Scars of global financial crash clearly visible in Reykjavik

Peter O’Dwyer visits Iceland eight years after the global financial system crashed. Despite taking a very different path to Ireland, the scars of the catastrophe are still all too evident there as they are here

Scars of global financial crash clearly visible in Reykjavik

EIGHT years ago when the global financial system crashed, Ireland found itself caught in the eye of a violent storm that battered its citizens and institutions alike and left a lasting legacy of hurt that endures today.

A few hundred kilometres north a similar story was unfolding in Iceland.

Despite taking a very different path since, the scars of financial catastrophe are still all too evident there, as they are here.

To an outsider looking back at the years preceding the Great Recession it’ll surely seem like there was something in the water of the North Atlantic.

A little too much sea air saw Ireland and fellow minnow Iceland down the economic tools of the past to embark on a whirlwind journey into the world of high finance.

Two new titans of banking were born — in their own estimation, at least.

The sleepy Icelandic capital Reykjavik, set against idyllic mountain ranges and perched on the country’s south-eastern coastline, became a centre of international commerce.

For a while it all looked to be going swimmingly, of course.

As the Tiger roared without fear of hoarsening, the Icelanders embarked on a transformation for the ages: from humble, hardworking and, in an economic sense, boring, to kingpins of the financial world.

Finance became the new fishing and Iceland became yet another basket case economy.

For a country of 320,000 or so inhabitants it was an especially ill-judged path to pursue.

Where Ireland’s bloated banks grew to three times the size of GDP, Iceland’s grew to between nine and 10 times the size of their economy.

Investors spent years piling into Iceland assets while the locals gorged themselves on a diet of easy credit not too dissimilar to our own.

One key difference though was that many of their loans were taken out in foreign currencies which carried lower interest rates than loans denominated in Icelandic krona.

When the plug was pulled, investors couldn’t take their money from the country quick enough and the currency collapsed.

The shiny foreign denominated loans that once seemed like a one-way ticket to unprecedented prosperity suddenly became multiple times more expensive to pay back as the value of the krona slumped.

The country’s new concert hall in Reykjavik which was built before the crash; Icelanders embarked on a transformation for the ages: from humble, hardworking and, in an economic sense, boring, to kingpins of the financial world
The country’s new concert hall in Reykjavik which was built before the crash; Icelanders embarked on a transformation for the ages: from humble, hardworking and, in an economic sense, boring, to kingpins of the financial world

Inflation took off and in a country that relies heavily on imports things went from bad to worse pretty quickly.

Capital restrictions were put in place to stem the flow of money from the economy and prevent a further collapse of the krona meaning, among other things, anyone travelling abroad had to rock up to the bank with a plane ticket to withdraw foreign currency.

For businesses, the difficulties caused by the controls were plentiful too.

If in the immediate aftermath of the crash, Ireland and Iceland met at a fork in the road, it was the latter that undoubtedly took the road less travelled and ripped up the economic rule book.

Where the Irish authorities pumped €64bn of taxpayers money into saving their banks, Iceland let theirs fail.

The Icelandic people were put before foreign interests and many even had their mortgages written down.

Iceland’s modern-day leaders delivered for its people in the wake of unprecedented chaos. Or so the story goes, at least.

In reality, whether or not taking the road less travelled has made all the difference remains very much up for debate: their methods may have differed but the result of the Irish and Icelandic paths to recovery have yielded strikingly similar results.

Iceland, like austerity poster boy Ireland, has seen a stronger recovery than most with higher growth and unemployment of 4%.

The Icelandic economy will grow by about 3.7% this year and the International Monetary Fund (IMF) describes it as a time of “unambiguously strong economic performance”.

Director general of the Federation of Icelandic Industries, Almar Gumundsson has a similar view.

“We are seeing this quite clearly in the export data that Iceland has, over the past 10-15 years, started to export different things than we used to export. You don’t have to go a long way back to see that Iceland was a very typical economy; exporting fish, exporting aluminium. Now the tide has changed a bit where you see that Iceland is formed out of four pillars,” Mr Gumundsson explains.

The outlook is good for those four pillars of the Icelandic economy: seafood exports, heavy-industry, tourism, and the knowledge-based economy, he adds.

Being able to devalue its currency during the crisis gave Iceland a leg-up in the export market that Ireland didn’t have as its goods became cheaper for the world to buy.

“From the economics point of view, it’s clear that the huge devaluation helped us a lot to stimulate growth in export sectors so that’s obviously important. But I think to be fair the other part we should remember of why the crisis struck so heavily in Iceland was that we had our own currency which had appreciated a lot before.

“There were obviously some imbalances also on business balance sheets and individual or household balance sheets where businesses and people had foreign denominated loans which obviously magnified the crisis,” he adds.

It magnified the crisis to such an extent that many Icelandic businesses went bust, in fact.

Of those, quite a few were in a construction industry almost twice the size of its historical average.

Same mistakes, different country.

Capital controls have stunted investment and made raising funds particularly difficult for companies in the last seven years but are now being eased and and for the most part don’t affect the day-to-day business of a company, Mr Gumundsson adds.

Previously, a licence from the Central Bank and an accompanying 90-day wait was needed to do something as simple as buy from an overseas trading partner but this no longer applies and other than the investment issue, companies are getting on with things without the hindrance of the controls.

With interest rates far higher in Iceland than anywhere else in the Western world the worry now is that rather than seeing investors pull money from the economy when the restrictions are lifted that speculative foreign money will instead begin to flow into the country again just as it did in the years leading up to the crisis.

The current government — shorn of its former leader Sigmundur Daví Gunnlaugsson who stepped down in the wake of the Panama Papers revelations — has been good for business and acted in the interests of the people, he argues.

High wage inflation though threatens undoing all that good work.

Much like Ireland, it is here that the split in Icelandic society is evident.

Business bodies call for efforts to protect competitiveness above all else, the government points towards the highly impressive statistical economy but the people just don’t feel it.

Enda Kenny lost an election asking voters to keep the same sort of recovery going.

“No... No, no, no,” Theodór Magnússon’s responds incredulously to the suggestion that Icelanders are seeing significant wage increases at the moment.

But the Federation clearly showed wages climbing by more than 8% compared to 3.5% in Norway and just 1.2% in Finland, I protest.

“It was a nice chart,” he says, “but merely a lie”.

Increases are all relative to existing salaries, he adds, and besides, the other countries don’t have to contend with inflation, Icelandic-style.

It’s that inflation that has brought me to Theodór — or Teddi — and his wife Helga’s home 20km or so outside of Reykjavik.

More specifically, I’m here to examine the impact it has had on the unique inflation-linked mortgages the 85% or so of Icelanders have.

Inflation-linked mortgages which see the principal owed on the loan increase with the rate of inflation were introduced in 1979 to fight the effects of years of hyperinflation.

There’s little evidence that the policy has worked but plenty to suggest it has made things substantially worse. Initially, wages were linked too but only for a few years.

“In the beginning the salary was index-linked; everything was index-linked but then they took the salary out of it and just left the loan,” Vilhjálmur Bjarnason chairman of the Homes Association which is fighting against the indexed-loans says.

Gudmundur Asgeirsson, a colleague of Vilhjálmur’s at the Homes Association who lost his home in the aftermath of the crash, says the move was designed to protect savings but has ended up being a subsidy for the banks straight from people’s pockets.

“What they seem to have not realised at the time is that this wasn’t really a solution, it was just a quick fix that didn’t really address the underlying problem and what it did in the long run — and that’s why we ended up with this problem we are facing now — is that… this system of inflation indexing the loans really just fuels more inflation. It doesn’t fix that problem. It’s sort of like just putting a band aid on it without doing the necessary surgery to fix what’s really going on inside the skin,” he says.

“Payments were as expected for four years once we took the loan out. The thing about these loans is that you never know how much you have to pay next year or next month so you can never plan ahead.

“Every 10 years there’s a crash in Iceland because of the index-linked loans. We are just the collateral damage,” Teddi says.

Investors spent years piling into Iceland assets while the locals gorged themselves on a diet of easy credit not too dissimilar to our own.
Investors spent years piling into Iceland assets while the locals gorged themselves on a diet of easy credit not too dissimilar to our own.

Teddi and Helga built their home in a quiet suburb of Reykjavik with the help of a 20m IKR (€142,000) mortgage taken out in two parts.

Today, after making repayments of about €400 every month for 14 years, they owe the bank more than €192,000. They’ve yet to miss a payment.

“It is very depressing that you work all day and all your payment goes into this mortgage; these big loans but they never lower them, they never get less. You never owe them less,” says Helga, a 63-year-old mother of three adult daughters.

Slaves to the banks, is how she describes their existence.

Hordes of young, educated Icelanders have left in an unprecedented brain drain.

The country’s main hospital leaks as the rest of the public service creaks under the pressure of years of underinvestment.

People are disillusioned with the political landscape. It all sounds eerily familiar.

There’s been debt relief — a concept far more alien to us in Ireland — but it’s made little or no difference to most families.

Debt in excess of 110% of the value of the home was forgiven in a deal struck between the government and banks.

In 2010, the Supreme Court also ruled loans indexed to foreign currencies — which account for approximately 10% of home loans —to be illegal meaning those mortgage holders were no longer on the hook for krona losses.

The debt relief perhaps represents progress but for most Icelanders it only served to chip away at a portion of the huge principal increases that followed the crash.

“They create these remedies that are only half-way solutions. Each and every remedy they create seems to spawn new problems or unintended consequences instead of really just going directly at the heart of the problem, they apply all these band-aids that don’t really solve the underlying problem,” Homes Association employee Asgeirsson says.

Going to the heart of the problem means having the mortgage-link abolished.

“There was a committee that was created by the government at the time which, in 2009 I think, was ordered to look into this possibility but they decided not to do it and the main argument that they put forward was that if they did then that would severely impact the pension funds because the pension funds own a lot of financial assets that are tied to the mortgage loans.

“They calculated, I think, that this would cost the pension funds between 200bn IKR and 300bn IKR if they did this. I think that’s not incorrect, I think it’s a correct calculation probably and, of course, it’s a reasonable argument that you want to protect the pension funds but at the same time what they really were doing was burning the homes.

“It’s sort of like, for me, I have my pension rights and, of course, I don’t want to lose them, but at the same time I don’t want to lose my home at the same time so if I had to choose I would rather keep my home because I need that right now but I won’t need the pension until decades later.”

It’s in this fight that Teddi and Helga and their unblemished repayment record have become unlikely lynchpins with their mortgage acting as a test case in the Homes Association’s bid to have the loans deemed illegal.

An initial legal action which came to an end in November 2015 failed.

That action was against the State-owned lender, the next will be against the State.

Success would offer respite for some 85% of Icelandic mortgage holders, Teddi says.

There’s a personal motivation too: being in their mid-sixties Teddi and especially Helga — who works in the public sector which requires employees to retire at 70 — don’t have too many years left in full-time employment.

When Teddi was briefly out of work after the closure of the country’s old NATO base in 2006, they got a little too close for comfort to the prospect of losing their home and have no appetite for a re-run.

“This period when he was out of work we were really preparing to sell this house but what would we buy? Where would we go? Could we pay rent? Could we sell it? Could we pay up the loans? How would it work?

“It’s so much insecurity and for people of our age that had planned their life in a way and then it was like your feet are just swept up from you.”

Having recently returned from a weekend trip to Ireland with friends, the grandmother of six was taken by the beauty of the Irish scenery which is in stark contrast to the black, rugged volcanic rock upon which Iceland is built.

“Just look around here you don’t see a green spot… everything seemed so green and so fresh [in Ireland] and much cheaper than here.”

Much like Irish homeowners looking enviously towards Icelanders with their low unemployment, mortgage writedowns and failed banks the grass may not be all that greener on the other side though.

Where thousands of Irish mortgage holders struggle with lengthy arrears and fight to stay afloat in a sea of negative equity, many Icelanders have to contend with throwing their hard-earned money into a bottomless black hole.

The writedowns merely undid part of the huge mortgage spike inflation brought after the crash while there was never an option for Iceland to save their banks as Ireland did.

Two very different paths to recovery have been travelled by the North Atlantic outposts but, for now at least, the destination remains equally elusive.

Three generations face loss of home as debt talks fail

María Birna Gunnarsdóttir and her husband Thorsteinn Hedinsson.
María Birna Gunnarsdóttir and her husband Thorsteinn Hedinsson.

‘We paid the bank €1,790 every month but they took the money and I did not know what they did with it. The mortgage got bigger and bigger.”

OUT in the cold. That’s how María Birna Gunnarsdóttir and her husband Thorsteinn Hedinsson feel after efforts to resolve their crippling mortgage debt finally failed.

Now about to lose their home, the cold could soon become an all-too desperate reality.

Having spent five years hoping to secure a deal from the country’s debtors’ ombudsman, their application and subsequent appeal were rejected.

Five years of stagnation would be bad, but five of mounting interest costs was significantly worse.

They’re at the point of no return with their debts, and their home is due to be sold at auction any day now.

At that point, their daughter and her two children — aged seven and two — will be homeless.

A neighbour, and one of Maria’s work colleagues are in a similar position.

“We don’t know!” Maria says forlornly of where they’ll go.

A rental apartment big enough to house three generations will be needed, but could be hard to find in Reykjavik — at an affordable price, at least.

Like so many others, they couldn’t keep pace with a runaway mortgage that continued to grow, no matter how much they repaid.

“Well, we paid the bank 250,000 IKR (€1,790) every month but they took the money and I did not know what they did with it. It got bigger and bigger every month. By the end of the year they came to close the electric in the house, turn off the heat and water,” says Thorsteinn.

Not only did they pay the bank for their mortgage, but to look after their utilities too.

Apparently, it’s a common enough arrangement in Iceland, and one that makes a fair degree of sense when times are good.

But in December 2010, things were far from good.

Repayments were made every month as they tried to restructure the loan, but with little success.

“They said ‘relax, relax, everything is okay’. They said we don’t have to worry.”

A 1.5m IKR write-off was subsequently secured as part of a deal the government did with the banks, but did little to relieve their problems as their loan grew to twice its initial size in 1999.

When they entered the ombudsman process, their creditors were unable to pursue them for the debt — but when that failed everything was fair game once again.

“I hate them,” Thorsteinn says of the government that swept to power in 2013 on a promise of helping struggling homeowners.

The ruling coalition would argue they’ve delivered on that promise.

Many others would argue otherwise. What’s left is a sea of resentment and anger. That’s the case for Maria, at least.

She openly admits to being angry.

Her husband seems long past anger however; despair being a far more fitting description.

“It’s okay though,” he says wryly, “there’s life after death”.

‘We need to do something, they don’t even listen to us’

Icelandic couple Teddi Magnússon and his wife Helga borrowed 20m Icelandic Krona and owe about 27m IKR today despite 14 years of repayments.
Icelandic couple Teddi Magnússon and his wife Helga borrowed 20m Icelandic Krona and owe about 27m IKR today despite 14 years of repayments.

Teddi Magnússon did a little back-of-the-napkin maths recently.

Over the past 14 years he estimated he’d made repayments totalling 12 million Icelandic krona (€86,000) on a 6m IKR (€43,000) loan, and still wasn’t rid of it.

In fact, the 65-year-old grandfather and his wife Helga still have another €71,000 left to pay off thanks to the unique Icelandic mortgage system they consider themselves prisoners of.

In the past two years, they’ve managed to knock a total of €230 off what they owe by virtue of making repayments of €400 every month without fail.

It’d be enough to drive you round the bend. Or to revolution, apparently.

“I just came from Dublin,” Helga says.

“I was on a guided walk around the city. You have this 100 anniversary now of the revolution in the post office and we just came from our parliament protesting the Panama Papers.

“This is how we felt; the mood we were in: Let’s do what they did in this post office. We need to do something, they don’t even listen to us.”

When the former Icelandic prime minister Sigmundur Daví Gunnlaugsson’s was caught up in revelations that he and his wife owned an offshore firm with a significant claim on the collapsed banks, thousands took to the streets of Reykjavik demanding his resignation.

For a people who by their own admission aren’t known for making much of a fuss, it represented a spectacular protest not seen since the height of the financial crash when locals pelted parliament with rocks and demanded a response to the crisis.

Much of the anger on that occasion stemmed from the impact the crash had on Icelanders mortgages.

As inflation rose sharply so did the amount of money ordinary people owed the banks.

Making repayments was no protection from the spiralling principals they owed lenders.

Since their introduction in 1979, the unique inflation-linked mortgages had rarely been manageable but this was a whole other level of difficulty.

“If the inflation is very low: 0.5% up to 1%, it’s bearable. Anything above that is unbearable,” Teddi says.

In the wake of Iceland’s spectacular financial crash — more than a match for any catastrophe we managed to engineer in Ireland — inflation climbed to 18%.

The 12m IKR loan was one of two Teddi and Helga took out to build and furnish their modest home in a suburb of Reykjavik.

In total, they borrowed 20m IKR and owe about 27m IKR today despite 14 years of repayments.

The total would be much higher were they not fortunate enough to have two incomes and the ability to pay down extra each month.

As grandparents in their mid-60s, the clock on their seemingly immovable loan is ticking though.

“They call it the grey army; people like us — I’m 63, he’s 65 — that are sailing into their pension and I know that I cannot stop working when I am 67, I cannot. If we stop working our pension will not pay our monthly repayments,” says Helga.

“If something happens — you lose a job or get sick and you are out of work for a period of time then you are in deep shit,” her husband adds.

If initial impressions are anything to go by, the mild-mannered couple don’t seem like the type to turn the air blue without good reason, nor would they strike one as readymade revolutionaries.

All this talk of armies and uprisings must offer a glimpse into something very amiss.

And in a country where 85% of mortgage holders are tied to seemingly endless repayments forever ratcheting up with inflation, it’s not hard to figure out where the problem lies either.

‘They seem to just want to make my children homeless’

As Iceland’s banks exploded the economy nosedived.
As Iceland’s banks exploded the economy nosedived.

“That was the worst time ever to lose your job; when the economic situation is getting worse and at the same time you find yourself without a job, with no income and rising mortgage payments.

“That can’t end well, and for me it didn’t,” says Gudmundur Asgeirsson.

In 2006, he was a young professional settling into a new apartment with his wife and two children. A third was on the way.

Unfortunately, so too was one of biggest bankruptcies the world has ever seen, as Iceland’s banks imploded and the economy shook to its core.

One of those lenders, Landsbanki, had loaned Gudmundur and his now ex-wife 18m IKR (€128,680) to buy their modest new apartment on a 90% mortgage.

Monthly repayments of 100,000 to 120,000 IKR (€714.900 to €857.890) were just about manageable.

“Just a regular-sized apartment,” he says, “nothing big, nothing glamorous, just basically what we needed for the family. It was nothing extravagant or anything.”

Then, everything changed.

Inflation went “through the roof”, mortgage payments followed suit, and the software firm he worked for was forced to lay him off.

At the same time that he found himself without work, the repayments rose quickly to 170,000 IKR a month.

“Everything was getting more expensive for the public and this, of course, because of the inflation-indexed loans, really affects your mortgage in a very bad way,” he explains.

When they couldn’t make the repayments, Gudmundur tried to restructure the loan.

“They had their arms full with really just trying to save the bank so they couldn’t help me,” he says.

“Because everything was stuck in the banks, they didn’t foreclose on our apartment immediately.

“A whole year passed and we just kept living in our apartment, even if we knew that we are in default and some day the debt collector will come and foreclose upon us.”

When he and his wife divorced in 2010, the courts were needed to determine how the separation would look.

“We had accumulated a lot of other debt: Car loans, credit card debt, all kinds of things besides the mortgage — just trying to make ends meet, but of course you can’t do that in the long run by collecting debt.

“So at the divorce it was very difficult to make a financial separation between husband and wife because it was a big mess.”

What was intended to be a debt that would help provide for his family, turned out to be one that ruined it.

In the shakedown, his ex-wife kept the apartment and associated debts, while Gudmundur shouldered much of the rest.

The portion of the mortgage debt above 110% of the home value was written off in 2011, but to little avail.

Despite the court ruling, the bank continued to pursue both for the remaining debt and five years later, the situation still hasn’t been resolved, but should be in the coming weeks.

What happens then is anyone’s guess.

The ex-wife has tried to strike a deal with the bank, but to no avail.

“They seem to just want to make my children homeless,” Gudmundur says.

“The last thing I heard from my ex-wife about it was that she would just try to find a rental apartment somewhere.

“She has a steady income now so maybe she can afford it. I hope she can, so my children won’t be homeless.”

Capital costs


For a capital, Reykjavik city centre is remarkably small.

Home to 120,000 Icelanders or so, it’s by far the country’s largest urban centre but, in truth, little more than a small town.

Think Ennis. Wexford, maybe.

Perched on the coast with stunning, snowcapped mountains in the background, it’s an idyllic setting too.

A dual carriage way hugs the coast and wraps around the outskirts of the city linking the docks at one end to the business-lined streets a little further along.

Between the two is the blink-and-you-miss-it city centre.

The main shopping street — a one-way affair that crackles with the sound of heavy-grip car tyres and hums with the distinctive hushed conversation of locals — opens out into a little square.

There, sitting innocuously adjacent to cafés, bars and hotels, is the prime minister’s house.

Far from the palatial houses other premiers call home, the Icelandic prime minister resides in a fittingly non-descript but quaint two-storey building.

It’s apparently not unusual for Icelanders to bump into their esteemed political leaders, nor would it be when you can walk right up to the front door without so much as a gate to negotiate.

A stone’s throw away is the gleaming, glass-fronted Harpa concert hall. An undeniably impressive building, it sticks out just a tad amongst the rest of the city’s modest architecture.

Like just about every city on earth, there’s an Irish bar. Two, in fact.

Across the road is an American-themed bar populated with a decent scattering of locals and visitors.

Like most Nordic cities, nothing comes cheap in Reykjavik though. A pint will set you back a tidy €8.50 or so. A little pub-grub comes in at an eye-watering €20.

Far from being alone, the public houses are in plentiful company in the high-cost cohort of establishments.

The going rate for a run-of-the-mill haircut comes in just shy of €30.

Given the prominence one barber gives it in his shop window that must be cheap too.

When a small, readymade wrap sets you back nearly €6, it’s surprising Icelanders eat lunch at all.

When the going rate for a banana is north of €4, it’s surprising anyone ventures outside their front door.

With average after-tax wages in the region of €33,000, it’s not exactly cheap for locals either.

Regardless of the cost though, Iceland’s tourism industry is in rude health.

The country’s stunning scenery and incredible natural wonders are drawing visitors in unprecedented numbers after the volcanic eruption that wreaked havoc on European travellers in mid-2010.

So much so that many locals credit the eruption with almost single handedly lifting the country’s beleaguered economy.

It’s a simplistic view of things but there appears to be more than a grain of truth in it nonetheless.

Just imagine how busy it’d be if prices were more in line with Ennis than with Temple Bar.

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