Iceland's Crisis

As most people have heard at this point, Iceland has been one of the hardest hit in the current financial crisis. Björk summarizes the situation best in this very thoughtful article in the London Times:

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.

This weekend I wanted to learn a bit more about what the situation in Iceland is like and found an Icelandic blog Iceland Weather Report linked from A Fistful of Euros that has been giving regular updates on the situation on the ground:

[T]here were massive layoffs here at the end of last month. Most of those were in the construction industry - manual workers, designers, architects … anyone in the business of constructing new buildings. Many were foreign citizens who had been living and working here temporarily in construction. The second-largest hard-hit industry was, obviously, the financial services sector - bank workers being laid off. The third-largest was retail. In addition, many people have been laid off and then re-hired on different terms, which usually has meant that they’ve had to take a pay cut.

Basically, things here have slowed down drastically. Public and private spending has been cut back wherever possible. Pretty much anything that can be postponed, has been postponed. That goes for companies and institutions [public and private], as well as individuals. People aren’t going out to buy new cars or even new clothes these days, nobody is remodelling their house or doing anything of the sort that isn’t absolutely crucial. A state of affairs that I suspect isn’t unique to Iceland - this is what happens across the board in a recession.

What IS unique to Iceland - and very troubling - is the state of our currency.

The New York Times had an article on the impact as well, much of it focusing on the implications of Kronur's rapid fall in value on the economy. The starkness of it all didn't really hit me until I read that a third of Icelanders are considering leaving though:

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.

So how did this happen? Tom Friedman explains the basics:

The Icelandic banks, while not invested in U.S. subprime mortgages, had gone on their own borrowing and lending binges, wooing savers from across Europe with 5.45 percent interest savings accounts [Note: Interest rates were around 15% because of high inflation].

In a flat world, money can easily seek out the highest returns, and when word got around about Iceland, deposits poured in from Britain — some $1.8 billion. Unfortunately, though, when global credit markets closed up, and the krona fell, “the Icelandic banks were unable to finance their debts, many of which were denominated in foreign currencies.”

The current situation is dire and its enormity is somewhat difficult to comprehend, Iceland is a small country and according to Iceland Weather Report the claims that Britan is making on Landsbanki , "are 3-4 times higher than the war compensation claims Germany was made to pay after World War II." Recovering from a shock like this is going to be a difficult, long, and painful process. And yet I want to end this post on a somewhat positive note. While the effects of this crisis are truly terrible and none of what happened can be excused it is also an opportunity to reevaluate and to change direction. Icelanders are a proud, dynamic, and well-educated people and have recovered from worse, or (once more) in the words of Iceland Weather Report:

Cultivating what really matters. A return to basic values. That’s the prevailing emphasis around here these days and yes, it is a Very Good Thing. A few short weeks ago the media was still glorifying our “Tycoons” and doing features on people who decorated their massive concrete homes with cold fixtures and soulless minimalist furniture. What we get now is stories of people sticking together, helping each other [...]

Education authorities are making sure children have a secure place in the preschools even if their parents default on payments. A crisis committee is being set up to help people who have lost their jobs. Mortgages are all being taken over by the state’s Housing Financing Fund and those who can’t make mortgage payments can apply to have them halted for the time being. [..]

We have good, solid resources: fish in the sea, heat in the ground, copious amounts of energy, a beautiful country with myriad opportunities in tourism, and an excellent workforce: a nation of well-educated and hard working people, many of whom are now out of work and who can use their expertise to help rebuild our economy and much of the infrastructure. After all, this is not the worst that we have endured: on two or three occasions in the past the Icelandic nation has been close to being wiped out by calamities much worse than this, such as volcanic eruptions and the bubonic plague.