Peter Geoghegan

Journalist, author, broadcaster

Rebuilding Iceland

Iceland after the kreppa. My long-form piece from Sunday Business Post, May 22, 2011.

‘Sometimes it doesn’t feel like there’s been a crash here at all.”

Heather Millard, an English documentary filmmaker living in Reykjavik, is chatting tome over coffee in a trendy bar in the Icelandic capital’s achingly hip 101neighbourhood. ‘‘Yes, incomes are lower and there is less job security, but it still doesn’t feel like something massive has happened.”

It’s a wet Tuesday night, but the rain isn’t the only aspect of Reykjavik that seems untouched since my last visit in August 2008, just weeks before the crisis – which Icelanders call the kreppa – hit.

Now, as then, the lively bars on Laugavegur, the city’s pedestrianised main drag, do a roaring trade.

All the main shops are open for business – empty units are conspicuous by their absence – and a hundred metres or so from where I’m sitting, construction workers are busy putting the finishing touches to the shimmering multi-million euro Reykjavik Concert Hall development.

‘‘It looks like everything is normal,” says Millard, whose film Future Of Hope focuses on the possibilities for Iceland in the aftermath of the economic crash, and features a soundtrack by Irish singer-songwriter Damien Rice. ‘‘But beneath the surface, there is a lot of anger and a lot of problems that still haven’t been dealt with properly.”

As I quickly learn, to understand Iceland today, and what happened in October 2008 when the country’s banking system collapsed virtually overnight, you have to know where to look. Borgartún is as good a place to start as any.

Look up Borgartún on Wikipedia and you will be told that this wide avenue, less than ten minutes’ walk from the throbbing heart of 101, is the city’s financial district. You will also still read that ‘‘although relatively small, Iceland has become a major European financial centre, hosting at least four large investment banks and numerous smaller banks’’.

Iceland is no longer a financial centre in any real sense of the word. Instead, Borgartu ¤ n today stands as a physical testament to the mania that engulfed this small island – 103,000 square kilometres in total, slightly bigger than Ireland or, as Icelanders are fond of saying, about the same size as Kentucky – in the decade up to 2008.

Here, among the ugly mish-mash of glass, steel and concrete that calls to mind the nondescript business districts of a minor north American city, lies the headquarters of every major Icelandic financial institution. Many are empty.

There are half-built apartment blocks, tens of thousands of feet of unused office space.

Towering glass-fronted buildings block the sunlight, and even on a bright spring morning the street feels cold and desolate.

The best-selling Icelandic writer Andri Snaer Magnason calls Borgartún the ‘‘boulevard of broken ideologies’’, and it’s not hard to see why.

At one end is the former headquarters of Kaupthing, responsible for the biggest default in corporate history after Lehman Brothers, WorldCom and Enron, according to the credit agency Moody’s.

Halfway down the street sits H²f-i, or the White House. It was in this whitewashed wooden building, on an open piece of land facing out onto the roaring Atlantic, that Ronald Reagan and Mikhail Gorbachev met in at a 1986 summit often cited as the moment that the Cold War definitively thawed.

Now, states across Europe – including, of course, Ireland – are looking at Iceland as a model for a different kind of revolution: one in which bondholders, and not citizens, shoulder the burden of debt repudiation.

In October 2008,when the gaping financial hole in the balance sheets of Iceland’s privatised banks became apparent, the three major banks carried debts equivalent to almost ten times the country’s GDP.

As the extent of the banks’ exposure became apparent, the government responded by liquidating the banks and moving their saleable assets and loans into three new institutions.

Since then, the Icelandic public have twice rejected referendums on paying back the British and Dutch governments some €4 billion for losses incurred in reimbursing customers of Icesave, the online savings account that collapsed two and a half years ago.

But has Iceland really ‘‘burned the bondholders’’, As many in Ireland have called on us to do? Huginn Thorsteinsson, an economist seconded from the University of Akureyri to the ministry of finance in Reykjavik, rejects the suggestion.

‘‘Some people would say that we made the creditors bleed, but the government would never say that,” he says. ‘‘We would say that there was just no other option.

By necessity, we had to create the new banks.

That’s why these creditors are not worse off – repaying their liabilities in the old banks was just impossible.”

Thorsteinsson, a bright thirtysomething with a degree in philosophy, is in the process of explaining the complicated financial machinations that took place in Iceland’s banking sector in October 2008 – when Kaupthing, Landsbanki and Glitnir were transformed into the imaginatively titled New Kaupthing, New Landsbanki and New Glitnir – when an unexpected guest arrives at his door.

It is Steingrímur Sigfússon, the Icelandic minister of finance. ‘‘I heard you were here and wanted to come and say hello,” he tells me.

The minister of finance heard that a reporter From an Irish Sunday newspaper was in his ministry, and took unscheduled time out to meet him? It might sound like poetic licence but, as even the casual visitor soon realises, this is how life works in a country of just 320,000 people, hundreds of miles from continental Europe.

Nobody schedules interviews until the day before, if at all; the parliament or a ministry are as easy to visit as any cafe or bookshop; every major building is less than five minutes walk from another; and everyone with any power knows everybody else with any power.

The finance ministry occupies just one floor of an uninspiring stone building off Laugevagur in the centre of Reykjavik.

When Iceland’s banks were privatised in the 1990s, regulation was reduced to a bare Minimum and, as the private banking sector mushroomed, the ministry was effectively relegated to the sidelines.

Now, with capital controls in place, the Icelandic krona closed off from international currency trading and an IMF-approved fiscal plan to administer, this rather bijou office is a seat of real power in Iceland.

Sigfússon, a balding and athletic man in hismid-50s,makes a good fist of talking up the Icelandic economy – growth for 2011 is projected at a healthy 2.5 per cent, compared to the 3.5 per cent contraction recorded last year – but he seems to over-sell the country’s prospects. ‘‘We are through the worst,” he says more than once, without looking like he fully believes it himself.

In truth, the economic outlook for Iceland is decidedly mixed.

Unemployment is hovering around 8 per cent, which is much lower than many feared, but which is nonetheless a serious problem in a country without any real history of joblessness.

Until the 1980s, fisheries provided jobs for anyone that needed them; thereafter the boom in finance, construction and services took up the slack caused by the privatisation of the fishing industry. But not any more.

Most ordinary Icelanders are still paying off massive debts on houses, cars, university degrees and much else.

That many of these loans were taken out in foreign currency is one of the more unbelievable aspects of Iceland’s incredible story.

Due to its small size, the Icelandic krona has historically been particularly volatile and sensitive to fluctuations. It was a closed currency for most of the 1980s, and continued to oscillate wildly during the 1990s.

When the currency stabilised at a very strong position from 2003 on, however, Icelandic banks began encouraging customers to borrow in cheap foreign currency – even doling out 75-year mortgages in dollars and yen as the Icelandic housing market boomed.

When the banking system collapsed, so did the krona.

The result, in some cases, was the cost of loans doubling or trebling. The government responded by passing a law that debts, regardless of the currency they were taken out in, could not exceed 110 per cent of their Icelandic value.

This measure was well received by the Icelandic public but, unfortunately, inflation began to spiral at the same time, peaking at almost 20 per cent in 2009. As Icelandic loans are tied to inflation, a product of the currency fluctuations of the 1980s, Icelandic debtors found that even if they had taken out loans in krona, the cost of their debt soared.

One Reykjavik architect tells me that he bought his house for 25 million krona in 2007.Now, despite paying off nine million krona in the intervening years, the mortgage stands at 34million krona, due to the rise in inflation since the kreppa.

Inside the ministry of finance, Thorsteinsson is sympathetic to such problems, but believes that it is time for a shift in Iceland’s collective mindset. ‘‘People are angry, they are frustrated, they see their loans getting bigger.

They want the Finance Vikings [the sobriquet given to the bankers who sprung to prominence during the boom] behind bars. It’s all understandable, but we need to get past it now. It’s cold and difficult to say, but we can’t let this five-year period in Icelandic history haunt us for ever.”

While the cause of the collapse has been well-documented – a report by a special investigations committee to the Althingi, Iceland’s parliament, found government and regulators guilty of ‘‘extreme negligence’’ in the run-up to the crisis – discerning the kreppa’s long-term effects is much trickier.

Anger and denial, evinced in last month’s rejection of the second Icesave referendum, remain the leitmotif of post-crash Iceland. But effective political change has proved more elusive.

‘‘There’s a very strong feeling in Iceland that politics is still tied in with special interests, that it’s either partly or totally corrupt,” says Ottar Proppe, a popular Icelandic singer who was elected to Reykjavik City Council last year.

Proppe, who looks like a 1970s glam rocker, complete with unkempt long hair and dark sun glasses, is a leading member of the Best Party.

Formed by Icelandic comedian Jo¤ n Gnarr after the crash, the Best Party unexpectedly won the 2010 Reykjavik council election on a manifesto that included everything from improving equality and transparency, to free swimming pools and bringing a panda to the local zoo.

‘‘We have a long history in Iceland of political parties coming together in the national interest, usually after natural disasters, like in the 1960s when the herring stocks collapsed,” he says when we meet in City Hall.

‘‘In those times, all the political parties had an easy time coming together to fight for the same thing. But now, because the disaster is unnatural, it’s not happening the same way.

There is a lot of shifting around, a lot of blame, and not a lot of consensus. All political parties and institutions here have a very low approval rating still.

We are trying to bring a more common sense approach to it, to try and get out of this culture of confrontation.” Despite some creative policies and a refreshing approach, the new Best Party leadership at City Hall has had a difficult political baptism.

Having taken almost 35 per cent of the vote last year, support for the party in Reykjavik has recently slipped to less than 20 per cent.

Nationally, the coalition government between finance minister Sigfússon’s Left-Greens and the Social Democratic Alliance led by Jóhanna Sigurardóttir has also seen its popularity dwindle

since winning the 2009 general election. The main benefactor of these shifting political tides has been the right wing Independence Party – the party responsible for Iceland’s financial crisis in the first place.

Defeated in 2009 for the first time since its formation in 1931, the Independence party now regularly polls 40 per cent, and looks set to return to power sooner rather than later.

In the wake of the crash, there was a purge of the Independence Party’s upper echelons. Many famous faces retired, while one, the former leader Geir Haarde, prime minister on that fateful October day, is to stand trial for misconduct.

Yet much of the political and banking class that oversaw Iceland’s disastrous experiment in mass privatisation – first in fishing, then in banking and energy – remain in prominent positions.

Haarde’s predecessor David Oddsson, Who was the head of the Central Bank when the crash hit, is now editor of Morgunbla -i-, Iceland’s most influential daily newspaper, and many big names from Iceland’s failed banking experiment are still major players in the fishing industry.

Over at the dinky Althingi building, home to Iceland’s 63-member parliament and literally across the street from Reykjavik City Hall, Thrainn Bertelsson, a popular writer and filmmaker turned Left-Green politician, expresses frustration at the continued power of conservative voices in Iceland.

‘‘Every day here [in the Parliament], I watch the members of parliament from the party responsible for the economic collapse shout till they are blue in the face that wages aren’t doubling, that the sun isn’t shining.

There’s not a word of regret. Nobody has ever said: ‘We got the nation into a terrible mess.

We’re sorry. We promise not to do this again’. What really scares me is that 35per cent of the population still buys into it,” he says.

The Irish influence on Iceland is considerable – from Kolumkilli, the Irish sorcerer spirit in Iceland’s most famous novel, Haldor Laxness’s sardonic masterpiece Independent People, to place names such as Patreksfjrur in the remote north-west.

But the experiences of the last two and a half years have given this Atlantic relationship a new emphasis: most Icelanders are extremely inquisitive about their south-easterly neighbour, and in 2009 a new initiative, the Ireland-Iceland Project, was created to develop links between the two islands.

Bertelsson, an alumnus of UCD in the 1960s, sees reasons to be hopeful in both countries. ‘‘In both Iceland and Ireland we have a wonderful, frustrating system of government called democracy.

That means that change takes a bit longer, but we are able to change,” he says.

One place where change is definitely on the agenda is Toppst²in, a former coal fired power station on the suburban edge of Reykjavik. Scheduled for demolition before the crash, the intervention of Andri Snar Magnason, arguably Iceland’s leading public intellectual, and others has seen the power station transformed into a space for creative industries, designers and innovators.

The smell of sulphur, ubiquitous in Reykjavik on account of the geothermal water, hangs heavy in the air as Magnason, a passionate but humorous guide, takes me on a whistle-stop tour of the power station.

Clothed mannequins left over from a fashion show the previous week lie dotted among the rusting machinery, while in one of the ground floor units an electric car designer is adapting European vehicles for the Chinese market.

‘‘The climate for entrepreneurship is very positive right now.

There’s a really positive attitude towards trying new things,” Magnason says. ‘‘The negative side is that we are still seeing this ideological struggle, with people trying to reinstate the old system with the old rules which caused the crisis in the first place.”

In 2006Magnason published Dreamland: A Self-Help Manual for a Frightened Nation. The book is a stinging – and incredibly prescient – critique of the Icelandic government’s policy of damming rivers for the gain of aluminium companies.

Two years later, the crash that Magnason foretold hit. ‘‘I was moving into my new house at exactly that time, and we were the only ones buying anything,” he says, recalling the early days of the crash.

‘‘It was really amazing going into all these stores in town – electric shops, lighting shops. It was like going to a funeral. We had a child who was about six months old and normally people would smile at the baby, but they all looked glum.

We were going into all these luxury shops that don’t exist any more. I still remember this uncollected $10,000 lamp in one of those shops. It was so decadent, but beautiful in away, all this junk.”

In the wake of the kreppa, there was also a wave of interest in renewing Icelandic politics, with new forms of democracy based on mass participation and consensus building gaining popularity. One of those at the forefront of this movement was Gu-jón Gu-jónsson, a telecom industry entrepreneur and professor of entrepreneurship at Reykjavik University. Gu-jónsson created the House of Ideas, a loosely-defined office-space/think-tank, out of which came the proposal for a National Assembly for all Iceland.

Early last year,1,500 Icelanders, the majority selected randomly from the National Registry, met in a conference hall on the outskirts of Reykjavik to brainstorm ways to rebuild the country’s economy and its values. Gujónsson explains the National Assembly’s genesis: ‘‘There was a sense of a lack of leadership in the country.

That lack of leadership empowered the grassroots. We felt that precisely because there was a lack of leadership, there was a chance to do something.”

Since its first meeting, however, the National Assembly has run into a series of problems.

Elections to a Constitutional Assembly charged with redrawing the Icelandic constitution were recently ruled invalid by the High Court, while the movement’s momentum has also been blunted by the glacial speed of change in Icelandic public life.

Not everyone even agrees that social and political transformation is possible in Iceland. ‘‘I don’t see serious change happening here. I see everyone admitting they are failures, but I don’t think we fell deep enough to change the system totally.

The people in control have been able to react,” says Gudmundur Oddur Magnusson, a professor at Iceland’s Academy of the Arts, and one of the country’s leading visual artists.

During the boom, bankers and financiers Showered money on Iceland’s burgeoning arts scene.

The most infamous example of this largesse occurred at the 2008 Frieze Art Fair in London when, on almost the very same day that Iceland’s economy went into meltdown, a life-size reconstruction of a popular Reykjavik bar, Sirkus, knocked down to make way for luxury apartments during the boom, was unveiled.

Budget airline Iceland Express sponsored the project, which has since became a symbol of national folly.

Magnusson rejects the popular sentiment That most Icelanders are innocent victims of the excesses of global capitalism. ‘‘Although we blame some bad people in the banks for what happened, we should feel guilty too. Everyone has a tad of guilt.

We allowed this to happen, we were all part of it,” he says. Reclining on an armchair among examples of his work in a down-at-heel lock-up not far from Reykjavik’s putative financial district, Magnusson exudes the air of a man more comfortable in Iceland’s current climate.

He cites the country’s plentiful fish stocks, easy access to cheap, sustainable energy, retention of a Nordic social model and a national history of over-coming adversity as factors working in the country’s favour. ‘‘We have an in-built predisposition to self-help – it’s the old family system that is still in place in Iceland.

We are still able to produce food and warmth, and it’s always been cheap to live here,” he says. ‘‘The lesson we’ve learned from the crash is that we have to face reality.

We have to be much more realistic about the way things are. Although our income has been cut by 30 per cent, we can easily live on that.”

Magnusson may well be right, but Iceland’s old order still retains plenty of control. The night before I leave Reykjavik, I eat dinner in my hotel. Directly across from my table sit a group of well-dressed Icelandic and continental European businessmen.

Towards the end of the meal, an Icelander is asked what happened during the boom. ‘‘Well,” he says, holding a glass of dessert wine in front of him, ‘‘we tried to create Hong Kong in Reykjavik.”

He pauses for a moment and looks around the table. ‘‘I think we still can.”

His European guests, who look genuinely shocked, laugh nervously. His compatriots nod approvingly.

Despite the turmoil of the last two and a half year, it seems that the ending of Iceland’s most recent – and inglorious – saga hasn’t been written just yet.

Rebuilding Iceland
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