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2008-10-06 18:46:09
Almost overnight, its population became the wealthiest on Earth. Tracy McVeigh
in Reykjavik finds that the credit crunch is making the cash disappear
Blue Lagoon
Lie back and think of an economic upturn...bathers take to the Blue Lagoon,
near Reykjavik. Photograph: Bruno Morandi/Getty
The snow has arrived early in Reykjavik after an unusually long and warm
summer. The freeze has brought out the ghostly green haze of the aurora
borealis - the Northern Lights - the shape of which shifts dramatically across
the tiny city's black skies.
The bars and restaurants of Iceland's capital are packed, the Range Rovers and
BMWs are parked nose to tail all along the streets of the central 101 district,
and music is pumping from a black stretch Hummer limousine cruising by.
'What can we do? Its difficult times but we've spent all day talking about it,
watching the news getting worse and worse. We had to go out and be with
friends. Maybe it's like the party at the end of the world,' says Egill
Tomasson, 32, sitting in the Kaffeebarinn bar.
Iceland is on the brink of collapse. Inflation and interest rates are raging
upwards. The krona, Iceland's currency, is in freefall and is rated just above
those of Zimbabwe and Turkmenistan. One of the country's three independent
banks has been nationalised, another is asking customers for money, and the
discredited government and officials from the central bank have been huddled
behind closed doors for three days with still no sign of a plan. International
banks won't send any more money and supplies of foreign currency are running
out.
People talk about whether a new emergency unity government is needed and if the
EU would fast-track the country to membership. On Friday the queues at the
banks were huge, as people moved savings into the most secure accounts.
Yesterday people were buying up supplies of olive oil and pasta after a
supermarket spokesman announced on Friday night that they had no means of
paying the foreign currency advances needed to import more foodstuffs.
This North Atlantic volcanic island, which is the size of Cuba, with a
population of 320,000 - the size of Coventry's - is an unlikely player on the
global financial stage. It is famous for its fish, geysers and for winning the
UN's 2007 'best country to live in' poll. But Iceland built its extraordinary
wealth on the crest of the worldwide credit boom and now the crunch is sweeping
it away, bankrupting a people for whom the past eight years have been, for most
of them and by their own admission, one long party.
The nation's celebrated rags-to-riches story began in the Nineties when free
market reforms, fish quota cash and a stock market based on stable pension
funds allowed Icelandic entrepreneurs to go out and sweep up international
credit. Britain and Denmark were favourite shopping haunts, and in 2004 alone
Icelanders spent 894m on shares in British companies. In just five years, the
average Icelandic family saw its wealth increase by 45 per cent.
But, as a result of the international banking crisis, the billionaires who own
everything from West Ham United football club to the Somerfield supermarket
chain, Hamleys toy shops and the House of Fraser, are in trouble and the
country is drowning in debt.
Iceland's cheap labour force, the Poles and Lithuanians, have left already -
there's little point in sending home such a worthless currency, and the tourist
season is over. Iceland is on its own.
In the Kaffeebarinn, Egill Tomasson isn't drinking because he has a music
festival to organise. Iceland Airwaves takes place in a fortnight, when more
than 100 Icelandic bands and 50 foreign ones will play in venues around the
city over four days. Most of the tickets have been sold in krona, but the
international acts need to be paid in euros, which is going to cost the
organisers dearly.
'People here are going to need this festival,' says Tomasson. 'This crisis has
been a heavy blow. And many people should have a bad conscience for what has
happened. Someone should be prosecuted, they have sucked Iceland dry, taken the
money and ran, and left us totally in the shit. People I know who have gone to
the UK or the US to study have found their grants worthless, they are
stranded.'
Like many his age, Tomasson has only a vague memory of harder times, before the
boom that brought Iceland the highest per capita wealth in the world. Older
islanders call them the 'Krutt-kynslotin' - the cuddly generation. Eco-aware,
earnest but pampered, they drift from organic caf to bar, listening to the
music of Bj rk and Sigur R s, islanders who have made it big abroad. 'They will
have to get their hands dirty now,' says chef Siggi Hall, Iceland's answer to
Gordon Ramsay, with an effusive vocabulary to match.
'That's good though, they are the I-generation; iPods, iPhones, everything
starts with I. Well, we will have to go back to the basics now. Icelanders are
risk-takers, but hard working, they will have to downsize. We will have to eat
haddock and Icelandic lamb and forget these imports of goose livers and
Japanese soy sauce. When everyone was extremely rich in Iceland - you know,
last month, it was with money that they never have earned. Now those who were
extremely rich are just normally rich, but they think they are poor. They were
spoilt, spending billions.'
Hall is due to open his new restaurant on 17 October, but insists the crisis is
not worrying him. 'I had been losing customers because people were flying off
to Copenhagen and London and New York for the weekend, to eat out. Now they
will stay in Iceland, but they will still eat out. People need to eat.'
Outside the city's Hofdahollin car showroom, looking a little rumpled for men
trying to sell new and used cars for 35,000 and up, owner Runar Olafsson and
his top salesman are sharing a Marlboro. They are not expecting any customers
today. 'A few years ago we couldn't get enough top-end cars and we started
importing them. We were selling 120, 140, a month. But it turned around so
fast,' says Olafsson. 'It's so dramatic, just in one month. We have already
seen two dealers go down.
'Customers would come in and we would apply for credit online for them, a 100
per cent loan, and they can drive away in their new Range Rover. It took ten
minutes, it was very easy. But 60 to 70 per cent of those loans were in foreign
currency, Japanese yen or Swiss francs, and they have gone up 90 per cent as
the krona burns. A car worth 5 million krona now has a 9 million loan on it;
how are people going to make those payments?'
Foreign currency loans are a problem for homeowners, too. 'Loans have been very
cheap, house prices rose and there was a lot of good-quality housebuilding. But
the building has halted, nothing is being finished, nothing is selling. The
interest rates are staggering. What people are doing now is swapping houses if
they want to go bigger or smaller. That is what is keeping us afloat,' says
estate agent Ingolfur Gissurarson. His mobile goes off - the ringtone is A Hard
Day's Night by the Beatles. 'I changed it to suit the times,' he smiles.
Blame it on the Vikings. Icelanders like to hark back to their ancestors, the
rebel Vikings who, as the nation's most revered daughter Bj rk once explained,
'couldn't deal with authority in Norway. So they flew off in this mad ocean in
a wooden boat which is pretty hardcore, North Atlantic in the year 800. And
they found this island full of snow ... yeeeah!'
'The Icelandic psyche is an important part of all of this,' says Hellgrimur
Helgason, who writes an outspoken newspaper column which exposes feuds between
Iceland's ruling class and its entrepreneurs. He is also the author of 101
Reykjavik, a popular novel populated by 'Krutt-kynslotin' characters.
'Before the market reforms the country had stagnated, no one thought Icelanders
could be businessmen. We were poor fishermen or farmers, so it had an
incredible effect on confidence when we saw these young men out buying up
British and Danish companies. Everyone grabbed at the new opportunities like
children. Really, it was no surprise that Hamleys toy shop was one of the first
purchases.'
Gunnghilder Sveinbjarna and her friend, Anna Lara Magnusdottir, are ordering
their second bottle of red wine in the Philippe Starck-designed interior of
Reykjavik's Bar 5. Tonight the young women are feeling no pain.
'We come out at the weekend to forget our children and our problems, and this
time we will drink extra hard to make sure we forget the economic crisis too,'
says Gunnghilder, raising a glass. 'Tomorrow the sore head.'
The door to Hell
Iceland is known as the Land of the Midnight Sun because in summer there are
almost 24 hours of daylight.
There are 15 active volcanoes in Iceland, including Mount Hekla, long
believed to be the entrance to Hell.
More books are published per capita in Iceland than in any other country.
Many Icelanders still practise the old Viking religion of Norse mythology.
Icelanders drink more Coca-Cola than anyone else in the world.
The British connection
Iceland's biggest bank, Kaupthing, has investments in Costcutter, Somerfield,
Jane Norman and the Laurel Pub Company which manages the Slug & Lettuce chain.
It jointly owns Kaupthing Edge, an internet savings bank with 150,000 British
savers.
Baugur, an Icelandic international investment company, has significant stakes
in Iceland supermarkets, Moss Bros, French Connection, Woolworths, Saks,
Whittard of Chelsea, Goldsmiths, House of Fraser, Whistles and Oasis.