Tue, Oct 07, 2008 - Page 9 News List

The melting wealth of Iceland

Almost overnight, Iceland’s population became the wealthiest on Earth. But the credit crunch is making the cash vanish just as quickly

By Tracey McVeigh  /  THE OBSERVER, REYKJAVIK

The snow has arrived early in Reykjavik after an unusually long and warm summer. The freeze has brought out the ghostly green haze of the aurora borealis — the Northern Lights — the shape of which shifts dramatically across the tiny city’s black skies.

The bars and restaurants of Iceland’s capital are packed, the Range Rovers and BMWs are parked nose to tail all along the streets of the central 101 district, and music is pumping from a black stretch Hummer limousine cruising by.

“What can we do? Its difficult times but we’ve spent all day talking about it, watching the news getting worse and worse, we had to go out and be with friends. Maybe it’s like the party at the end of the world,” says Egill Tomasson, 32, sitting in the Kaffeebarinn bar.

Iceland is on the brink of collapse. Inflation and interest rates are raging upwards. The krona, Iceland’s currency, is in freefall and is rated just above those of Zimbabwe and Turkmenistan. One of the country’s three independent banks has been nationalized, another is asking customers for money, and the discredited government and officials from the Central Bank have been huddled behind closed doors for three days with still no sign of a plan. International banks won’t send any more money and supplies of foreign currency are running out.

People talk about whether a new emergency unity government is needed and if the EU would fast-track the country to membership. On Friday the queues at the banks were huge as people moved savings into the most secure accounts. On Saturday people were buying up supplies of olive oil and pasta after a supermarket spokesman announced on Friday night that they had no means of paying the foreign currency advances needed to import more foodstuffs.

This North Atlantic volcanic island, the size of Cuba and with a population of 320,000, is an unlikely player on the global financial stage. It is famous for its fish, geysers and for winning the UN’s “best country to live in” poll last year.

But Iceland built its extraordinary wealth on the crest of the worldwide credit boom and now the crunch is sweeping it away, bankrupting a people for whom the last eight years have been, for most of them and by their own admission, one long party.

The nation’s celebrated rags-to-riches story began in the 1990s when free market reforms, fish quota cash and a stock market based on stable pension funds allowed Icelandic entrepreneurs to go out and sweep up international credit.

Britain and Denmark were favorite shopping haunts, and in 2004 alone Icelanders spent US$1.57 billion on shares in British companies. In just five years, the average Icelandic family saw its wealth increase by 45 percent.

But as a result of the international banking crisis, the billionaires who own major names such as — in Britain alone — West Ham United soccer club, the Somerfield supermarket chain, Hamley’s toy shops and the House of Fraser department stores, are in trouble and the country is drowning in debt.

Iceland’s cheap labor force, the Poles and Lithuanians, have left already — there’s little point in sending home such a worthless currency, and the tourist season is over. Iceland is on its own.

In the Kaffeebarinn, Egill Tomasson isn’t drinking because he has a music festival to organize. Iceland Airwaves takes place in a fortnight, when more than 100 Icelandic bands and 50 foreign ones will play in venues around the city over four days. Most of the tickets have been sold in krona, but the international acts need to be paid in euros, which is going to cost the organizers dearly.

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