Letter from Iceland

From the Financial Times comes this account of life in Iceland:

By Robert Jackson

Give it a population of 300,000, about the same as Coventry, 70 per cent of them in the cities of Reykjavik and Akureyri. Ensure they are all related and give the majority the ability to trace their ancestry back to the times of settlement, more than a thousand years earlier. Endow these people with industry and ambition. Give them their own language - all but unchanged for a millennium - a literary tradition, three national newspapers, two television channels, free universal healthcare and education and close to zero unemployment. Give this country a consistently high ranking in the world standard-of-living charts and you have the Iceland of the recent past. Not a bad place, all in all.

Now allow this country's banks - virtually unregulated - to borrow more than 10 times their country's gross domestic product from the international wholesale money markets. Watch as a Graf Zeppelin of debt propels its self-styled "Viking Raiders" across the world's financial stage, accumulating companies like gamblers hoarding chips. Then sit on the sidelines as the airship flies home and explodes, showering its blazing wreckage over this once proud, yet tiny, nation.

There you see the Iceland of today - the victim of an economic 9/11 and one of the very few places in the world where the words "financial meltdown" can be used without fear of exaggeration.

There is no daytime TV in Iceland. Parents are at work and children at school, so the test card, that feature of a bygone age, is the only thing aired. For the transmitters to be switched on in mid-afternoon and a sombre-looking Geir Haarde, the prime minister, to appear behind a desk, a national flag at his side, it had to be serious - and it was. The country was on the verge of bankruptcy; the government was taking control of the banks and was going to assume far-reaching powers to secure the safety of the nation and its savers.

As I watched, I felt a detached sympathy for those poor people living on a blighted island - until it dawned on me that I was one of them. Recent events had savaged my net worth by 60 per cent and pushed up my cost of living by more than 20 per cent. Iceland's plight was mine, too. What I failed to appreciate at the time was the emotion of this unprecedented television address, particularly in the way it finished:

"Fellow countrymen... If there was ever a time when the Icelandic nation needed to stand together and show fortitude in the face of adversity, then this is the moment. I urge you all to guard that which is most important in the life of every one of us, to protect those values which will survive the storm now beginning. I urge families to talk together and not to allow anxiety to get the upper hand, even though the outlook is grim for many. We need to explain to our children that the world is not on the edge of a precipice, and we all need to find an inner courage to look to the future... Thus with Icelandic optimism, fortitude and solidarity as weapons, we will ride out the storm.

God bless Iceland."

Edda, my partner, was in tears on the sofa beside me.

A drive across town later that afternoon, October 6, at first gave grounds for comfort. The roads were as full as usual for the Reykjavik rush-hour - a half-hour build-up of traffic. Aircraft flew in and out of the downtown airport, students made their way home from schools and universities - note the plural - while visitors went to hospitals and fitness fiends to sports clubs. Reykjavik showed all the outward appearances of carrying on.

But a different picture began to emerge from the hourly news bulletins on the car radio. The Icelandic krona's freeze in the capital markets had now spilled over into the day-to-day transactions of Icelanders abroad. Holidaymakers and business travellers venturing "til Útlanda", as it is called, found their credit cards refused, and those wishing to buy foreign currency could not find willing sellers, aside from one or two who limited their purchases to €200.

Trust in the banks had evaporated and people were trying to find a safe haven for their cash. One man had waited for six hours in a bank while his life savings, more than £1m in kronur (at IKr200 to the pound), were counted out in cash in front of him. "I feel like an innocent man dragged from his bed, put in a barrel and hurled over Gullfoss!" wrote one journalist that morning. "We have been brought down by a handful of men who bet our nation's wealth, fame and prosperity on a throw of the dice." Gullfoss is one of Iceland's tourist attractions - a majestic 100ft waterfall.

On collecting our daughter from her handball practice, I learnt the news that her club could not obtain the foreign currency it needed to release their new team shirts from customs. The city's myriad sports teams rely on local sponsors and our daughter also brought the news that this source of funding for her team was likely to dry up in the months to come. Later that evening, Skype, our communications lifeline, would not renew our credits with an Icelandic credit card. E-mails began to arrive from friends overseas, alarmed by news reports and asking if we were all right.

But all this was trivial compared with the financial distress, in some cases ruin, that now faces a significant proportion of the population.

Easy access to 100 per cent mortgages has seen a change to the traditional pattern of young Icelanders living with their parents until their mid-twenties. The suburbs of Reykjavik have grown by a third in the past decade, most of it housing for first-time buyers. Whole new neighbourhoods have emerged. New streets house young couples, many with children, most with two cars in the drive and furnished with the best that Ikea can provide. All bought with 100 per cent loans, many in foreign currencies.

Iceland is the only country in the world that indexes its loans in addition to charging interest. This means that when Icelanders borrow IKr1,000 from the bank and inflation increases by 5 per cent, the bank increases their debt to IKr1,050 at the end of the year. A great deal for the bank and fine for you, too - so long as the property's value and your salary are increasing by inflation and more. The majority of Icelandic mortgages are based on this punitive system and with inflation running at nearly 20 per cent, they will see their IKr1,000 loan turn into a IKr1,200 loan. The interest burden will increase proportionally. This is bad enough, but when coupled with falling house prices, it means that many face a particularly savage variety of negative equity. The impact on highly geared borrowers, which in practice means most Icelanders, would be hard enough even with two incomes, but with unemployment set to soar, many households are going to go under.

A recent first-time buyer, a woman in her late twenties, said: "I took a 100 per cent loan to buy an apartment. I placed my savings in Kaupthing's money market account, because it promised high interest rates, and my pensions in Kaupthing's Vista 1 at the prospect of becoming a millionaire retiree. Both of these funds were based on stock investments and I knew that they were risky - but I took the bait and the risk. Now most of this money, if not all, is lost."

Icelanders are by nature frugal people. It was one of the few countries in the world, perhaps the only one, that had a pension system that could meet the needs of its ageing population. But in recent years, many older people have been persuaded by the banks to invest their savings in high-yielding money-market accounts. As a result of the collapse of the banking system, many of these accounts have seen huge write-downs and some are now worth less than half of their previous values. The additional money people had put aside to top up their pensions has been hard hit.

Bjork, Iceland's ambassadress of cool, summed it up in The Times on October 28: "Young families are threatened with losing their houses and elderly people their pensions. This is catastrophic. There is also a lot of anger. The six biggest venture capitalists in Iceland are being booed in public places and on TV and radio shows; furious voices insist that they sell all their belongings and give the proceeds to the nation. Gigantic loans, it has been revealed, were taken out abroad by a few individuals and without the full knowledge of the Icelandic people. Now the nation seems to be responsible for having to pay them back."

A homemade banner, made of sheets, hangs over the main motorway in Reykjavik, tied to the railings of a bridge. "Stondum Saman!" it cries out. "Let us stand together!" It's the new rallying cry of a beleaguered nation.

Icelanders have seen their economy swell and shrink from time to time over the centuries, and always handled it calmly. Perhaps their heritage in fishing and agriculture enabled them to meet good years and bad with equanimity. Now they must cope equally well with an attack of economic bulimia. To understand what makes this crisis - kreppa, as it is known here - so unlike any other, a little history is needed.

For Icelanders, the golden years were the early years, shortly after the land was settled in the ninth century. The Viking tradition, the Althing - the legislative assembly dating to 930 - and the literary canon of Sagas and Eddas are the nation's cultural bedrock. But after that, Iceland almost disappears from the history books. While the agricultural revolution, the Renaissance, the industrial revolution came and went, while the fine cities of Europe were being built, while artists from Michelangelo to Mozart were pouring forth their creations, while the great inventions and discoveries were being invented and discovered, Icelanders were hunkering down in their turf houses, meeting the hardest challenge of all - survival.

They survived plague, famine, earthquakes and volcanoes. There were times when some even considered abandoning the island. But they stayed on. They stayed and survived. Icelanders will tell you that only the fittest survived, but that is only half the story, because survival requires another key attribute: stubbornness. And Icelanders have it in spades. It is a national trait, and they view it not as a weakness but as a virtue. It comes from experiencing hardship and enduring it. It means finding satisfaction in a simple task done well and sticking to it; finding comfort and solace in family and kinship and being bound by those familial bonds and duties. And perhaps most important of all, it means believing in the independence of the individual as part of the fabric of nationhood, and fighting for that independence. Put simply, the country has values.

And this is what sets this catastrophe apart from the earthquakes and plagues of former years. This is a man-made disaster and worse still, one made by a small group of Icelanders who set off to conquer the financial world, only to return defeated and humiliated. The country is on the verge of bankruptcy and, even more important for those of Viking stock, its international reputation is in tatters. It hurts.

Picture a pig trying to balance on a mouse's back and you'll get some idea of the scale of the problem. In a mere seven years since bank deregulation and privatisation, Iceland's financial institutions had managed to rack up $75bn of foreign debt. In his address to the nation, Haarde put the problem in perspective by referring to the $700bn financial rescue package in America: "The huge measures introduced by the US authorities to rescue their banking system represent just under 5 per cent of the US GDP. The total economic debt of the Icelandic banks, however, is many times the GDP of Iceland."

And here is the nub. Iceland's banks borrowed more than $250,000 for every man, woman and child in Iceland, and placed an impossible burden on the modest reserves of the central bank in the event of default. And default they have.

Voices of caution - there were many in Iceland - were drowned out by a media that became fixated on the nation's emergence from drab pupa to gaudy butterfly. Yet, Icelanders' opinions were divided. For some, the success of their Viking Raiders, buying up the British high street, one even acquiring that most treasured bauble of all, a Premier League football club, marked the arrival of a golden era. The transformation of Reykjavik from a quiet, provincial fishing port to a brash financial centre had been as swift as it was complete, and with the musicians Bjork and Sigur Ros and Danish-Icelandic artist Ólafur Eliasson attracting global audiences, cultural prestige went hand in hand with financial success. Icelanders could hold their heads high before the rest of the world.

Hallgrimur Helgason, well-known for his novel 101 Reykjavik, said in a letter to the nation in a Sunday newspaper on October 26: "Deep down inside we idolised these titans, these money pop-stars. Awestruck we watched their adventures and admired them when they supported the arts and charities. We never had clever businessmen, not for a thousand years, not to mention men who had won battles in other countries... "

For others, the growth was too rapid, the change too extreme. Many became uncomfortable with the excesses of the Viking Raiders. The liveried private jets, the Elton John parties, the residences in St Moritz, New York and London and the yachts in St Tropez - all flaunted in Sed og Heyrt, Iceland's equivalent of Hello! magazine - were not, and this is important, they were not Icelandic. There was a strong undertow of public opinion that felt that all this ostentatious celebration of lavish lifestyles and excess was causing the nation to disconnect from its thousand-year heritage. In his letter to the nation, Hallgrimur continued: "This was all about the building of personal image rather than the building of anything tangible for the good of our nation and its people. Icelanders living abroad failed to recognise their own country when they came home."

What international sympathy there was for Iceland's plight evaporated with the dark realisation that the downfall of Iceland's three main banks - Landsbanki, Kaupthing and Glitnir - brought with it the potential loss of £8bn for half a million savers in northern Europe, the bulk of whom were British. The shrill media response in the UK was reported extensively in Iceland. The British government's use of anti-terror legislation to freeze the assets of Landsbanki pushed Iceland's banking system into the abyss. It was a move viewed in Iceland as hateful and unnecessary. A few days later the one remaining viable bank, Kaupthing, went under.

Then Landsbanki was placed on a British Treasury list of groups subjected to financial sanctions, along with al-Qaeda and the Taliban. A copy of the UK government webpage appeared in Icelandic papers and a new website, www.indefence.is, was launched. A picture on it shows a young girl with a placard that reads: "I am not a terrorist, Mr Brown."

At this time of year, the most-watched TV show in Iceland is Saturday night's Spaugstofan, which translates literally as The Spoof Room. It's a hit-or-miss affair, but events of the past few weeks have provided the writers with a rich seam of source material. A recent episode featured a well-worked lampoon of the film Titanic, entitled Icetanic, with Geir Haarde and the chairman of the governors of the central bank, David Oddsson, standing on the bridge of "the economy that could not sink". A sketch shows Gordon Brown throwing Icelanders off a life raft. "Get back in the water where you belong, you terrorist bastard!" he shouts as he throws another one overboard.

When I tried to explain Iceland's plight to a friend in the UK who works in banking, I received short shrift. "You must have gone troppo, Robert! They may not have dressed up in burkas and strapped several kilos of Semtex around their waists. But to go into the high street, persuade charities, pensioners, local authorities to deposit money and then disappear, having trousered nigh on £8bn is, even by City standards, bad. Financial terrorism, grand larceny, call it what you will, but the government had to act and act quickly to stop funds leaving the country."

Troppo can hardly apply one degree south of the Arctic Circle, but if its northern equivalent is to go polar, then evidently I have.

Fear, outrage, jealousy and guilt have mingled to form a volatile cocktail of emotions as the blame game has started, and Icelanders attempt to come to terms with it all. They are divided between those who blame the Viking Raiders and those who blame successive governments and central banks for allowing them to behave the way they did.

There have been demonstrations, previously almost unheard of in Iceland, in which families have marched on the parliament buildings, stringing up an effigy of Oddsson along the way.

Of the various Viking Raiders, only one, Jon Asgeir, of Baugur fame, has had the guts to turn up and face the music on a TV chat show. But any temporary benevolence towards him evaporated when it emerged that he had arrived back in Iceland with high-street billionaire Sir Philip Green in tow. Together they proposed to buy Baugur's debt, reported at the time as £2bn, thereby acquiring the group's UK retail assets, including House of Fraser and Hamleys at a significant discount that would involve massive debt writeoffs.

One of the most telling images was the departure of Jon Ásgeir's private jet on news that the government had nationalised Glitnir Bank (in which his investment vehicle Stodir was a leading shareholder), wiping out his shareholding and rattling the debt-burdened house of cards that is his Baugur business empire. Painted black and as sleek as a Stealth bomber, the aircraft was photographed taxiing from its hangar by Morgunbladid, a daily newspaper. Like the last helicopter out of Saigon, the departure of Ásgeir's jet symbolised the end of an era, the last act of Iceland's debt-fuelled spending spree.

Bjorgolfur Thor and his father Bjorgolfur Gudmundsson have, to date, disappeared from the radar. Together they own a majority stake in Landsbanki, and Gudmundsson owns West Ham United football club. Their jets have also flown the coop. Downtown, beside the harbour, construction work on a landmark project underwritten by them, the National Concert Hall, is expected to stop any day now. Like Hallgrimskirkja, the striking cathedral that presides over Reykjavik and that took more than 40 years to complete thanks to a lack of finance, the concert hall might need a change in the country's fortunes before it can be completed.

The government has announced that it will carry out a thorough investigation into what happened and determine who is to blame. It will be called "The White Book", and "leave no stone unturned in getting to the truth". It will not be a slender volume.

We live now in a foreign-currency lockdown, and although the government has assured everyone that there are sufficient reserves to buy essentials such as oil, grain and medical supplies for the winter, such assurances only serve to create a further sense of unease in a people who have learnt to take such commodities for granted.

There is some encouraging news. The International Monetary Fund is putting the finishing touches to a $2bn bailout package and this is likely to lead to a further $4bn from a consortium of Nordic central banks. These funds will come with stringent conditions that will impose external financial controls and impinge heavily on Iceland's hard-won sovereign independence. But they should inject some much-needed confidence into the currency and into an embattled people.

There is an Icelandic expression: "We started with two empty hands." Whoever coined it could not have expected that it would still be so pertinent in 2008, as the nation begins the process of rebuilding its economy and that thing it covets most of all, its reputation.

It is going to be a long, hard struggle.


Robert Jackson is a British journalist who has lived in Iceland since 2003.