The almost incredible, but accurate, stories of Iceland’s boomtime.
Then came the bust. Even people who didn’t fully understand it, repeated the joke: “What’s the difference between Ireland and Iceland? One letter and six months.”
But now the joke’s on us. Because while Iceland went into freefall in September 2008 as its three main banks collapsed like dominoes one after another, today the country that let them fail, is bouncing back.
Their growth is rising for the third year in a row, they have almost eliminated their debt burden, and unemployment is falling; it is almost the complete reverse of the Irish story. It’s been a huge turnaround, in a relatively short time. But just don’t tell them they made the right “choice”.
“I always have to stress that what was done in 2008 was not a matter of choice,” Industry Minister Steingrimur Sigfusson is at pains to point out, sitting in his modest offices, overlooking the busy docks in Reykjavik.
Our nearest northern neighbour – the volcanic and incredibly beautiful country of just 320,000 people – has become a fascinating case study for economists. While economically we are now poles apart, it’s hard to ignore the fact that there are plenty of similarities between our two countries, a fact hammered home when the minister reminds me he has to keep an eye on the time to attend a funeral.
“We never made any calculated decision to let the banks fail,” he reiterates, referring to Iceland’s operation beyond the euro safety net. “It was outside the reach of our abilities to attempt a rescue, we had limited resources and backing up our banks was impossible for us.”
It is just a few months since the country won its court battle against the British and Dutch investors in the failed online bank Icesave, tidying up one of the last loose ends to the country’s financial restructuring plans. One would forgive the government for feeling smug about this victory and the economic ‘miracle’ of recent years, were it not for the fact the mood on the street is quite different.
“We are not getting any rise in wages,” a 50-something actor I meet later in a downtown café, tells me. His comment would not gain much sympathy in Ireland, I tell him, but he explains that while Icelanders never saw a deliberate pay cut in their salary cheques, they didn’t have to, because inflation took care of that. As the Krona collapsed, inflation rose to a high of 6.5% a year ago, settling back to 4.1% last autumn, and currently running at 4.8%, year-on-year.
On top of that, mortgages linked to inflation took a battering and there was the bizarre case of many younger bank customers being persuaded to take on ‘cheap money’ by taking out large loans in Swiss francs and Japanese yen. They partied like the Irish – until their currency collapsed and overnight they found their debt had doubled. Some lawyers have successfully challenged the legality of such loans, but it’s a long and slow process.
Katrine, a single mother who works in IT, told me she was trading down for the third time, in order to make some kind of dent in her mortgage. “At this stage, I don’t think I will ever get it paid off, it’s just helping to reduce a capital that I will never catch up with.”
Tales of ‘debt forgiveness’ for the Icelanders seem as much a fairytale as stories that our own banks are lending to small business again. In my week in Reykjavik, I never met one homeowner who had seen any easing in their debt, or who had any anecdotal evidence.
The Icelanders have the same fascination with owning property as the Irish and in general have shunned long-term renting – perhaps a throwback to their own colonial history, having been ruled, first by Norway, and then Denmark, for centuries. But now they are paying a heavy price.
Business journalist Gisli Valdorsson tells me that a lot of nurses and doctors are now spending their holidays working in Norway, to make ends meet, and some of the fall in unemployment figures is due to long-term emigration, he adds.
He recalls the riots at parliament in January 2009 – which seem to now be a major embarrassment to most Icelanders. “It was the first time tear gas – or pepper spray – was used here since the NATO riots in 1949,” says Valdorsson. The Icelanders are not known for aggression, and many would rather forget it.
“It was very unusual for us,” says Valdorsson, “to have windows broken in our parliament.”
And while the politicians took a battering, today’s polls show the lowest level of trust is with the financial industry, even in the so-called ‘new’ banks.
I point out one of these ‘new’ banks to a taxi driver and he snorts back: “New bank? It’s just a new name for the same old ones. If I go in there, they will tell me they can’t lend to me because of my credit rating. My credit rating? What about theirs? I have never gone bankrupt!”
And while Minister Sigfusson is “most proud’’ of the government’s success at reducing the country’s deficit, he notes that voters are likely to return the previous government in the April 27 general election — another similarity with recent Irish opinion polls, I point out.
“Yes, it would be good if people would remember who caused the crisis, rather than the people who are trying to sort it out. But I am not looking for political rewards, or popularity. I want to be able to sit back and say ‘we did it, and the future outlook is good’.”
One of the things his government did was to enlist the help of two independent academics — an economist (Gylfi Magnusson) and a lawyer — to help them get back on track. Days after he appeared on stage at a protest rally outside the parliament, the government brought Magnusson ‘indoors’ and appointed him a business minister, in January 2009.
Today, he is back at his desk in the university, where he is an economics professor, maybe slighty bruised, but not bowed. “It was in answer to a public outcry,” he says, “and I found it quite frustrating at times — being without a political party or a constituency. But we were in an unprecedented situation.”
After two years, he returned to academia, but is happy to see the progress being made by his former colleagues. “We now have economic growth, our fiscal deficit is quite reasonable and our unemployment is far lower than in western Europe,” he says, though he is very aware at what cost that was achieved: “Maybe some people expected to get back to the pre-crash standard of living, and I know there are a lot of households still hurting, and there is anger at that.
“Take home pay fell by the equivalent of about 20%, because the krona fell like a stone. In just one-and-a-half years, people lost half their purchasing power.” And he is keen to point out something that tends to get lost in the story of Iceland’s crash: the country did lose a lot of money by attempting to firefight the crisis. “Our Central Bank tried to keep the banks afloat and lent them huge amounts for bad collateral, and so the Central Bank then had to be refinanced by the State, leaving our taxpayers with a huge bill.”
The big stick used to wield over the Irish was our loss of reputation on the markets if we didn’t play ball with bondholders, so how has the ‘naughty boy’ of Iceland fared after burning its international investors?
“Let’s be clear here,” says Magnusson, “Iceland never defaulted on any sovereign debt, but I would have to be honest and admit that Iceland now has to pay a considerable risk premium – our pre-crisis Triple A rating is now one step from junk!”
The country successfully returned to the bond markets last summer and Valdorsson says the mood is optimistic: “Investors are always looking to the future and the Icesave result has exonerated us to an extent, too.”
And while tough new capital controls may be stunting the arrival of foreign investment, the country is still looking to its three main income generators — fisheries, hard metal exports and tourism — to pull it through.
Tourism could well be the real saviour: latest figures show 40,000 tourists visited the country in February, up from 12,000 in February 2012.
In a country where you can move house to a better location — literally, by lifting it off its foundations and moving it lock, stock and barrel to a new site — there is certainly a sense that the people here are moving on.
“We have had a tough few years and we are not out of the woods yet,” admits Magnusson, “but the big picture is that we have landed on our feet.”
Impressions of Iceland are all about perspective, it seems. Despite the Icelanders being keen to tell otherwise, Corkman John Andrews finds the standard of living here ‘fantastic’.
Originally from Mahon in Cork, Andrews (brother of Olympic athlete Marian Heffernan) has worked as a professional football coach in Reykjavik since 2008 — currently coaching the women’s team.
He says his salary hasn’t changed much since he arrived, and although sponsorship for the team is harder to come by, there are plenty of upsides: “The food is great, and the people are amazingly friendly. It’s easy to be accepted here if you are seen to be making an attempt at the language, even though everyone here speaks excellent English.”
He is also proud to have been part of Iceland’s recent history:
“I saw it unfold and I’m delighted that finally a country and a government did the right thing and refused to heap the financial burden on the everyday people, who, let’s face it, did nothing wrong. Unlike Ireland, which gave the majority of the bailout money back to the bankers, the Icelandic government seems to represent the people.”
When the crash happened, John was even offered a second job, in a country where the modest population size means everyone looks out for their neighbour.
“Apart from the reduction of imported goods and the weakening of our currency, my life is pretty much similar to 2008. Going abroad is costly now, but I am quite happy to live here and use Icelandic krona. In general, the government is doing a great job and listening to the people. It’s great to be in a country trying its best to live up to this ethos.”
He believes the future is bright for his adopted country. “Iceland seems to be focused on fixing the problems at home first, and not on an outside agenda driven by European policies. I was invited to leave Ireland, (to pursue a career in professional football with Coventry City), so I was never forced out, and I have nothing but love and affection for Cork, and Ireland. But had I stayed, I would have been forced to leave in order to make a living. And for this alone, I think politicians over the last 20 years should be ashamed of themselves. The rich are certainly getting richer, and the rest are forgotten about.”
Taking a very different line from the Irish Government, the plan for Icelandic recovery has been driven by the coalition of the Left-Greens and Social Democratic Alliance.
“We introduced a three-bracket private tax system,” explains Industry Minister Steingrimur Sigfusson, inset, below, “to put the burden on the medium and high income earners. We introduced a wealth tax, in effect, and raised child benefit.”
Buthe admits that in recent years Iceland had mirrored more the American low-tax system, rather than the Nordic one. “There has been a very strong social profile in all our measures and the IMF even praised us for defending the Nordic style of social welfare. Unfortunately, in Ireland, the low income groups have been hardest hit,” notes Sigfusson.
“We want to make sure the lower paid remain active as consumers, instead of marginalised. It’s a combination of social cohesion and keeping the low income groups active. Austerity alone will never solve it.”
Strong capital controls to limit the rush of revenue out of the country are also going some way towards curbing the creation of new tax exiles. “And the ones who do leave, well, maybe they are the people we can do without anyway,” says Sigfusson, stoically.