# Iceland's Economic Collapse



## tomahawk6 (8 Nov 2008)

I wonder if this could be America's future next year ?

http://www.nytimes.com/2008/11/09/world/europe/09iceland.html?_r=1&pagewanted=all&oref=slogin

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. As many as 75 percent of Iceland’s private-sector architects have probably 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. 

By 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.”


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## Ex-Dragoon (8 Nov 2008)

Its a pity really, its one of my favourite stops when I sail. We always had a good time there and were treated right.


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## tomahawk6 (13 Nov 2008)

A Russian bailout and what strings ?
http://www.casr.ca/ft-arctic-russia-iceland-1.htm

Arctic Sovereignty – Russia & Iceland – Financial Crisis – October 2008

When Russia offers Billions of Dollars to Iceland,
Canada should pay close attention to the Terms

Edited excerpts of an article first published in the Financial Times ( UK ) [1] 

We have not yet received the kind of support that we need from our NATO friends," said the Prime Minister, Geir Haarde. "Thus, in a situation like that, one has to go looking for new friends." Would this new friendship extend as far as military co-operation? Prime Minister Haarde quickly denied the suggestion that Russia might be given access to an air base, vacated by the US Air Force. Officials also denied any such trade-off. "We are a founding member of NATO."

Alexei Kudrin, Russia's Minister of Finance, confirmed that Russia had indeed received a request from the Icelandic government for credit. "We will examine it ," Kudrin said. "Iceland is well known as a country with tough budgetary discipline and a high rating of reliability. We view such an application positively." 

Chris Weafer, Chief Strategist at Uralsib investment bank [ was more blunt: ] "Lending money to Iceland is a very strong and very clear statement from Russia that it is solvent and that it has spare cash." He added: "This is going to make a big difference to the Icelandic economy ... it builds up political goodwill which could be helpful when Russia gets into difficult negotiations over territorial disputes in the Arctic," said Mr. Weafer.

Iceland noted that Western Allies failed to offer the assistance needed to avert crisis

Iceland needs to bolster its foreign exchange reserves in an attempt to shore up its krona. Depreciation had caused sharp price rises in imported goods , such as fuel.
The central bank said that it had begun intervening in currency markets to try to strengthen the krona , helping it to rise thirteen percent ( 13 % ) against the euro. 

Mr Haarde declined to say which countries had refused to offer help. He did say that the Nordic central banks were the only ones to come forward before Russia. In the spring [ of 2008 , these nordic countries ] had agreed to a loan of US $ 2 B , but the Icelandic government decided that it needed even more funds to shore up its currency.

When finalized, the Russian package will almost double Iceland's foreign currency reserves. Mr Haarde said that the funding would be used only to shore up the Icelandic currency, the krona. Foreign loans would not be extended to bail out the commercial banks. [2] "Iceland has never defaulted on its national debt – and it never will." said Mr Haarde.

There was some confusion over the status of the Russian loan. Iceland's central bank said that the US $ 5.5 B loan was secured. Later, however , Iceland acknowledged that the loan had not yet been finalized. Iceland is continuing to look abroad for other funds.


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## tomahawk6 (17 Nov 2008)

By offering the Russians the use of an air base I think Iceland plans to play off the Russians to get more NATO help. At least thats what I hope is going on. Canada should declare Iceland a rotectorate. 

http://www.barentsobserver.com/russia-invited-to-icelands-airbase.4525408-58932.html

In an official lunch with foreign diplomats, Icelandic President Olafur Ragnar Grimsson shocked neighboring Nordic countries with inviting Russia to take use of the strategically important airbase.
Foreign diplomats hardly believed what they heard when the Icelandic president said that his country needs “new friends” and that Russia should be invited to take use of the old U.S. airbase of Keflavik. 

In the lunch which took place in Reykjavik last Friday, Mr. Grimsson accused neighboring countries of failing to support the crisis-ridden Iceland, newspaper Dagbladet reports with reference to Klassekampen. 

An internal memo from the Norwegian Foreign Ministry, obtained by the newspaper, describes the diplomats present in the event as “shocked” by the speech. 

-The North Atlantic is important for the Nordic countries, the USA and the UK. That is a fact which these countries seem to ignore, the president said, adding that “Iceland should rather make new friends”. 

According to Dagbladet, the Russian ambassador present at the lunch was rather perplexed by the invitation, saying that “Russia does not really need the airport”. 

The Icelandic president has no formal powers over foreign policy issues.

Iceland does not have its own armed forces, and has been dependent on military cooperation with NATO allies. The USA in 2006 closed down its air base at Keflavik, and Iceland has since been practically without air force support.


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## Drag (17 Nov 2008)

From what I read elsewhere, it is the Brits that are fanning this situation.  The Icelandic banks that are failing had extensive banking operation in the UK, may times the size of Iceland's GDP(something like 9-10x).  When they started going belly up, the government of Iceland decided to guarantee the deposits of the citizens of Iceland only.  The British government held the view that the deposits of their citizens should be guaranteed too and are blocking any loans to Iceland by the EU until iceland agrees to back the Brits' deposits too.  IMO the government of Iceland has a responsibility for its citizens only and does not have the resources to back British depositors too.  If individuals in Britain lost money in the failure of a PRIVATE Icelandic institution, too bad.  This is why Iceland feel abandoned.


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## Harley Sailor (17 Nov 2008)

Maybe it is time Denmark takes Iceland back under it's control.  It was not that long ago (1944) that Iceland broke away from Denmark.


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## drunknsubmrnr (17 Nov 2008)

D3 said:
			
		

> From what I read elsewhere, it is the Brits that are fanning this situation.  The Icelandic banks that are failing had extensive banking operation in the UK, may times the size of Iceland's GDP(something like 9-10x).  When they started going belly up, the government of Iceland decided to guarantee the deposits of the citizens of Iceland only.  The British government held the view that the deposits of their citizens should be guaranteed too and are blocking any loans to Iceland by the EU until iceland agrees to back the Brits' deposits too.  IMO the government of Iceland has a responsibility for its citizens only and does not have the resources to back British depositors too.  If individuals in Britain lost money in the failure of a PRIVATE Icelandic institution, too bad.  This is why Iceland feel abandoned.



Let me get this straight...

The Icelandic banks borrow 10x their GDP from individuals in the UK, spend it like drunken sailors (not that that is necessarily bad), can't pay it back and it's the UK's fault?

Could you explain how that works?


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## Drag (17 Nov 2008)

Well, PRIVATE companies from Iceland use their strong currency to buy up other PRIVATE institutions in the UK that hold deposits worth 10x Icelands GDP.  Now the UK expects the government of Iceland to pay out this deposits and is basically holding a gun to Iceland's head in form of withholding EU loans, hence forcing Iceland to turn to Putin.  As I said, the government of Iceland is only responsible to bail out citizens of Iceland.


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## aesop081 (17 Nov 2008)

Harley Sailor said:
			
		

> Maybe it is time Denmark takes Iceland back under it's control.  It was not that long ago (1944) that Iceland broke away from Denmark.



Why not suggest that the UK take back control of the US while we're at it.

 :


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## drunknsubmrnr (17 Nov 2008)

D3 said:
			
		

> Well, PRIVATE companies from Iceland use their strong currency to buy up other PRIVATE institutions in the UK that hold deposits worth 10x Icelands GDP.  Now the UK expects the government of Iceland to pay out this deposits and is basically holding a gun to Iceland's head in form of withholding EU loans, hence forcing Iceland to turn to Putin.  As I said, the government of Iceland is only responsible to bail out citizens of Iceland.



So you feel that the Icelanders have no responsibility for their actions?


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## Drag (17 Nov 2008)

Let me put it to you like this:  Lets say TD or RBC decided to expand their operations south of the border and aggressively grew their business to the point that their business here was only a fraction of their total business.  Then due to pervailing US economic conditions they went broke (Icelandic banks got hit by the US subprime lending crisis and that's why they went under, not for economic condition in Iceland).  The Government of Canada then decides to guarantee all of the deposits in Canada to protect the Canadian economy.  The government of Canada would have no responsibility to US depositors what so ever.  let the US government deal with that.  Do you think the Government of Canada should be responsible??


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## drunknsubmrnr (17 Nov 2008)

Actually, the Icelandic banks failed because they were extremely highly leveraged. The subprime crisis tipped them over the brink, but any of a number of other crises would have done the same thing. The Icelandic banks were able to do this because they were very lightly regulated, and because they borrowed a LOT of money from the UK among others. That money came from a lot of people's savings, it's not just some faceless corporation. Iceland used this money to buy up a lot of assets from around the word, and spent a LOT of other people's money domestically to build/buy/etc a standard of living they wouldn't have come close to otherwise.

Once the Icelandic government nationalised the banks, they tried to move all remaining cpaital from the other countries to the head offices in Iceland. The UK objected to this, and refuses to allow new loans to Iceland until they pay off what they already owe. That's normal procedure in this type of circumstance.

In the example you cited, the Canadian government as represented by the Canada Deposit Insurance Corporation would protect deposits  (American and Canadian) in Canadian branches, while the US Federal Deposit Insurance Corporation would protect deposits (American and Canadian) in US branches. The Icelandic banks never set up deposit insurance, among other things. They weren't even keen on minimum capital ratios.


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## Drag (17 Nov 2008)

If an Icelandic institution is operating in the UK, would it not have to follow UK laws?  I still do not see why the government of Iceland should be responsible for business transactions between private institutions and foreigners.  People probably got better rates for not having protections like deposit insurance, that is a risk you take...  No amount of deposit insurance would have helped in this case.


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## drunknsubmrnr (17 Nov 2008)

D3 said:
			
		

> If an Icelandic institution is operating in the UK, would it not have to follow UK laws?



Yes. Hence the reason the UK is so very ticked off at the Icelandic banks. They tried to break the law. 



			
				D3 said:
			
		

> I still do not see why the government of Iceland should be responsible for business transactions between private institutions and foreigners.



They took over the banks, and were therefore responsible for their debts. All of the debts, not just the ones they want.



			
				D3 said:
			
		

> People probably got better rates for not having protections like deposit insurance, that is a risk you take...



They were still protected by UK laws.



			
				D3 said:
			
		

> No amount of deposit insurance would have helped in this case.



How do you figure that?


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## Harley Sailor (18 Nov 2008)

CDN Aviator said:
			
		

> Why not suggest that the UK take back control of the US while we're at it.
> 
> :



Not a bad idea at all, for when the economy totally falls apart.  The difference being that Iceland was part of Denmark/ Norway from 1267 until 1944.  If not for the British invasion during WWII, Iceland would most likely still be a part of Denmark.

Yes, yet another time when the British got involved in Icelandic politics.


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## Drag (18 Nov 2008)

Well if they had to follow UK laws why is the UK deposit insurance system not protecting depositors?  Icelandic government took over operations in Iceland and UK used counter-terror laws to give assets of the UK subsidiaries to other UK institutions.  We may as well agree to disagree, because I still believe that the government of Iceland has s to responsibility for the debt of those institutions in the UK.


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## drunknsubmrnr (18 Nov 2008)

D3 said:
			
		

> Well if they had to follow UK laws why is the UK deposit insurance system not protecting depositors?



They were operating as part of the parent banks, not as subsidiaries, and were therefore not part of the UK government deposit insurance scheme. Apparently they also missed their private deposit insurance payments as well.



			
				D3 said:
			
		

> Icelandic government took over operations in Iceland and UK used counter-terror laws to give assets of the UK subsidiaries to other UK institutions.



The British government had already done similar things to two other British banks that had failed in the previous week.



			
				D3 said:
			
		

> We may as well agree to disagree, because I still believe that the government of Iceland has s to responsibility for the debt of those institutions in the UK.



Sure. I'll base my opinions on facts, and you base yours on whatever it is that you use.


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