REYKJAVIK, Iceland: People go bankrupt all the time. Companies do, too. But countries?
The global financial crisis has laid waste to some major banks and other financial institutions in the United States and Europe, but Iceland may be the first country to face the prospect of going bust along with them.
After a decade-long binge in which Iceland’s banks, and some of its citizens, expanded beyond their means, the bill has come due. While the full effects of the potential crash have not hit yet, some Icelanders like Bubbi Morthens are already feeling the pain.
“There is a lot of fear in society and there are people who are losing everything,” Morthens said Wednesday after singing at an impromptu midday concert in central Reykjavik intended to lift people’s spirits.
Morthens is a former fish industry worker turned rock singer who is now known as the Elvis of Iceland. Like many of his compatriots, he did well when Iceland was riding high, accumulating considerable wealth.
Then, the financial crisis gripping his country intensified last month. The government seized control of Iceland’s third-largest bank. Morthens said he lost his life savings, which he had invested mostly in the bank’s stock.
“What is important at a time like this is not picking out whom to blame,” he said. “We have a government that is trying to do their best, but we will have to see what they come up with. Maybe it is a new dawn for Iceland.”
The government’s attempts to get ahead of the problems cascading through its financial system have not restored confidence. In just 24 hours, for instance, it abandoned an effort to peg its currency to a basket of others.
And on Thursday, the government seized Kaupthing Bank, the country’s largest lender, effectively completing the nationalization of the banking system.
In a country raked by icy North Atlantic winds and dotted with volcanoes and geysers, where people live with the threat of earthquakes and maritime disasters, few seem to be losing their cool over the financial crisis – yet.
Still, with the country facing the imminent threat of “national bankruptcy,” as Prime Minister Geir Haarde put it earlier this week, many people are talking about an epochal change. The only problem is that nobody knows what that might mean.
Nations have gone bankrupt before, of course, but countries like Argentina – not a country that thinks of itself as closer to Europe than the developing world.
What it means for Iceland so far, people here say, is that the days when the economy seemed capable of gravity-defying feats are gone. So are the days when Icelandic investors went on an international buying spree, adding some of the biggest names of the British and American retail industries to their portfolios.
So too, they conclude, are the days when ordinary citizens effortlessly joined in the fun, taking out second mortgages to finance their own trips abroad or at least to the Laugavegur, the main shopping strip in Reykjavik.
“It’s difficult; the landscape is very difficult,” said Franch Michelsen, a watch dealer in downtown Reykjavik, as he took a break from cleaning his shop window on Wednesday.
People are still buying watches costing up to 100,000 Icelandic kronur, or about $900, he said. Above that price, there is a flight to quality similar to the one that has galvanized the financial markets. Buyers are apparently interested only in the biggest name, the most liquid investment, Michelsen said – in this case, Rolexes.
“People want something they can take anywhere in the world and sell it,” he said.
This capital city of 120,000 still displays the fruits of the decade-long economic boom that followed the deregulation of Iceland’s financial sector in the 1990s – hip cafes, lobster restaurants and stylish shops selling outdoor gear.
After the government nationalized Morthens’s bank, Glitnir, in September, some people rushed to grocery stores, worried about possible shortages on a remote island where fish is one of the few foods that does not need to be imported.
But the shelves are still stocked, and any such hoarding this time around seems to have eased.
Instead, the financial situation is playing out in a parallel universe inside the offices of Glitnir and the other two big banks, Landsbanki and Kaupthing. The government said Thursday that Kaupthing’s domestic deposits were fully guaranteed.
The government had originally planned to take a 75 percent stake in Glitnir, but said Wednesday that the bank was in even worse shape than it had thought and would be handed over to financial regulators. Landsbanki, the nation’s second-largest bank, was nationalized on Tuesday.
But not just bankers are getting hurt. Some Icelanders with recently acquired mortgages face a double threat. Home prices have been falling, and analysts expect them to decline further. But many of these mortgages were taken out in foreign currencies – marketed by the banks as a way to benefit from lower interest rates abroad, as rates in Iceland rose into the double digits over the last year.
Now, with the Icelandic krona plunging, homeowners have to pay back suddenly far more expensive euro- or dollar-value of their mortgages – a kind of negative equity, squared.
The Rev. Karl Sigurbjornsson, the bishop of Iceland, who leads the state-sponsored Lutheran church, says he worries about how the prospect of financial suffering will affect a society that “was led to believe that it was unlimited growth forever.”
“What will happen when the dust settles?” he asked during an interview in his office. “A lot of people will be very angry. It will be a challenge for our society,” which in the past placed a premium on cohesion rather than the pursuit of wealth.
What will happen next? Analysts say events in the financial sector are moving too fast to make useful economic forecasts.
Some in this country of 300,000 think the economy will prove to be resilient, regardless of what happens to the banks or even the country’s finances. They point to Iceland’s recent prowess in heavier industries like aluminum production – Alcan and Alcoa both have plants here – and alternative energy.
For instance, Eyjolfur Rafnsson, chief executive of Mannvit Engineering, which designs geothermal and hydroelectric power plants, said he had seen no negative effects on his business from the financial crisis. The company plans to open an office in Budapest next week, adding to international sites in Germany and Britain.
He said he even saw some possible benefits for his company, if not for Iceland as a whole. Because of the fall in the value of the krona, he said, “today we can compete anywhere in the world, except maybe India.”
To Bishop Sigurbjornsson, the silver lining in the financial crisis is the prospect that it will bring Icelanders, steeped in the sagas of the Vikings, back in touch with traditional values.
In his office, he points to a picture from 1908, showing an isolated country church. Villagers gather for a Sunday service at the wooden church, whose roof is covered with turf – a cheap form of insulation.
“Other countries build houses with brick and stone,” he said. “These good times, these times of wealth, are a fairly short part of our history.”
Meanwhile the Prime Minister, Haarde, was drawing some practical conclusions, as Fitch Ratings downgraded the country’s debt and Iceland awaited a possible loan from Russia.
“What we have learned from this whole exercise is that it is not wise for a small country to try to take a leading role in international banking,” he said at a news conference.
1 comment:
In Flailing Iceland, Disbelief and Regret
By Eric Pfanner
9 October 2008
REYKJAVIK, Iceland: People go bankrupt all the time. Companies do, too. But countries?
The global financial crisis has laid waste to some major banks and other financial institutions in the United States and Europe, but Iceland may be the first country to face the prospect of going bust along with them.
After a decade-long binge in which Iceland’s banks, and some of its citizens, expanded beyond their means, the bill has come due. While the full effects of the potential crash have not hit yet, some Icelanders like Bubbi Morthens are already feeling the pain.
“There is a lot of fear in society and there are people who are losing everything,” Morthens said Wednesday after singing at an impromptu midday concert in central Reykjavik intended to lift people’s spirits.
Morthens is a former fish industry worker turned rock singer who is now known as the Elvis of Iceland. Like many of his compatriots, he did well when Iceland was riding high, accumulating considerable wealth.
Then, the financial crisis gripping his country intensified last month. The government seized control of Iceland’s third-largest bank. Morthens said he lost his life savings, which he had invested mostly in the bank’s stock.
“What is important at a time like this is not picking out whom to blame,” he said. “We have a government that is trying to do their best, but we will have to see what they come up with. Maybe it is a new dawn for Iceland.”
The government’s attempts to get ahead of the problems cascading through its financial system have not restored confidence. In just 24 hours, for instance, it abandoned an effort to peg its currency to a basket of others.
And on Thursday, the government seized Kaupthing Bank, the country’s largest lender, effectively completing the nationalization of the banking system.
In a country raked by icy North Atlantic winds and dotted with volcanoes and geysers, where people live with the threat of earthquakes and maritime disasters, few seem to be losing their cool over the financial crisis – yet.
Still, with the country facing the imminent threat of “national bankruptcy,” as Prime Minister Geir Haarde put it earlier this week, many people are talking about an epochal change. The only problem is that nobody knows what that might mean.
Nations have gone bankrupt before, of course, but countries like Argentina – not a country that thinks of itself as closer to Europe than the developing world.
What it means for Iceland so far, people here say, is that the days when the economy seemed capable of gravity-defying feats are gone. So are the days when Icelandic investors went on an international buying spree, adding some of the biggest names of the British and American retail industries to their portfolios.
So too, they conclude, are the days when ordinary citizens effortlessly joined in the fun, taking out second mortgages to finance their own trips abroad or at least to the Laugavegur, the main shopping strip in Reykjavik.
“It’s difficult; the landscape is very difficult,” said Franch Michelsen, a watch dealer in downtown Reykjavik, as he took a break from cleaning his shop window on Wednesday.
People are still buying watches costing up to 100,000 Icelandic kronur, or about $900, he said. Above that price, there is a flight to quality similar to the one that has galvanized the financial markets. Buyers are apparently interested only in the biggest name, the most liquid investment, Michelsen said – in this case, Rolexes.
“People want something they can take anywhere in the world and sell it,” he said.
This capital city of 120,000 still displays the fruits of the decade-long economic boom that followed the deregulation of Iceland’s financial sector in the 1990s – hip cafes, lobster restaurants and stylish shops selling outdoor gear.
After the government nationalized Morthens’s bank, Glitnir, in September, some people rushed to grocery stores, worried about possible shortages on a remote island where fish is one of the few foods that does not need to be imported.
But the shelves are still stocked, and any such hoarding this time around seems to have eased.
Instead, the financial situation is playing out in a parallel universe inside the offices of Glitnir and the other two big banks, Landsbanki and Kaupthing. The government said Thursday that Kaupthing’s domestic deposits were fully guaranteed.
The government had originally planned to take a 75 percent stake in Glitnir, but said Wednesday that the bank was in even worse shape than it had thought and would be handed over to financial regulators. Landsbanki, the nation’s second-largest bank, was nationalized on Tuesday.
But not just bankers are getting hurt. Some Icelanders with recently acquired mortgages face a double threat. Home prices have been falling, and analysts expect them to decline further. But many of these mortgages were taken out in foreign currencies – marketed by the banks as a way to benefit from lower interest rates abroad, as rates in Iceland rose into the double digits over the last year.
Now, with the Icelandic krona plunging, homeowners have to pay back suddenly far more expensive euro- or dollar-value of their mortgages – a kind of negative equity, squared.
The Rev. Karl Sigurbjornsson, the bishop of Iceland, who leads the state-sponsored Lutheran church, says he worries about how the prospect of financial suffering will affect a society that “was led to believe that it was unlimited growth forever.”
“What will happen when the dust settles?” he asked during an interview in his office. “A lot of people will be very angry. It will be a challenge for our society,” which in the past placed a premium on cohesion rather than the pursuit of wealth.
What will happen next? Analysts say events in the financial sector are moving too fast to make useful economic forecasts.
Some in this country of 300,000 think the economy will prove to be resilient, regardless of what happens to the banks or even the country’s finances. They point to Iceland’s recent prowess in heavier industries like aluminum production – Alcan and Alcoa both have plants here – and alternative energy.
For instance, Eyjolfur Rafnsson, chief executive of Mannvit Engineering, which designs geothermal and hydroelectric power plants, said he had seen no negative effects on his business from the financial crisis. The company plans to open an office in Budapest next week, adding to international sites in Germany and Britain.
He said he even saw some possible benefits for his company, if not for Iceland as a whole. Because of the fall in the value of the krona, he said, “today we can compete anywhere in the world, except maybe India.”
To Bishop Sigurbjornsson, the silver lining in the financial crisis is the prospect that it will bring Icelanders, steeped in the sagas of the Vikings, back in touch with traditional values.
In his office, he points to a picture from 1908, showing an isolated country church. Villagers gather for a Sunday service at the wooden church, whose roof is covered with turf – a cheap form of insulation.
“Other countries build houses with brick and stone,” he said. “These good times, these times of wealth, are a fairly short part of our history.”
Meanwhile the Prime Minister, Haarde, was drawing some practical conclusions, as Fitch Ratings downgraded the country’s debt and Iceland awaited a possible loan from Russia.
“What we have learned from this whole exercise is that it is not wise for a small country to try to take a leading role in international banking,” he said at a news conference.
Post a Comment