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Iceland's crisis

Iceland's crisis

| Text: Berit Kvam Photo:Thordur Thorarinsson/

The money, the assets - have they all evaporated? Once upon a time there was a tiny country - an island - far out at sea, west of Scandinavia, east of the large American continent.

A rugged landscape with white clouds of steam shooting out from the centre of the Earth, where hot water geysers erupt from the naked ground and the colours of the rainbow reflect in the majestic Golden Falls. A place where goblins still live on in people's imaginations. Richer in natural resources like fish and clean energy than any other country could ever dream of. So fabulously attractive to tourists that visitors soon will outnumber the locals by 100,000.

This is the place where people were tempted and fooled - some fooling themselves into doing things they shouldn't have. But many had grown tired of struggling with two, maybe three jobs, tired of working while others had long since retired. They wanted to grow big, get rich, earn fast money, build big houses, buy nice planes and big cars and show the world - not least the bigger boys - that they could do much better and make much more money than them. And all this without saving a single Krona. They just needed to borrow some money, becoming rich by borrowing from even richer men - money-lending bank owners who'd sell stocks to whoever fancied some. Then they'd borrow some more for yet others to borrow and spend - all the loot they wanted. Even the finest diamond ring for their girl - on a lease.

...but one, two, three - that was the end of the tale. As we all now know, it all ended with a giant bang, and capital disappeared like morning dew. During September and October 2008 the entire stock market and 90 percent of Iceland's banking sector collapsed. Today the entire Icelandic society is in debt, and everybody has to pay the bill: employees, the unemployed - even those who weren't tempted by the fairytale have to chip in now. The Krona has lost half its value, the base rate is 13 percent, inflation remains high - although it is slowly falling, offering a small glimpse of light. House prices have fallen, in and around Reykjavik several thousand flats stand unfinished as building work has dried out. There are no buyers for the big cars, and dealerships cannot take in new stock. It is nice to be a tourist in Iceland, but very hard for the unemployed and those who sit on foreign currency loans, let alone those who are both unemployed and struggle with a foreign loan. The situation is so bad that the government has established a committee whose sole task it is to make sure children and adults don't fall ill because of poverty, and that young and old avoid becoming permanently incapacitated. The smartest thing "anyone" can do now is to leave the black Jaguar in the garage.

Why did things go so wrong?

Glitnir collapsed on 29 October 2008. The bank had no liquidity. It had debt to service, and the usual way for a bank to do that is to borrow more money, but the credit had run out. Because the bank had become so large compared to the Icelandic national economy, the country's central bank could do nothing to help. They didn't have enough money. It was the beginning of a domino effect which would wipe out nearly the entire Icelandic finance  sector.
Gunnar T. Andersen is the new Director General for Iceland's Financial Supervisory Authority (FME)

"There are many who should shoulder the blame, he says, listing the heads of banks, FME, the central bank, government and the common people."

"But it's difficult to control a bank which doubles in size every year. Before you finish an investigative report, it has turned into a different bank."

The banks simply outgrew the small nation of Iceland. Controls and legislation were too weak. Gunnar T. Andersen points to the numbers showing a yearly growth in BNP between 2000 and 2008 of more than 10 percent, and a growth in income of 73 percent between 2000 and 2007. The stock market grew by 174 percent between 2004 and 2008. House prices soared by 74 percent during that same period, while banks and other financial institutions grew 554 percent. Meanwhile, traditional industry growth remained moderate.

"That growth came mainly with the construction of the much discussed dam, power plant and aluminium plant in East Iceland," says Gunnar T. Andersen.

"Real growth in other parts of the economy was more modest. Between 2004 and 2008 Iceland's economic growth was in large parts driven by lending offers from banks and building societies. There was easy access to cheap, foreign capital, and Iceland's banks used it", he  adds.

Many went with the flow

"When people earning Icelandic Kroner take out foreign currency loans, they take a huge risk. We know currency markets can move fast and dramatically. Many financed cars and houses with foreign currency loans. When the value of the Icelandic Krona is slashed in half, that debt doubles. And everybody were allowed to borrow money back then. It's tempting to think people believed there was a gold-spinning machine somewhere. I even heard of a cat who was given a credit card."

Private individuals apart, many businesses spent money buying foreign companies, often financed by foreign currency loans. A lot of them have gone bust or have been nationalised.

Dirty business?

Were the Icelandic fooled by a gang of crooks? And where did all the money go?

The Financial Supervisory Authority is investigating what happened. A special prosecutor has been established to process these cases.

"The Financial Supervisory Authority has so far provided the prosecutors office with 21 cases which we think are of a criminal nature. We're talking insider trading, stock manipulation and very bad business practices. We will investigate such cases for the rest of this year, and probably the whole of next year as well."

But the money, the assets - have they all evaporated?

"Many believe the money is hidden away in tax havens. But most of the growth was driven by lending and borrowing. Stocks have been lost, loans are rotten and much of the assets have disappeared," says Gunnar T. Andersen.


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