Iceland's free wheeling economy is now a microcosm of the worst effects of the credit crunch, writes Derek Scally
GARETH O'SULLIVAN has had an interesting few weeks. The Ballina native's trip to Turkey last month ended with three days in a squalid prison because of a missing stamp in his passport.
On his return to Reykjavik - his home for the last two years - he discovered that the economy had all but collapsed in his absence. Iceland's three main banks had been nationalised, freezing the savings of 90 per cent of Icelanders.
Not knowing what they're worth has been a rude awakening for Icelanders after a decade of hubris and excess familiar to anyone in Ireland, where buying a Porsche was the bare minimum to keep up with the Jonassons.
"My first impression when I came here was how expensive everything was - from a shirt to a pint," says O'Sullivan. "But I just presumed salaries were matching and that everyone had money to eat well, dress well and take lots of holidays."
As in Ireland, however, much of the party was fuelled on debt. The credit-card penetration rate in Iceland is one of the highest in the world and small purchases don't even require the hassle of a signature or Pin.
After a precarious history of subsisting on fish on a volcanic North Atlantic island, high interest rates and financial market wheeler-dealers brought money to Iceland in grand style, and everyone was determined to enjoy it.
"I used to buy whatever I wanted, whenever I wanted, but now you don't buy what you don't need - you buy nothing," says middle-aged Solveig Kristinsdottir in a Reykjavik cafe, staring at her empty coffee cup.
Her mortgage has jumped €26,000 in six months, several thousand euro worth of bonds has been wiped out and her bank cannot tell her whether she still has three million króna (€19,700) in a mutual fund. "We can do nothing except wait," she says tensely, "but what for?"
No one knows. The only certainty these days in Iceland is inflation of somewhere between 15 and 20 per cent. And yet the disconcerting feeling of a phoney crisis persists as life in the pretty, blustery capital of Reykjavik appears to go on as usual.
The city's biggest shopping centre buzzes with customers professing a stoic optimism that, even though recession looms, the acute crisis will be short-lived.
"We're doing better business than usual," says a perplexed sales clerk in a shoe store. "I don't know whether it's people doing their Christmas shopping early or what."
Look closer, though, and it's clear that window shopping is becoming as popular as buying. Emptying shelves are not being restocked. The shell of a new performing arts centre sits half-finished in the centre of town.
THE ONES WHO claimed to know everything about Iceland's new money, a tiny elite of two dozen billionaires, have vanished from view after pulling off one of the most daring sleight of hand tricks in financial history.
In a country the size of England with the population of Cork, a country with no big industries apart from fish, aluminium and tourism, these 40-something billionaires drew together enough debt and equity to dominate the economy at home and buy up dozens of well-known retail names abroad, from House of Fraser to the Oasis clothing chain.
They played every financial casino in Europe with virtual money until the credit crunch brought the roulette wheel to a jerking halt. They were wise to go, considering the wrath most ordinary Icelanders feel towards them now. People are furious too at the government for deregulating the banking sector, and at the central bank for allowing banks run up debts 12 times the size of Iceland's GDP.
The anger is deeply felt because, in this crisis, absolutely everyone in Iceland is affected, no matter how careless or prudent their approach to money. Granny's bank notes hidden at home are worth less than half their value of a few months ago, a mother's bank savings are frozen and a daughter is stuck with a mortgage that is spiralling out of control.
For years, the only home loans available in Iceland were high-interest indexed credit. Borrowers were burdened with a loan principle that, despite their repayments, often continued to grow year-on-year.
Faced with that ludicrous situation, many turned instead to lower-interest foreign-currency mortgages, believing the bank hype that it would save them money even with significant currency fluctuations.
Kolbeinn Dudjonsson, 37, and his wife Thorhalla are typical. They bought a home for 46 million króna (around €302,000 now) last November with savings and two separate mortgages: an 18 million króna domestic mortgage and another 18 million króna loan in Swiss francs and Japanese yen.
Rising interest rates at home combined with the króna's plunge on exchange markets, means that the value of the 36 million króna loans have soared 44 per cent in a year to 52 million króna. Repayments have jumped 60 per cent on their foreign-currency mortgage and 25 per cent on their domestic mortgage.
The 14 million króna equity in the property has been eaten up by falling house prices; finding a buyer is an impossibility, with no one buying and banks no longer giving mortgages.
"There is absolutely nothing we can do," says Kolbeinn. "No one knows anything about anything. It's like losing a loved one; we're still in shock and haven't got to anger yet."
Kolbeinn tries to hide that uncertainty when talking to his three children, aged 11 to 16. "The children watch the news and ask, 'Is Iceland bankrupt?' We try to explain to them that life will change, that we don't know how much, and that we have to be careful what we spend money on."
Iceland has had periodic economic crises before, he said, but this is the first time people have been up to their eyes in mortgages, car loans and credit-card debt.
Appalling stories can be heard around Reykjavik, of maturing mortgages spinning out of control and nest eggs wiped out. Polish immigrant workers find themselves trapped in Iceland with worthless savings and homes they cannot sell. Icelandic students abroad watch their tuition fees spiral out of control. Their credit cards are refused and bank cards will yield a maximum of €50 each.
The central bank of Iceland is now tightly managing its limited foreign-currency reserves.
Solveig Kristinsdottir's mother-in-law is heading to the US for three months but is only allowed to bring 50,000 króna - €110 per month - and only after producing her tickets.
Solveig hopes her husband's car-repair business will do well if lean times force people to repair existing cars rather than buy new ones.
But he expects to run out of spare parts soon, for at least as long as the central bank keeps control of foreign-exchange transactions. "Food and medicines have priority, car parts are down the list," says Solveig wryly.
In the trendy Thorvaldsen bar, owner Arni says business is slow but steady. He's had to trim staff and his drinks supplier is now asking for money up front before delivering stock.
Like most in Reykjavik these days, however, his mild-mannered exterior eventually yields to a real tension and flaring anger at the government and the small elite that has yet to explain how it technically bankrupted the country. "People would prefer to take counterfeit money these days over the Icelandic króna," he says. "I think the only reason we stayed out of the euro and kept the króna was to let that small group of people get away with things they couldn't have done with euro supervision."
THE EURO: the word on everyone's lips. It's clear that, as soon as the economy is stabilised, a debate is looming over whether Iceland should finally join the EU.
Until then, talking heads in the media try to keep spirits up with ideas to restart the economy. The banking sector is finished, they admit, but Iceland can rely on its fish stocks, or perhaps harness geothermal heat to make itself a giant of heavy industry.
Behind the stoic talk and flashes of anger, though, is the badly dented self-confidence of a small island nation. "Until now we were always very welcome everywhere because we spent so much money, because of Björk, because young people thought we were cool, but no more," said Gauti Kristmannsson, a lecturer in translation studies at the University of Iceland. "Now we're the laughing stock of Europe, something small nations tend to take very seriously."
As days pass with no news from the banks or the government, national introspection has reached fever-pitch online. One blogger writes of an experience in Holland where a taxi driver called his wife to tell her he had Icelandic passengers, "as if there were lepers in his cab".
After the row over British deposits in online Icelandic banks, there are postings about Icelanders being heckled in a London pub and refused service in a shop in Glasgow. Forums are filled with unprintable rants about Gordon Brown's retaliatory action: freezing Iceland's assets in Britain by enacting anti-terrorism legislation.
Gareth O'Sullivan and his Icelandic fiancée consider themselves among the lucky ones. He signed a new work contract in September to manage a premiere league women's soccer team. The couple were just about to buy an apartment with a foreign-currency loan when the crisis hit.
O'Sullivan's greatest exposure is through his travel company, Go Sports, which organises trips to British Premiership football matches.
Four Icelandic groups have already cancelled on him and three more are in doubt. But a consignment of tickets to every Manchester United match for the rest of the season, unlike most things in Iceland these days, is an asset with market value.
The first crash is over, but Iceland is feeling the chill of an uncertain future, alone in the Atlantic and outside the EU.
Some 70 years after poet Louis MacNeice visited Iceland, there's a new ring of truth to his words of an island "with the fear of loneliness And uncommunicableness; all the wires are cut, my friends Live beyond the severed ends".