
Then another.
Boom!
A
s it is mid-December, the sun rises, barely, at 10:50 a.m. and sets with enthusiasm at 3:44 p.m. This is obviously better than no sun at all, but subtly worse, as it tempts you to believe you can simulate a normal life. And whatever else this place is, it isn’t normal. The point is reinforced by a 26-year-old Icelander I’ll call Magnus Olafsson, who, just a few weeks earlier, had been earning close to a million dollars a year trading currencies for one of the banks. Tall, white-blond, and handsome, Olafsson looks exactly as you’d expect an Icelander to look—which is to say that he looks not at all like most Icelanders, who are mousy-haired and lumpy. “My mother has enough food hoarded to open a grocery store,” he says, then adds that ever since the crash Reykjavík has felt tense and uneasy.
Two months earlier, in early October, as the market for Icelandic kronur dried up, he’d sneaked away from his trading desk and gone down to the teller, where he’d extracted as much foreign cash as they’d give him and stuffed it into a sack. “All over downtown that day you saw people walking around with bags,” he says. “No one ever carries bags around downtown.” After work he’d gone home with his sack of cash and hidden roughly 30 grand in yen, dollars, euros, and pounds sterling inside a board game.
Before October the big-name bankers were heroes; now they are abroad, or laying low. Before October Magnus thought of Iceland as essentially free of danger; now he imagines hordes of muggers en route from foreign nations to pillage his board-game safe—and thus refuses to allow me to use his real name. “You’d figure New York would hear about this and send over planeloads of muggers,” he theorizes. “Most everyone has their savings at home.” As he is already unsettled, I tell him about the unsettling explosions outside my hotel room. “Yes,” he says with a smile, “there’s been a lot of Range Rovers catching fire lately.” Then he explains.
For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn’t afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. “The fishing guys pretty much discovered the trade and made it huge,” says Magnus. “But they made so much money on it that the financial stuff eventually overwhelmed the fish.” They made so much money on it that the trade spread from the fishing guys to their friends.
It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders—especially young Icelanders—own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is set it on fire and collect the insurance: Boom!
The rocks beneath Reykjavík may be igneous, but the city feels sedimentary: on top of several thick strata of architecture that should be called Nordic Pragmatic lies a thin layer that will almost certainly one day be known as Asshole Capitalist. The hobbit-size buildings that house the Icelandic government are charming and scaled to the city. The half-built oceanfront glass towers meant to house newly rich financiers and, in the bargain, block everyone else’s view of the white bluffs across the harbor are not.
T
he best way to see any city is to walk it, but everywhere I walk Icelandic men plow into me without so much as a by-your-leave. Just for fun I march up and down the main shopping drag, playing chicken, to see if any Icelandic male would rather divert his stride than bang shoulders. Nope. On party nights—Thursday, Friday, and Saturday—when half the country appears to take it as a professional obligation to drink themselves into oblivion and wander the streets until what should be sunrise, the problem is especially acute. The bars stay open until five a.m., and the frantic energy with which the people hit them seems more like work than work. Within minutes of entering a nightclub called Boston I get walloped, first by a bearded troll who, I’m told, ran an Icelandic hedge fund. Just as I’m recovering I get plowed over by a drunken senior staffer at the Central Bank. Perhaps because he is drunk, or perhaps because we had actually met a few hours earlier, he stops to tell me, “Vee try to tell them dat our problem was not a solfency problem but a likvitity problem, but they did not agree,” then stumbles off. It’s exactly what Lehman Brothers and Citigroup said: If only you’d give us the money to tide us over, we’ll survive this little hiccup.
A nation so tiny and homogeneous that everyone in it knows pretty much everyone else is so fundamentally different from what one thinks of when one hears the word “nation” that it almost requires a new classification. Really, it’s less a nation than one big extended family. For instance, most Icelanders are by default members of the Lutheran Church. If they want to stop being Lutherans they must write to the government and quit; on the other hand, if they fill out a form, they can start their own cult and receive a subsidy. Another example: the Reykjavík phone book lists everyone by his first name, as there are only about nine surnames in Iceland, and they are derived by prefixing the father’s name to “son” or “dottir.” It’s hard to see how this clarifies matters, as there seem to be only about nine first names in Iceland, too. But if you wish to reveal how little you know about Iceland, you need merely refer to someone named Siggor Sigfusson as “Mr. Sigfusson,” or Kristin Petursdottir as “Ms. Petursdottir.” At any rate, everyone in a conversation is just meant to know whomever you’re talking about, so you never hear anyone ask, “Which Siggor do you mean?”
Because Iceland is really just one big family, it’s simply annoying to go around asking Icelanders if they’ve met Björk. Of course they’ve met Björk; who hasn’t met Björk? Who, for that matter, didn’t know Björk when she was two? “Yes, I know Björk,” a professor of finance at the University of Iceland says in reply to my question, in a weary tone. “She can’t sing, and I know her mother from childhood, and they were both crazy. That she is so well known outside of Iceland tells me more about the world than it does about Björk.”
One benefit of life inside a nation masking an extended family is that nothing needs to be explained; everyone already knows everything that needs to be known. I quickly find that it is an even greater than usual waste of time to ask directions, for instance. Just as you are meant to know which Bjornjolfer is being spoken of at any particular moment, you are meant to know where you are on the map. Two grown-ups—one a banker whose office is three blocks away—cannot tell me where to find the prime minister’s office. Three more grown-ups, all within three blocks of the National Gallery of Iceland, have no idea where to find the place. When I tell the sweet middle-aged lady behind the counter at the National Museum that no Icelander seems to know how to find it, she says, “No one actually knows anything about our country. Last week we had Icelandic high-school students here and their teacher asked them to name an Icelandic 19th-century painter. None of them could. Not a single one! One said, ‘Halldor Laxness?’!” (Laxness won the 1955 Nobel Prize in Literature, the greatest global honor for an Icelander until the 1980s, when two Icelandic women captured Miss World titles in rapid succession.)
T
he world is now pocked with cities that feel as if they are perched on top of bombs. The bombs have yet to explode, but the fuses have been lit, and there’s nothing anyone can do to extinguish them. Walk around Manhattan and you see empty stores, empty streets, and, even when it’s raining, empty taxis: people have fled before the bomb explodes. When I was there Reykjavík had the same feel of incipient doom, but the fuse burned strangely. The government mandates three months’ severance pay, and so the many laid-off bankers were paid until early February, when the government promptly fell. Against a basket of foreign currencies the krona is worth less than a third of its boom-time value. As Iceland imports everything but heat and fish, the price of just about everything is, in mid-December, about to skyrocket. A new friend who works for the government tells me that she went into a store to buy a lamp. The clerk told her he had sold the last of the lamps she was after, but offered to order it for her, from Sweden—at nearly three times the old price.
Bjarni Brynjolfsson: A fishing guide, who is back to hosting fly-fishermen instead of bankers.
Still, a society that has been ruined overnight doesn’t look much different from how it did the day before, when it believed itself to be richer than ever. The Central Bank of Iceland is a case in point. Almost certainly Iceland will adopt the euro as its currency, and the krona will cease to exist. Without it there is no need for a central bank to maintain the stability of the local currency and control interest rates. Inside the place stews David Oddsson, the architect of Iceland’s rise and fall. Back in the 1980s, Oddsson had fallen under the spell of Milton Friedman, the brilliant economist who was able to persuade even those who spent their lives working for the government that government was a waste of life. So Oddsson went on a quest to give Icelandic people their freedom—by which he meant freedom from government controls of any sort. As prime minister he lowered taxes, privatized industry, freed up trade, and, finally, in 2002, privatized the banks. At length, weary of prime-ministering, he got himself appointed governor of the Central Bank—even though he was a poet without banking experience.
After the collapse he holed up in his office inside the bank, declining all requests for interviews. Senior government officials tell me, seriously, that they assume he spends most of his time writing poetry. (In February he would be asked by a new government to leave.) On the outside, however, the Central Bank of Iceland is still an elegant black temple set against the snowy bluffs across the harbor. Sober-looking men still enter and exit. Small boys on sleds rocket down the slope beside it, giving not a rat’s ass that they are playing at ground zero of the global calamity. It all looks the same as it did before the crash, even though it couldn’t be more different. The fuse is burning its way toward the bomb.
When Neil Armstrong took his small step from Apollo 11 and looked around, he probably thought, Wow, sort of like Iceland—even though the moon was nothing like Iceland. But then, he was a tourist, and a tourist can’t help but have a distorted opinion of a place: he meets unrepresentative people, has unrepresentative experiences, and runs around imposing upon the place the fantastic mental pictures he had in his head when he got there. When Iceland became a tourist in global high finance it had the same problem as Neil Armstrong. Icelanders are among the most inbred human beings on earth—geneticists often use them for research. They inhabited their remote island for 1,100 years without so much as dabbling in leveraged buyouts, hostile takeovers, derivatives trading, or even small-scale financial fraud. When, in 2003, they sat down at the same table with Goldman Sachs and Morgan Stanley, they had only the roughest idea of what an investment banker did and how he behaved—most of it gleaned from young Icelanders’ experiences at various American business schools. And so what they did with money probably says as much about the American soul, circa 2003, as it does about Icelanders. They understood instantly, for instance, that finance had less to do with productive enterprise than trading bits of paper among themselves. And when they lent money they didn’t simply facilitate enterprise but bankrolled friends and family, so that they might buy and own things, like real investment bankers: Beverly Hills condos, British soccer teams and department stores, Danish airlines and media companies, Norwegian banks, Indian power plants.
That was the biggest American financial lesson the Icelanders took to heart: the importance of buying as many assets as possible with borrowed money, as asset prices only rose. By 2007, Icelanders owned roughly 50 times more foreign assets than they had in 2002. They bought private jets and third homes in London and Copenhagen. They paid vast sums of money for services no one in Iceland had theretofore ever imagined wanting. “A guy had a birthday party, and he flew in Elton John for a million dollars to sing two songs,” the head of the Left-Green Movement, Steingrimur Sigfusson, tells me with fresh incredulity. “And apparently not very well.” They bought stakes in businesses they knew nothing about and told the people running them what to do—just like real American investment bankers! For instance, an investment company called FL Group—a major shareholder in Glitnir bank—bought an 8.25 percent stake in American Airlines’ parent corporation. No one inside FL Group had ever actually run an airline; no one in FL Group even had meaningful work experience at an airline. That didn’t stop FL Group from telling American Airlines how to run an airline. “After taking a close look at the company over an extended period of time,” FL Group C.E.O. Hannes Smarason, graduate of M.I.T.’s Sloan School, got himself quoted saying, in his press release, not long after he bought his shares, “our suggestions include monetizing assets … that can be used to reduce debt or return capital to shareholders.”
Nor were the Icelanders particularly choosy about what they bought. I spoke with a hedge fund in New York that, in late 2006, spotted what it took to be an easy mark: a weak Scandinavian bank getting weaker. It established a short position, and then, out of nowhere, came Kaupthing to take a 10 percent stake in this soon-to-be defunct enterprise—driving up the share price to absurd levels. I spoke to another hedge fund in London so perplexed by the many bad LBOs Icelandic banks were financing that it hired private investigators to figure out what was going on in the Icelandic financial system. The investigators produced a chart detailing a byzantine web of interlinked entities that boiled down to this: A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets—the banks, soccer teams, etc. Since the entire world’s assets were rising—thanks in part to people like these Icelandic lunatics paying crazy prices for them—they appeared to be making money. Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge-fund manager. “This was how the banks and investment companies grew and grew. But they were lightweights in the international markets.”
O
n February 3, Tony Shearer, the former C.E.O. of a British merchant bank called Singer and Friedlander, offered a glimpse of the inside, when he appeared before a House of Commons committee to describe his bizarre experience of being acquired by an Icelandic bank.
Singer and Friedlander had been around since 1907 and was famous for, among other things, giving George Soros his start. In November 2003, Shearer learned that Kaupthing, of whose existence he was totally unaware, had just taken a 9.5 percent stake in his bank. Normally, when a bank tries to buy another bank, it seeks to learn something about it. Shearer offered to meet with Kaupthing’s chairman, Sigurdur Einarsson; Einarsson had no interest. (Einarsson declined to be interviewed by Vanity Fair.) When Kaupthing raised its stake to 19.5 percent, Shearer finally flew to Reykjavík to see who on earth these Icelanders were. “They were very different,” he told the House of Commons committee. “They ran their business in a very strange way. Everyone there was incredibly young. They were all from the same community in Reykjavík. And they had no idea what they were doing.”
Hordur Torfason: An activist and a protest organizer.
He examined Kaupthing’s annual reports and discovered some amazing facts: This giant international bank had only one board member who was not Icelandic, for instance. Its directors all had four-year contracts, and the bank had lent them £19 million to buy shares in Kaupthing, along with options to sell those shares back to the bank at a guaranteed profit. Virtually the entire bank’s stated profits were caused by its marking up assets it had bought at inflated prices. “The actual amount of profits that were coming from what I’d call banking was less than 10 percent,” said Shearer.
In a sane world the British regulators would have stopped the new Icelandic financiers from devouring the ancient British merchant bank. Instead, the regulators ignored a letter Shearer wrote to them. A year later, in January 2005, he received a phone call from the British takeover panel. “They wanted to know,” says Shearer, “why our share price had risen so rapidly over the past couple of days. So I laughed and said, ‘I think you’ll find the reason is that Mr. Einarsson, the chairman of Kaupthing, said two days ago, like an idiot, that he was going to make a bid for Singer and Friedlander.’” In August 2005, Singer and Friedlander became Kaupthing Singer and Friedlander, and Shearer quit, he said, out of fear of what might happen to his reputation if he stayed. In October 2008, Kaupthing Singer and Friedlander went bust.
In spite of all this, when Tony Shearer was pressed by the House of Commons to characterize the Icelanders as mere street hustlers, he refused. “They were all highly educated people,” he said in a tone of amazement.
H
ere is yet another way in which Iceland echoed the American model: all sorts of people, none of them Icelandic, tried to tell them they had a problem. In early 2006, for instance, an analyst named Lars Christensen and three of his colleagues at Denmark’s biggest bank, Danske Bank, wrote a report that said Iceland’s financial system was growing at a mad pace, and was on a collision course with disaster. “We actually wrote the report because we were worried our clients were getting too interested in Iceland,” he tells me. “Iceland was the most extreme of everything.” Christensen then flew to Iceland and gave a speech to reinforce his point, only to be greeted with anger. “The Icelandic banks took it personally,” he says. “We were being threatened with lawsuits. I was told, ‘You’re Danish, and you are angry with Iceland because Iceland is doing so well.’ Basically it all had to do with what happened in 1944,” when Iceland declared its independence from Denmark. “The reaction wasn’t ‘These guys might be right.’ It was ‘No! It’s a conspiracy. They have bad motives.’” The Danish were just jealous!
The Danske Bank report alerted hedge funds in London to an opportunity: shorting Iceland. They investigated and found this incredible web of cronyism: bankers buying stuff from one another at inflated prices, borrowing tens of billions of dollars and re-lending it to the members of their little Icelandic tribe, who then used it to buy up a messy pile of foreign assets. “Like any new kid on the block,” says Theo Phanos of Trafalgar Funds in London, “they were picked off by various people who sold them the lowest-quality assets—second-tier airlines, sub-scale retailers. They were in all the worst LBOs.”
But from the prime minister on down, Iceland’s leaders attacked the messenger. “The attacks … give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system,” said Central Bank chairman Oddsson in March of last year. The chairman of Kaupthing publicly fingered four hedge funds that he said were deliberately seeking to undermine Iceland’s financial miracle. “I don’t know where the Icelanders get this notion,” says Paul Ruddock, of Lansdowne Partners, one of those fingered. “We only once traded in an Icelandic stock and it was a very short-term trade. We started to take legal action against the chairman of Kaupthing after he made public accusations against us that had no truth, and then he withdrew them.”
One of the hidden causes of the current global financial crisis is that the people who saw it coming had more to gain from it by taking short positions than they did by trying to publicize the problem. Plus, most of the people who could credibly charge Iceland—or, for that matter, Lehman Brothers—with financial crimes could be dismissed as crass profiteers, talking their own book. Back in April 2006, however, an emeritus professor of economics at the University of Chicago named Bob Aliber took an interest in Iceland. Aliber found himself at the London Business School, listening to a talk on Iceland, about which he knew nothing. He recognized instantly the signs. Digging into the data, he found in Iceland the outlines of what was so clearly a historic act of financial madness that it belonged in a textbook. “The Perfect Bubble,” Aliber calls Iceland’s financial rise, and he has the textbook in the works: an updated version of Charles Kindleberger’s 1978 classic, Manias, Panics, and Crashes, a new edition of which he’s currently editing. In it, Iceland, he decided back in 2006, would now have its own little box, along with the South Sea Bubble and the Tulip Craze—even though Iceland had yet to crash. For him the actual crash was a mere formality.
W
ord spread in Icelandic economic circles that this distinguished professor at Chicago had taken a special interest in Iceland. In May 2008, Aliber was invited by the University of Iceland’s economics department to give a speech. To an audience of students, bankers, and journalists, he explained that Iceland, far from having an innate talent for high finance, had all the markings of a giant bubble, but he spoke the technical language of academic economists. (“Monetary Turbulence and the Icelandic Economy,” he called his speech.) In the following Q&A session someone asked him to predict the future, and he lapsed into plain English. As an audience member recalls, Aliber said, “I give you nine months. Your banks are dead. Your bankers are either stupid or greedy. And I’ll bet they are on planes trying to sell their assets right now.”
The Icelandic bankers in the audience sought to prevent newspapers from reporting the speech. Several academics suggested that Aliber deliver his alarming analysis to Iceland’s Central Bank. Somehow that never happened. “The Central Bank said they were too busy to see him,” says one of the professors who tried to arrange the meeting, “because they were preparing the Report on Financial Stability.” For his part Aliber left Iceland thinking that he’d caused such a stir he might not be allowed back into the country. “I got the feeling,” he told me, “that the only reason they brought me in was that they needed an outsider to say these things—that an insider wouldn’t say these things, because he’d be afraid of getting into trouble.” And yet he remains extremely fond of his hosts. “They are a very curious people,” he says, laughing. “I guess that’s the point, isn’t it?”
Icelanders—or at any rate Icelandic men—had their own explanations for why, when they leapt into global finance, they broke world records: the natural superiority of Icelanders. Because they were small and isolated it had taken 1,100 years for them—and the world—to understand and exploit their natural gifts, but now that the world was flat and money flowed freely, unfair disadvantages had vanished. Iceland’s president, Olafur Ragnar Grimsson, gave speeches abroad in which he explained why Icelanders were banking prodigies. “Our heritage and training, our culture and home market, have provided a valuable advantage,” he said, then went on to list nine of these advantages, ending with how unthreatening to others Icelanders are. (“Some people even see us as fascinating eccentrics who can do no harm.”) There were many, many expressions of this same sentiment, most of them in Icelandic. “There were research projects at the university to explain why the Icelandic business model was superior,” says Gylfi Zoega, chairman of the economics department. “It was all about our informal channels of communication and ability to make quick decisions and so forth.”
“We were always told that the Icelandic businessmen were so clever,” says university finance professor and former banker Vilhjalmur Bjarnason. “They were very quick. And when they bought something they did it very quickly. Why was that? That is usually because the seller is very satisfied with the price.”
You didn’t need to be Icelandic to join the cult of the Icelandic banker. German banks put $21 billion into Icelandic banks. The Netherlands gave them $305 million, and Sweden kicked in $400 million. U.K. investors, lured by the eye-popping 14 percent annual returns, forked over $30 billion—$28 billion from companies and individuals and the rest from pension funds, hospitals, universities, and other public institutions. Oxford University alone lost $50 million.
Geir Haarde: The former prime minister, on January 28, one of his last days in office.
Maybe because there are so few Icelanders in the world, we know next to nothing about them. We assume they are more or less Scandinavian—a gentle people who just want everyone to have the same amount of everything. They are not. They have a feral streak in them, like a horse that’s just pretending to be broken.
A
fter three days in Reykjavík, I receive, more or less out of the blue, two phone calls. The first is from a producer of a leading current-events TV show. All of Iceland watches her show, she says, then asks if I’d come on and be interviewed. “About what?” I ask. “We’d like you to explain our financial crisis,” she says. “I’ve only been here three days!” I say. It doesn’t matter, she says, as no one in Iceland understands what’s happened. They’d enjoy hearing someone try to explain it, even if that person didn’t have any idea what he was talking about—which goes to show, I suppose, that not everything in Iceland is different from other places. As I demur, another call comes, from the prime minister’s office.
Iceland’s then prime minister, Geir Haarde, is also the head of the Independence Party, which has governed the country since 1991. It ruled in loose coalition with the Social Democrats and the Progressive Party. (Iceland’s fourth major party is the Left-Green Movement.) That a nation of 300,000 people, all of whom are related by blood, needs four major political parties suggests either a talent for disagreement or an unwillingness to listen to one another. In any case, of the four parties, the Independents express the greatest faith in free markets. The Independence Party is the party of the fishermen. It is also, as an old schoolmate of the prime minister’s puts it to me, “all men, men, men. Not a woman in it.”
Walking into the P.M.’s minute headquarters, I expect to be stopped and searched, or at least asked for photo identification. Instead I find a single policeman sitting behind a reception desk, feet up on the table, reading a newspaper. He glances up, bored. “I’m here to see the prime minister,” I say for the first time in my life. He’s unimpressed. Anyone here can see the prime minister. Half a dozen people will tell me that one of the reasons Icelanders thought they would be taken seriously as global financiers is that all Icelanders feel important. One reason they all feel important is that they all can go see the prime minister anytime they like.
What he might say to them about their collapse is an open question. There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde, though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student. As a group, the Independence Party’s leaders have a reputation for not knowing much about finance and for refusing to avail themselves of experts who do. An Icelandic professor at the London School of Economics named Jon Danielsson, who specializes in financial panics, has had his offer to help spurned; so have several well-known financial economists at the University of Iceland. Even the advice of really smart central bankers from seriously big countries went ignored. It’s not hard to see why the Independence Party and its prime minister fail to appeal to Icelandic women: they are the guy driving his family around in search of some familiar landmark and refusing, over his wife’s complaints, to stop and ask directions.
“Why is Vanity Fair interested in Iceland?” he asks as he strides into the room, with the force and authority of the leader of a much larger nation. And it’s a good question.
As it turns out, he’s not actually stupid, but political leaders seldom are, no matter how much the people who elected them insist that it must be so. He does indeed say things that could not possibly be true, but they are only the sorts of fibs that prime ministers are hired to tell. He claims that the krona is once again an essentially stable currency, for instance, when the truth is it doesn’t currently trade in international markets—it is assigned an arbitrary value by the government for select purposes. Icelanders abroad have already figured out not to use their Visa cards, for fear of being charged the real exchange rate, whatever that might be.
The prime minister would like me to believe that he saw Iceland’s financial crisis taking shape but could do little about it. (“We could not say publicly our fears about the banks, because you create the very thing you are seeking to avoid: a panic.”) By implication it was not politicians like him but financiers who were to blame. On some level the people agree: the guy who ran the Baugur investment group had snowballs chucked at him as he dashed from the 101 Hotel, which his wife owns, to his limo; the guy who ran Kaupthing Bank turned up at the National Theater and, as he took his seat, was booed. But, for the most part, the big shots have fled Iceland for London, or are lying low, leaving the poor prime minister to shoulder the blame and face the angry demonstrators, led by folksinging activist Hordur Torfason, who assemble every weekend outside Parliament. Haarde has his story, and he’s sticking to it: foreigners entrusted their capital to Iceland, and Iceland put it to good use, but then, last September 15, Lehman Brothers failed and foreigners panicked and demanded their capital back. Iceland was ruined not by its own recklessness but by a global tsunami. The problem with this story is that it fails to explain why the tsunami struck Iceland, as opposed to, say, Tonga.
But I didn’t come to Iceland to argue. I came to understand. “There’s something I really want to ask you,” I say.
“Yes?”
“Is it true that you’ve been telling people that it’s time to stop banking and go fishing?”
A great line, I thought. Succinct, true, and to the point. But I’d heard about it thirdhand, from a New York hedge-fund manager. The prime minister fixes me with a self-consciously stern gaze. “That’s a gross exaggeration,” he says.
“I thought it made sense,” I say uneasily.
“I never said that!”
Obviously, I’ve hit some kind of nerve, but which kind I cannot tell. Is he worried that to have said such a thing would make him seem a fool? Or does he still think that fishing, as a profession, is somehow less dignified than banking?
A
t length, I return to the hotel to find, for the first time in four nights, no empty champagne bottles outside my neighbors’ door. The Icelandic couple whom I had envisioned as being on one last blowout have packed and gone home. For four nights I have endured their Orc shrieks from the other side of the hotel wall; now all is silent. It’s now possible to curl up in bed with “The Economic Theory of a Common-Property Resource: The Fishery.” One way or another, the wealth in Iceland comes from the fish, and if you want to understand what Icelanders did with their money you had better understand how they came into it in the first place.
The brilliant paper was written back in 1954 by H. Scott Gordon, a University of Indiana economist. It describes the plight of the fisherman—and seeks to explain “why fishermen are not wealthy, despite the fact that fishery resources of the sea are the richest and most indestructible available to man.” The problem is that, because the fish are everybody’s property, they are nobody’s property. Anyone can catch as many fish as they like, so they fish right up to the point where fishing becomes unprofitable—for everybody. “There is in the spirit of every fisherman the hope of the ‘lucky catch,’” wrote Gordon. “As those who know fishermen well have often testified, they are gamblers and incurably optimistic.”
Fishermen, in other words, are a lot like American investment bankers. Their overconfidence leads them to impoverish not just themselves but also their fishing grounds. Simply limiting the number of fish caught won’t solve the problem; it will just heighten the competition for the fish and drive down profits. The goal isn’t to get fishermen to overspend on more nets or bigger boats. The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention.
Johanna Sigurdardottir: The new prime minister, the modern world’s first openly gay head of state.
This insight is what led Iceland to go from being one of the poorest countries in Europe circa 1900 to being one of the richest circa 2000. Iceland’s big change began in the early 1970s, after a couple of years when the fish catch was terrible. The best fishermen returned for a second year in a row without their usual haul of cod and haddock, so the Icelandic government took radical action: they privatized the fish. Each fisherman was assigned a quota, based roughly on his historical catches. If you were a big-time Icelandic fisherman you got this piece of paper that entitled you to, say, 1 percent of the total catch allowed to be pulled from Iceland’s waters that season. Before each season the scientists at the Marine Research Institute would determine the total number of cod or haddock that could be caught without damaging the long-term health of the fish population; from year to year, the numbers of fish you could catch changed. But your percentage of the annual haul was fixed, and this piece of paper entitled you to it in perpetuity.
Even better, if you didn’t want to fish you could sell your quota to someone who did. The quotas thus drifted into the hands of the people to whom they were of the greatest value, the best fishermen, who could extract the fish from the sea with maximum efficiency. You could also take your quota to the bank and borrow against it, and the bank had no trouble assigning a dollar value to your share of the cod pulled, without competition, from the richest cod-fishing grounds on earth. The fish had not only been privatized, they had been securitized.
I
t was horribly unfair: a public resource—all the fish in the Icelandic sea—was simply turned over to a handful of lucky Icelanders. Overnight, Iceland had its first billionaires, and they were all fishermen. But as social policy it was ingenious: in a single stroke the fish became a source of real, sustainable wealth rather than shaky sustenance. Fewer people were spending less effort catching more or less precisely the right number of fish to maximize the long-term value of Iceland’s fishing grounds. The new wealth transformed Iceland—and turned it from the backwater it had been for 1,100 years to the place that spawned Björk. If Iceland has become famous for its musicians it’s because Icelanders now have time to play music, and much else. Iceland’s youth are paid to study abroad, for instance, and encouraged to cultivate themselves in all sorts of interesting ways. Since its fishing policy transformed Iceland, the place has become, in effect, a machine for turning cod into Ph.D.’s.
But this, of course, creates a new problem: people with Ph.D.’s don’t want to fish for a living. They need something else to do.
And that something is probably not working in the industry that exploits Iceland’s other main natural resource: energy. The waterfalls and boiling lava generate vast amounts of cheap power, but, unlike oil, it cannot be profitably exported. Iceland’s power is trapped in Iceland, and if there is something poetic about the idea of trapped power, there is also something prosaic in how the Icelanders have come to terms with the problem. They asked themselves: What can we do that other people will pay money for that requires huge amounts of power? The answer was: smelt aluminum.
Notice that no one asked, What might Icelanders want to do? Or even: What might Icelanders be especially suited to do? No one thought that Icelanders might have some natural gift for smelting aluminum, and, if anything, the opposite proved true. Alcoa, the biggest aluminum company in the country, encountered two problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the so-called “hidden people”—or, to put it more plainly, elves—in whom some large number of Icelanders, steeped long and thoroughly in their rich folkloric culture, sincerely believe. Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free but, as he put it, “we couldn’t as a company be in a position of acknowledging the existence of hidden people.” The other, more serious problem was the Icelandic male: he took more safety risks than aluminum workers in other nations did. “In manufacturing,” says the spokesman, “you want people who follow the rules and fall in line. You don’t want them to be heroes. You don’t want them to try to fix something it’s not their job to fix, because they might blow up the place.” The Icelandic male had a propensity to try to fix something it wasn’t his job to fix.
Back away from the Icelandic economy and you can’t help but notice something really strange about it: the people have cultivated themselves to the point where they are unsuited for the work available to them. All these exquisitely schooled, sophisticated people, each and every one of whom feels special, are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting. There are, of course, a few jobs in Iceland that any refined, educated person might like to do. Certifying the nonexistence of elves, for instance. (“This will take at least six months—it can be very tricky.”) But not nearly so many as the place needs, given its talent for turning cod into Ph.D.’s. At the dawn of the 21st century, Icelanders were still waiting for some task more suited to their filigreed minds to turn up inside their economy so they might do it.
Enter investment banking.
F
or the fifth time in as many days I note a slight tension at any table where Icelandic men and Icelandic women are both present. The male exhibits the global male tendency not to talk to the females—or, rather, not to include them in the conversation—unless there is some obvious sexual motive. But that’s not the problem, exactly. Watching Icelandic men and women together is like watching toddlers. They don’t play together but in parallel; they overlap even less organically than men and women in other developed countries, which is really saying something. It isn’t that the women are oppressed, exactly. On paper, by historical global standards, they have it about as good as women anywhere: good public health care, high participation in the workforce, equal rights. What Icelandic women appear to lack—at least to a tourist who has watched them for all of 10 days—is a genuine connection to Icelandic men. The Independence Party is mostly male; the Social Democrats, mostly female. (On February 1, when the reviled Geir Haarde finally stepped aside, he was replaced by Johanna Sigurdardottir, a Social Democrat, and Iceland got not just a lady prime minister but the modern world’s first openly gay head of state—she lives with another woman.) Everyone knows everyone else, but when I ask Icelanders for leads, the men always refer me to other men, and the women to other women. It was a man, for instance, who suggested I speak to Stefan Alfsson.
Lean and hungry-looking, wearing genuine rather than designer stubble, Alfsson still looks more like a trawler captain than a financier. He went to sea at 16, and, in the off-season, to school to study fishing. He was made captain of an Icelandic fishing trawler at the shockingly young age of 23 and was regarded, I learned from other men, as something of a fishing prodigy—which is to say he had a gift for catching his quota of cod and haddock in the least amount of time. And yet, in January 2005, at 30, he up and quit fishing to join the currency-trading department of Landsbanki. He speculated in the financial markets for nearly two years, until the great bloodbath of October 2008, when he was sacked, along with every other Icelander who called himself a “trader.” His job, he says, was to sell people, mainly his fellow fishermen, on what he took to be a can’t-miss speculation: borrow yen at 3 percent, use them to buy Icelandic kronur, and then invest those kronur at 16 percent. “I think it is easier to take someone in the fishing industry and teach him about currency trading,” he says, “than to take someone from the banking industry and teach them how to fish.”
He then explained why fishing wasn’t as simple as I thought. It’s risky, for a start, especially as practiced by the Icelandic male. “You don’t want to have some sissy boys on your crew,” he says, especially as Icelandic captains are famously manic in their fishing styles. “I had a crew of Russians once,” he says, “and it wasn’t that they were lazy, but the Russians are always at the same pace.” When a storm struck, the Russians would stop fishing, because it was too dangerous. “The Icelanders would fish in all conditions,” says Stefan, “fish until it is impossible to fish. They like to take the risks. If you go overboard, the probabilities are not in your favor. I’m 33, and I already have two friends who have died at sea.”
It took years of training for him to become a captain, and even then it happened only by a stroke of luck. When he was 23 and a first mate, the captain of his fishing boat up and quit. The boat owner went looking for a replacement and found an older fellow, retired, who was something of an Icelandic fishing legend, the wonderfully named Snorri Snorrasson. “I took two trips with this guy,” Stefan says. “I have never in my life slept so little, because I was so eager to learn. I slept two or three hours a night because I was sitting beside him, talking to him. I gave him all the respect in the world—it’s difficult to describe all he taught me. The reach of the trawler. The most efficient angle of the net. How do you act on the sea. If you have a bad day, what do you do? If you’re fishing at this depth, what do you do? If it’s not working, do you move in depth or space? In the end it’s just so much feel. In this time I learned infinitely more than I learned in school. Because how do you learn to fish in school?”
This marvelous training was as fresh in his mind as if he’d received it yesterday, and the thought of it makes his eyes mist.
“You spent seven years learning every little nuance of the fishing trade before you were granted the gift of learning from this great captain?” I ask.
“Yes.”
“And even then you had to sit at the feet of this great master for many months before you felt as if you knew what you were doing?”
“Yes.”
“Then why did you think you could become a banker and speculate in financial markets, without a day of training?”
“That’s a very good question,” he says. He thinks for a minute. “For the first time this evening I lack a word.” As I often think I know exactly what I am doing even when I don’t, I find myself oddly sympathetic.
“What, exactly, was your job?” I ask, to let him off the hook, catch and release being the current humane policy in Iceland.
“I started as a … “—now he begins to laugh—“an adviser to companies on currency risk hedging. But given my aggressive nature I went more and more into plain speculative trading.” Many of his clients were other fishermen, and fishing companies, and they, like him, had learned that if you don’t take risks you don’t catch the fish. “The clients were only interested in ‘hedging’ if it meant making money,” he says.
I
n retrospect, there are some obvious questions an Icelander living through the past five years might have asked himself. For example: Why should Iceland suddenly be so seemingly essential to global finance? Or: Why do giant countries that invented modern banking suddenly need Icelandic banks to stand between their depositors and their borrowers—to decide who gets capital and who does not? And: If Icelanders have this incredible natural gift for finance, how did they keep it so well hidden for 1,100 years? At the very least, in a place where everyone knows everyone else, or his sister, you might have thought that the moment Stefan Alfsson walked into Landsbanki 10 people would have said, “Stefan, you’re a fisherman!” But they didn’t. To a shocking degree, they still don’t. “If I went back to banking,” he says, with an entirely straight face, “I would be a private-banking guy.”
B
ack in 2001, as the Internet boom turned into a bust, M.I.T.’s Quarterly Journal of Economics published an intriguing paper called “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” The authors, Brad Barber and Terrance Odean, gained access to the trading activity in over 35,000 households, and used it to compare the habits of men and women. What they found, in a nutshell, is that men not only trade more often than women but do so from a false faith in their own financial judgment. Single men traded less sensibly than married men, and married men traded less sensibly than single women: the less the female presence, the less rational the approach to trading in the markets.
One of the distinctive traits about Iceland’s disaster, and Wall Street’s, is how little women had to do with it. Women worked in the banks, but not in the risktaking jobs. As far as I can tell, during Iceland’s boom, there was just one woman in a senior position inside an Icelandic bank. Her name is Kristin Petursdottir, and by 2005 she had risen to become deputy C.E.O. for Kaupthing in London. “The financial culture is very male-dominated,” she says. “The culture is quite extreme. It is a pool of sharks. Women just despise the culture.” Petursdottir still enjoyed finance. She just didn’t like the way Icelandic men did it, and so, in 2006, she quit her job. “People said I was crazy,” she says, but she wanted to create a financial-services business run entirely by women. To bring, as she puts it, “more feminine values to the world of finance.”
Today her firm is, among other things, one of the very few profitable financial businesses left in Iceland. After the stock exchange collapsed, the money flooded in. A few days before we met, for instance, she heard banging on the front door early one morning and opened it to discover a little old man. “I’m so fed up with this whole system,” he said. “I just want some women to take care of my money.”
It was with that in mind that I walked, on my last afternoon in Iceland, into the Saga Museum. Its goal is to glorify the Sagas, the great 12th- and 13th-century Icelandic prose epics, but the effect of its life-size dioramas is more like modern reality TV. Not statues carved from silicon but actual ancient Icelanders, or actors posing as ancient Icelanders, as shrieks and bloodcurdling screams issue from the P.A. system: a Catholic bishop named Jon Arason having his head chopped off; a heretic named Sister Katrin being burned at the stake; a battle scene in which a blood-drenched Viking plunges his sword toward the heart of a prone enemy. The goal was verisimilitude, and to achieve it no expense was spared. Passing one tableau of blood and guts and moving on to the next, I caught myself glancing over my shoulder to make sure some Viking wasn’t following me with a battle-ax. The effect was so disorienting that when I reached the end and found a Japanese woman immobile and reading on a bench, I had to poke her on the shoulder to make sure she was real. This is the past Icelanders supposedly cherish: a history of conflict and heroism. Of seeing who is willing to bump into whom with the most force. There are plenty of women, but this is a men’s history.
When you borrow a lot of money to create a false prosperity, you import the future into the present. It isn’t the actual future so much as some grotesque silicon version of it. Leverage buys you a glimpse of a prosperity you haven’t really earned. The striking thing about the future the Icelandic male briefly imported was how much it resembled the past that he celebrates. I’m betting now they’ve seen their false future the Icelandic female will have a great deal more to say about the actual one.
Author Michael Lewis is a contributor to The New York Times Magazine.
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."
link
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."
link
24 December 2008
Blomberg on Iceland
Dec. 23 (Bloomberg) -- It was the week before Christmas in Reykjavik, and all through the town Eva Hauksdottir led a band of 60 whistle-blowing, pan-banging, shouting demonstrators.
“Pay your own debts,” they yelled as they visited one bank office after another in Iceland’s capital. “Don’t make the children pay.”
When she isn’t leading one of the almost daily acts of protest in this land devastated by the global financial meltdown, Hauksdottir sells good luck charms made from the claws of ptarmigans, a local bird, and voodoo dolls in the form of bankers. She says she expects to lose her home, worth less than when she bought it two years ago, after the amount she owes jumped more than 20 percent.
Unrest following the end of a five-year economic boom is overshadowing the holidays in a country of 320,000 near the Arctic Circle, where the folklore is filled with magic, trolls and elves. Expansion ended with the collapse of the U.S. subprime mortgage market. The fallout in Iceland may presage civil disruptions elsewhere, as job losses multiply and credit bills come due. Few nations can count themselves safe, says Ian Bremmer, president of the New York-based Eurasia Group, which analyzes political risk for businesses.
“As people have their expectations changed radically, you can have protests come out of nowhere,” even in developed countries, Bremmer said.
‘Maybe Axes’
Riots in Greece this month, sparked by the police shooting of a teenager, became tinged with economic dissension. A group of Kuwaiti equity traders marched on the emir’s office in October to demand the closing of the stock exchange to stem losses. Even in U.S. cities, civil disorder is “conceivable” if unemployment rises above 10 percent from November’s 6.7 percent, Bremmer says.
Hauksdottir, the owner of a Reykjavik witchcraft shop, says over a cup of thyme and juniper tea that only civil disobedience can force banks to stop collecting debts that people can’t pay.
“We’ll use our voices, and then if we have to we’ll use our hands, and maybe axes,” Hauksdottir says.
At Reykjavik’s half-built concert hall, a symbol of the good times that juts from the harbor toward the North Pole, the visitor center is closed to visitors. The principal owner, Landsbanki Islands hf, failed in October. Marketing director Thorhallur Vilhjalmsson says he’s making ends meet on severance pay.
“Iceland right now is like Chernobyl after the blast,” Vilhjalmsson says. “It looks normal, but there’s radiation.”
Kicking Down Doors
The protests may escalate as bills come due and severance pay runs out for those who lost jobs at the three biggest lenders, including Landsbanki, the second-largest, says Stefan Palsson, a historian. He once led the Campaign Against Militarism, opposing NATO bases in the 1960s.
He said he’s surprised ordinary people are backing activists once considered “hooligans.” There was public outrage three years ago when environmentalists poured yogurt over aluminum representatives to protest a new plant.
“Now you have protesters kicking down doors at police stations, and respectable elderly people saying ‘Well, they’re young and full of enthusiasm, and anyway, they’re right!’” he said.
Inflation rose to 18.1 percent this month, and the International Monetary Fund predicts that Iceland’s economy will shrink 9.6 percent next year. The Washington-based global lender of last resort put together a rescue package for the country worth as much as $5.3 billion last month.
No-Debt Ethics
The decline in the krona and surge in prices are creating a triple whammy for borrowers whose home loans are typically linked to inflation or foreign currencies. Households owed more than double their disposable income at the end of 2006, almost twice the level in the U.S., according to the IMF.
Some Icelanders say the easy money of the past decade eroded the island’s traditions. A sheep farmer in the 1934 novel, “Independent People,” by Iceland’s only Nobel laureate, Halldor Laxness, preferred freedom from debt to any material comforts. His motto was: “I don’t owe anyone a penny.”
That philosophy may return, says Birgir Asgeirsson, 63, the priest at Reykjavik’s Hallgrimskirkja Lutheran church.
“I grew up learning that you work for what you get, but kids today just get what they want,” Asgeirsson says. “Now I can hear parents say ‘No, my little boy, it’s not that easy.’”
Gunnlaugur Gudmundsson is an astrologer and chief executive officer of a company that provides horoscope predictions for phone operators such as Vodafone Group Plc. Customer numbers have more than doubled since the crisis broke, he said.
“The classic question used to be, ‘I’m in love with this guy, will he marry me?’” he said at a table strewn with star- charts. “Now the questions are about jobs, and when the good times will return.”
Two-Year Contraction
The answer may be 2011, according to the IMF, which projects two years of economic contraction first.
That may take Iceland back to the income levels of five or 10 years ago, “and we weren’t badly off then,” said Hannes Holmstein Gissurarson, professor of politics at the University of Iceland and a central bank supervisory board member. Banks and politicians were victims of an “external shock,” and weren’t behaving much worse than their counterparts elsewhere, he said.
The difference was one of scale. As governments worldwide pumped money into stricken banks, Iceland couldn’t follow suit. By the end of last year, local banks had accumulated assets almost nine times the size of the country’s $12 billion economy, according to the IMF.
The lack of backup was a “systemic error no one thought of,” Gissurarson said.
‘Cocktail Party’
The Reykjavik concert hall was budgeted at 170 million pounds ($252 million), Vilhjalmsson says. That was more than 2 percent of gross domestic product -- equivalent to a $250 billion project in the U.S. Pointing to miniature models, Vilhjalmsson says the building’s glass shell was designed to refract the low Arctic sun in kaleidoscopic shades.
In midwinter in the world’s northernmost capital the sun appears for just four hours a day, leaving long evenings for Icelanders to figure out how their country got caught up in the global boom-and-bust. Vilhjalmsson has his own version.
“The West is having this great, long cocktail party,” Vilhjalmsson says. “And then, late in the evening, in comes this cute little dwarf, Iceland. And he gets drunk.”
“Pay your own debts,” they yelled as they visited one bank office after another in Iceland’s capital. “Don’t make the children pay.”
When she isn’t leading one of the almost daily acts of protest in this land devastated by the global financial meltdown, Hauksdottir sells good luck charms made from the claws of ptarmigans, a local bird, and voodoo dolls in the form of bankers. She says she expects to lose her home, worth less than when she bought it two years ago, after the amount she owes jumped more than 20 percent.
Unrest following the end of a five-year economic boom is overshadowing the holidays in a country of 320,000 near the Arctic Circle, where the folklore is filled with magic, trolls and elves. Expansion ended with the collapse of the U.S. subprime mortgage market. The fallout in Iceland may presage civil disruptions elsewhere, as job losses multiply and credit bills come due. Few nations can count themselves safe, says Ian Bremmer, president of the New York-based Eurasia Group, which analyzes political risk for businesses.
“As people have their expectations changed radically, you can have protests come out of nowhere,” even in developed countries, Bremmer said.
‘Maybe Axes’
Riots in Greece this month, sparked by the police shooting of a teenager, became tinged with economic dissension. A group of Kuwaiti equity traders marched on the emir’s office in October to demand the closing of the stock exchange to stem losses. Even in U.S. cities, civil disorder is “conceivable” if unemployment rises above 10 percent from November’s 6.7 percent, Bremmer says.
Hauksdottir, the owner of a Reykjavik witchcraft shop, says over a cup of thyme and juniper tea that only civil disobedience can force banks to stop collecting debts that people can’t pay.
“We’ll use our voices, and then if we have to we’ll use our hands, and maybe axes,” Hauksdottir says.
At Reykjavik’s half-built concert hall, a symbol of the good times that juts from the harbor toward the North Pole, the visitor center is closed to visitors. The principal owner, Landsbanki Islands hf, failed in October. Marketing director Thorhallur Vilhjalmsson says he’s making ends meet on severance pay.
“Iceland right now is like Chernobyl after the blast,” Vilhjalmsson says. “It looks normal, but there’s radiation.”
Kicking Down Doors
The protests may escalate as bills come due and severance pay runs out for those who lost jobs at the three biggest lenders, including Landsbanki, the second-largest, says Stefan Palsson, a historian. He once led the Campaign Against Militarism, opposing NATO bases in the 1960s.
He said he’s surprised ordinary people are backing activists once considered “hooligans.” There was public outrage three years ago when environmentalists poured yogurt over aluminum representatives to protest a new plant.
“Now you have protesters kicking down doors at police stations, and respectable elderly people saying ‘Well, they’re young and full of enthusiasm, and anyway, they’re right!’” he said.
Inflation rose to 18.1 percent this month, and the International Monetary Fund predicts that Iceland’s economy will shrink 9.6 percent next year. The Washington-based global lender of last resort put together a rescue package for the country worth as much as $5.3 billion last month.
No-Debt Ethics
The decline in the krona and surge in prices are creating a triple whammy for borrowers whose home loans are typically linked to inflation or foreign currencies. Households owed more than double their disposable income at the end of 2006, almost twice the level in the U.S., according to the IMF.
Some Icelanders say the easy money of the past decade eroded the island’s traditions. A sheep farmer in the 1934 novel, “Independent People,” by Iceland’s only Nobel laureate, Halldor Laxness, preferred freedom from debt to any material comforts. His motto was: “I don’t owe anyone a penny.”
That philosophy may return, says Birgir Asgeirsson, 63, the priest at Reykjavik’s Hallgrimskirkja Lutheran church.
“I grew up learning that you work for what you get, but kids today just get what they want,” Asgeirsson says. “Now I can hear parents say ‘No, my little boy, it’s not that easy.’”
Gunnlaugur Gudmundsson is an astrologer and chief executive officer of a company that provides horoscope predictions for phone operators such as Vodafone Group Plc. Customer numbers have more than doubled since the crisis broke, he said.
“The classic question used to be, ‘I’m in love with this guy, will he marry me?’” he said at a table strewn with star- charts. “Now the questions are about jobs, and when the good times will return.”
Two-Year Contraction
The answer may be 2011, according to the IMF, which projects two years of economic contraction first.
That may take Iceland back to the income levels of five or 10 years ago, “and we weren’t badly off then,” said Hannes Holmstein Gissurarson, professor of politics at the University of Iceland and a central bank supervisory board member. Banks and politicians were victims of an “external shock,” and weren’t behaving much worse than their counterparts elsewhere, he said.
The difference was one of scale. As governments worldwide pumped money into stricken banks, Iceland couldn’t follow suit. By the end of last year, local banks had accumulated assets almost nine times the size of the country’s $12 billion economy, according to the IMF.
The lack of backup was a “systemic error no one thought of,” Gissurarson said.
‘Cocktail Party’
The Reykjavik concert hall was budgeted at 170 million pounds ($252 million), Vilhjalmsson says. That was more than 2 percent of gross domestic product -- equivalent to a $250 billion project in the U.S. Pointing to miniature models, Vilhjalmsson says the building’s glass shell was designed to refract the low Arctic sun in kaleidoscopic shades.
In midwinter in the world’s northernmost capital the sun appears for just four hours a day, leaving long evenings for Icelanders to figure out how their country got caught up in the global boom-and-bust. Vilhjalmsson has his own version.
“The West is having this great, long cocktail party,” Vilhjalmsson says. “And then, late in the evening, in comes this cute little dwarf, Iceland. And he gets drunk.”
9 November 2008
NYT~ Frozen Iceland
REYKJAVIK, Iceland — The collapse came so fast it seemed unreal, impossible. One woman here compared it to being hit by a train. Another said she felt as if she were watching it through a window. Another said, “It feels like you’ve been put in a prison, and you don’t know what you did wrong.”
This country, as modern and sophisticated as it is geographically isolated, still seems to be in shock. But if the events of last month — the failure of Iceland’s banks; the plummeting of its currency; the first wave of layoffs; the loss of reputation abroad — felt like a bad dream, Iceland has now awakened to find that it is all coming true.
It is not as if Reykjavik, where about two-thirds of the country’s 300,000 people live, is filled with bread lines or homeless shanties or looters smashing store windows. But this city, until recently the center of one of the world’s fastest economic booms, is now the unhappy site of one of its great crashes. It is impossible to meet anyone here who has not been profoundly affected by the financial crisis.
Overnight, people lost their savings. Prices are soaring. Once-crowded restaurants are almost empty. Banks are rationing foreign currency, and companies are finding it dauntingly difficult to do business abroad. Inflation is at 16 percent and rising. People have stopped traveling overseas. The local currency, the krona, was 65 to the dollar a year ago; now it is 130. Companies are slashing salaries, reducing workers’ hours and, in some instances, embarking on mass layoffs.
“No country has ever crashed as quickly and as badly in peacetime,” said Jon Danielsson, an economist with the London School of Economics.
The loss goes beyond the personal, shattering a proud country’s sense of itself.
“Years ago, I would say that I was Icelandic and people might say, ‘Oh, where’s that?’ ” said Katrin Runolfsdottir, 49, who was fired from her secretarial job on Oct. 31. “That was fine. But now there’s this image of us being overspenders, thieves.”
Aldis Nordfjord, a 53-year-old architect, also lost her job last month. So did all 44 of her co-workers — everyone in the company except its owners. Some 75 percent of Iceland’s private-sector architects have been fired in the past few weeks, she said.
In a strange way, she said, it is comforting to be one in a crowd. “Everyone is in the same situation,” she said. “If you can imagine, if only 10 out of 40 people had been fired, it would have been different; you would have felt, ‘Why me? Why not him?’ ”
Until last spring, Iceland’s economy seemed white-hot. It had the fourth-highest gross domestic product per capita in the world. Unemployment hovered between 0 and 1 percent (while forecasts for next spring are as high as 10 percent). A 2007 United Nations report measuring life expectancy, real per-capita income and educational levels identified Iceland as the world’s best country in which to live.
Emboldened by the strong krona, once-frugal Icelanders took regular shopping weekends in Europe, bought fancy cars and built bigger houses paid for with low-interest loans in foreign currencies.
Like the Vikings of old, Icelandic bankers were roaming the world and aggressively seizing business, pumping debt into a soufflé of a system. The banks are the ones that cannot repay tens of billions of dollars in foreign debt, and “they’re the ones who ruined our reputation,” said Adalheidur Hedinsdottir, who runs a small chain of coffee shops called Kaffitar and sells coffee wholesale to stores.
There was so much work, employers had to import workers from abroad. Ms. Nordfjord, the architect, worked so much overtime last year that she doubled her salary. She was featured on a Swedish radio program as an expert on Iceland’s extraordinary building boom.
Two months ago, her company canceled all overtime. Two weeks ago, it acknowledged that work was slowing. But it promised that there would be enough to last through next summer.
The next day, everyone was herded into a conference room and fired.
Employers are hurting just as much as employees. Ms. Hedinsdottir has laid off seven part-time employees, cut full-time workers’ hours and raised prices. The Kaffitar branch on Reykjavik’s central shopping street was perhaps half full; in normal times, it would have been bursting at its seams.
While business is dwindling, costs are soaring. When the government took over the country’s failing banks in October, Ms. Hedinsdottir’s latest shipment of coffee — more than 109,000 pounds — was already on the water, en route from Nicaragua. She had the money to pay for it, but because the crisis made foreign banks leery of doing business with Iceland, she said, she was unable to convert enough cash into foreign currency.
“They were calling me every day and asking me what the situation was, and they got really nervous,” Ms. Hedinsdottir said of her creditors. They got so nervous that they sent the coffee to a warehouse in Hamburg, Germany, where it now sits while she tries to find the foreign currency to pay for it.
Her fixed costs are no longer fixed. Five years ago, the company built a new factory, borrowing the 120 million kronur — about $1.5 million — in foreign currencies. But the currency’s fall has increased her debt to 200 million kronur. This summer, her monthly payments were 2.5 million kronur; now they may be double that — the equivalent of $38,500 in Iceland’s debased currency.
“My financial manager is talking to the banks every day, and we don’t know how much we’re supposed to pay,” Ms. Hedinsdottir said.
In a recent survey, one-third of Icelanders said they would consider emigrating. Foreigners are already abandoning Iceland.
Anthony Restivo, an American who worked this fall for a potato farm in eastern Iceland and was heading home, said all of the farm’s foreign workers abruptly left last month because their salaries had fallen so much. One man arrived from Poland, he said, then realized how little the krona was worth and went home the next day.
At the Kringlan shopping center on the edge of Reykjavik, Hronn Helgadottir, who works at the Aveda beauty store, said she could no longer afford to travel abroad. But the previous weekend, she said, she and her husband had gone for a last trip to Amsterdam, a holiday they had paid for months ago, when the krona was still strong.
They ate as cheaply as they could and bought nothing. “It was strange to stand in a store and look at a bag or a pair of shoes and see that they cost 100,000 kronur, when last year they cost only 40,000,” she said.
In Kopavogur, a suburb of Reykjavik, Ms. Runolfsdottir, the recently fired secretary, said she had worried for some time that Iceland would collapse under the weight of inflated expectations.
“If you drive through Reykjavik, you see all these new houses, and I’ve been thinking for the longest time, ‘Where are we going to get people to live in all these homes?’” she said.
The real estate firm that used to employ Ms. Runolfsdottir built about 800 houses two years ago, she said; only 40 percent have been sold.
According to Icelandic law, Ms. Runolfsdottir and other fired employees have three months before they have to leave their jobs. At the end of that period, she will start drawing unemployment benefits.
Meanwhile, her husband’s modest investment in several now-failed Icelandic banks is worthless. “They were encouraging us to buy shares in their firms until the last minute,” she said.
She feels angry at the government, which in her view has mishandled everything, and angry at the banks that have tarnished Iceland’s reputation. And while she has every sympathy with the hundreds of thousands of foreign depositors who may have lost their money, she wonders why the Icelandic government — and, in essence, the Icelandic people — should have to suffer more than they already have.
“We didn’t ask anyone to put their money in the banks,” she said. “These are private companies and private banks, and they went abroad and did business there.”
Despite all this, Icelanders are naturally optimistic, a trait born, perhaps, of living in one of the world’s most punishing landscapes and depending for so much of their history on the fickle fishing industry. The weak krona will make exports more attractive, they point out. Also, Iceland has a highly educated, young and flexible population, and has triumphed after hardship before.
Ragna Sara Jonsdottir, who runs a small business consultancy, said she had met for the first time with other businesses in her office building. “We sat down and said, ‘We all have ideas, and we can help each other through difficult times,’ ” she said.
But she said she was just as shocked as everyone else by the suddenness, and the severity, of the downturn. When the prime minister, Geir H. Haarde, addressed the nation at the beginning of October, she said, her 6-year-old daughter asked her to explain what he had said.
She answered that there was a crisis, but that the prime minister had not told the country how the government planned to address it. Her daughter said, “Maybe he didn’t know what to say.”
This country, as modern and sophisticated as it is geographically isolated, still seems to be in shock. But if the events of last month — the failure of Iceland’s banks; the plummeting of its currency; the first wave of layoffs; the loss of reputation abroad — felt like a bad dream, Iceland has now awakened to find that it is all coming true.
It is not as if Reykjavik, where about two-thirds of the country’s 300,000 people live, is filled with bread lines or homeless shanties or looters smashing store windows. But this city, until recently the center of one of the world’s fastest economic booms, is now the unhappy site of one of its great crashes. It is impossible to meet anyone here who has not been profoundly affected by the financial crisis.
Overnight, people lost their savings. Prices are soaring. Once-crowded restaurants are almost empty. Banks are rationing foreign currency, and companies are finding it dauntingly difficult to do business abroad. Inflation is at 16 percent and rising. People have stopped traveling overseas. The local currency, the krona, was 65 to the dollar a year ago; now it is 130. Companies are slashing salaries, reducing workers’ hours and, in some instances, embarking on mass layoffs.
“No country has ever crashed as quickly and as badly in peacetime,” said Jon Danielsson, an economist with the London School of Economics.
The loss goes beyond the personal, shattering a proud country’s sense of itself.
“Years ago, I would say that I was Icelandic and people might say, ‘Oh, where’s that?’ ” said Katrin Runolfsdottir, 49, who was fired from her secretarial job on Oct. 31. “That was fine. But now there’s this image of us being overspenders, thieves.”
Aldis Nordfjord, a 53-year-old architect, also lost her job last month. So did all 44 of her co-workers — everyone in the company except its owners. Some 75 percent of Iceland’s private-sector architects have been fired in the past few weeks, she said.
In a strange way, she said, it is comforting to be one in a crowd. “Everyone is in the same situation,” she said. “If you can imagine, if only 10 out of 40 people had been fired, it would have been different; you would have felt, ‘Why me? Why not him?’ ”
Until last spring, Iceland’s economy seemed white-hot. It had the fourth-highest gross domestic product per capita in the world. Unemployment hovered between 0 and 1 percent (while forecasts for next spring are as high as 10 percent). A 2007 United Nations report measuring life expectancy, real per-capita income and educational levels identified Iceland as the world’s best country in which to live.
Emboldened by the strong krona, once-frugal Icelanders took regular shopping weekends in Europe, bought fancy cars and built bigger houses paid for with low-interest loans in foreign currencies.
Like the Vikings of old, Icelandic bankers were roaming the world and aggressively seizing business, pumping debt into a soufflé of a system. The banks are the ones that cannot repay tens of billions of dollars in foreign debt, and “they’re the ones who ruined our reputation,” said Adalheidur Hedinsdottir, who runs a small chain of coffee shops called Kaffitar and sells coffee wholesale to stores.
There was so much work, employers had to import workers from abroad. Ms. Nordfjord, the architect, worked so much overtime last year that she doubled her salary. She was featured on a Swedish radio program as an expert on Iceland’s extraordinary building boom.
Two months ago, her company canceled all overtime. Two weeks ago, it acknowledged that work was slowing. But it promised that there would be enough to last through next summer.
The next day, everyone was herded into a conference room and fired.
Employers are hurting just as much as employees. Ms. Hedinsdottir has laid off seven part-time employees, cut full-time workers’ hours and raised prices. The Kaffitar branch on Reykjavik’s central shopping street was perhaps half full; in normal times, it would have been bursting at its seams.
While business is dwindling, costs are soaring. When the government took over the country’s failing banks in October, Ms. Hedinsdottir’s latest shipment of coffee — more than 109,000 pounds — was already on the water, en route from Nicaragua. She had the money to pay for it, but because the crisis made foreign banks leery of doing business with Iceland, she said, she was unable to convert enough cash into foreign currency.
“They were calling me every day and asking me what the situation was, and they got really nervous,” Ms. Hedinsdottir said of her creditors. They got so nervous that they sent the coffee to a warehouse in Hamburg, Germany, where it now sits while she tries to find the foreign currency to pay for it.
Her fixed costs are no longer fixed. Five years ago, the company built a new factory, borrowing the 120 million kronur — about $1.5 million — in foreign currencies. But the currency’s fall has increased her debt to 200 million kronur. This summer, her monthly payments were 2.5 million kronur; now they may be double that — the equivalent of $38,500 in Iceland’s debased currency.
“My financial manager is talking to the banks every day, and we don’t know how much we’re supposed to pay,” Ms. Hedinsdottir said.
In a recent survey, one-third of Icelanders said they would consider emigrating. Foreigners are already abandoning Iceland.
Anthony Restivo, an American who worked this fall for a potato farm in eastern Iceland and was heading home, said all of the farm’s foreign workers abruptly left last month because their salaries had fallen so much. One man arrived from Poland, he said, then realized how little the krona was worth and went home the next day.
At the Kringlan shopping center on the edge of Reykjavik, Hronn Helgadottir, who works at the Aveda beauty store, said she could no longer afford to travel abroad. But the previous weekend, she said, she and her husband had gone for a last trip to Amsterdam, a holiday they had paid for months ago, when the krona was still strong.
They ate as cheaply as they could and bought nothing. “It was strange to stand in a store and look at a bag or a pair of shoes and see that they cost 100,000 kronur, when last year they cost only 40,000,” she said.
In Kopavogur, a suburb of Reykjavik, Ms. Runolfsdottir, the recently fired secretary, said she had worried for some time that Iceland would collapse under the weight of inflated expectations.
“If you drive through Reykjavik, you see all these new houses, and I’ve been thinking for the longest time, ‘Where are we going to get people to live in all these homes?’” she said.
The real estate firm that used to employ Ms. Runolfsdottir built about 800 houses two years ago, she said; only 40 percent have been sold.
According to Icelandic law, Ms. Runolfsdottir and other fired employees have three months before they have to leave their jobs. At the end of that period, she will start drawing unemployment benefits.
Meanwhile, her husband’s modest investment in several now-failed Icelandic banks is worthless. “They were encouraging us to buy shares in their firms until the last minute,” she said.
She feels angry at the government, which in her view has mishandled everything, and angry at the banks that have tarnished Iceland’s reputation. And while she has every sympathy with the hundreds of thousands of foreign depositors who may have lost their money, she wonders why the Icelandic government — and, in essence, the Icelandic people — should have to suffer more than they already have.
“We didn’t ask anyone to put their money in the banks,” she said. “These are private companies and private banks, and they went abroad and did business there.”
Despite all this, Icelanders are naturally optimistic, a trait born, perhaps, of living in one of the world’s most punishing landscapes and depending for so much of their history on the fickle fishing industry. The weak krona will make exports more attractive, they point out. Also, Iceland has a highly educated, young and flexible population, and has triumphed after hardship before.
Ragna Sara Jonsdottir, who runs a small business consultancy, said she had met for the first time with other businesses in her office building. “We sat down and said, ‘We all have ideas, and we can help each other through difficult times,’ ” she said.
But she said she was just as shocked as everyone else by the suddenness, and the severity, of the downturn. When the prime minister, Geir H. Haarde, addressed the nation at the beginning of October, she said, her 6-year-old daughter asked her to explain what he had said.
She answered that there was a crisis, but that the prime minister had not told the country how the government planned to address it. Her daughter said, “Maybe he didn’t know what to say.”
Subscribe to:
Posts (Atom)