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Icelandic miracle in meltdown
Sunday, October 05, 2008 By Robert Jackson in Reykjavik
While the eyes of the world were focused last week on the US bailout plan, it barely troubled the headlines in Iceland.

Yesterday the Icelandic government was finalising a plan for its crisis-hit economy, but denied it would nationalise Kaupthing, the country’s largest bank. Bjorgvin Sigurdsson, commerce and banking minister, said the government was actively seeking a ‘‘large loan’’ from abroad to shore up the krona.

All attention was on the Icelandic Central Bank’s €600 million rescue of Glitnir. Glitnir was a domestic bank that had, through access to global credit markets, created a business that far exceeded its modest domestic depositor base, making it a world player.

Along with Kaupthing and Landsbanki, Glitnir borrowed liberally and invested in the aggressive acquisition programmes of the self-styled ‘Viking raiders’ - Jon Asgeir Johannesson, Bjorgolfur Thor Bjorgolfsson and the Bakkavor Group brothers - themselves owners of the very banks that funded them.

For the most part unregulated, and benefiting from inflated credit ratings that assumed the Icelandic government would stand as lender of last resort in the event of a crisis, the three banks funded a bafflingly varied range of investments: West Ham Football Club, newspapers in Denmark, property in California and mobile phone networks in the former Soviet Union. If a business had a balance sheet that could be leveraged, it was bought.

For awhile, they seemed unstoppable. No deal was too big, no problem could not be overcome. Using a complex web of cross-owned companies, they moved swiftly and paid full prices for their targets. Their balance sheets swelled and so did their debt burden - at €70 billion, their combined debt stands at nearly ten times the nation’s GDP. Their growth had indeed been miraculous.

In Iceland, the banks transformed the housing market - 100 per cent mortgages and easy repayment terms set off a building and property boom that saw house prices double in five years. Foreign currency loans were available to first-time buyers and car owners alike. In one year, Iceland bought more top-of-the-range Range Rovers than any other Scandinavian country. The personal debt burden, from a standing start, became one of the highest in Europe.

When the credit crunch hit earlier this year, it was felt that the banks would be able to muddle through. They had adequate liquidity ratios and established lines of credit that would see them through well into 2009. No one could have predicted the recent destruction of some of Wall Street’s major financial institutions.

Confidence in the banking system has been hard hit globally; in Iceland it has evaporated. The currency is now trading at 40 per cent of its January values; the last seven days alone have seen a plummet of over 11 per cent and major international institutions have stopped trading in the currency altogether.

The Icelandic stock exchange, down 80 per cent, is in free fall and money market funds, once a safe haven for savers, are imposing write-downs in anticipation of further corporate failure.

Homeowners are confronted with negative equity, and businesses with no new credit lines. For an island population of 300,000 that relies on imported goods, the prospects of rampant inflation - already running at 15 per cent - deep recession and systemic failure loom.

Icelanders are shocked at the swiftness and depth of the turnaround. As they begin to count the increased costs of borrowing and the spiralling expense of living, there is a growing sense of outrage. This anger is directed, not only at the lack of regulation by the Central Bank and successive governments, but also at the greed and recklessness of the ‘Viking raiders’.

Last week, Icelanders saw their savings and pensions funds battered, their currency decimated and their national esteem in tatters. Sadly, this could just be the beginning. The Icelandic miracle has begun to unravel.

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