Iceland rising from the ashes of its 2008 economic collapse

By Simon Bowers  /  The Guardian, REYKJAVIK

Thu, Oct 10, 2013 - Page 9

A new mood of proud nationalism is emerging in economically resurgent Iceland after an out-of-control banking system sank the country into financial meltdown exactly five years ago. Riding this wave of confidence is 38-year-old Icelandic Prime Minister Sigmundur David Gunnlaugsson, elected in April on populist promises of mortgage relief for every homeowner.

Gunnlaugsson earned his spurs in years of outspoken campaigning against the foreign creditors who still haunt Iceland, particularly the British and the Dutch governments, which intervened after the collapse of Landsbanki <<->> the bank behind Icesave <<- >>on Oct.7 2008.

Hundreds of thousands of ordinary British and Dutch savers had previously switched their savings into online Icesave accounts, attracted by market-beating interest rates and promises that: "You can also rest assured that with Icesave you are offered the same level of financial protection as every bank in the UK."

When the crash came, however, Iceland’s deposit guarantee proved worthless, forcing the UK and the Netherlands to use their own taxpayer funds to compensate ordinary savers and sparking a poisonous diplomatic row.

It was a spat that, against the odds, Iceland won. While many other politicians in Iceland had urged a policy of appeasing the enraged British and Dutch governments, Gunnlaugsson had insisted they should go hang.

"Icelanders, as descendants of the Vikings, are highly individualistic and have difficulty putting up with authorities, let alone oppression," he said in one of his first speeches as prime minister.

Having helped win the famous Icesave victory from outside government, Gunnlaugsson has promised to carry that uncompromising approach with him as prime minister, hinting at a new wave of attacks on the interests of foreign creditors to Iceland’s three failed banks: Kaupthing, Glitnir and Landsbanki. Between them, these institutions had assets more than nine times the size of Iceland’s economic output when they failed in 2008.

From the wreckage, only three modest domestic banks emerged, allowing Iceland to keep functioning. The country was also able to let its overheated currency devalue, and impose capital controls to bring some stability.


Meanwhile, however, international bondholders and depositors were left out in the cold, waiting to recover what scraps they could from the banks’ administration processes. Five years on and they are still waiting.

Meanwhile, Gunnlaugsson’s main pre-election pledges were to squeeze these foreign creditors <<->> characterized as "hedge funds" or "vulture funds" <<->> in order to bankroll a 10 percent mortgage relief program for all homeowners.

Political opponents savaged the pledge.

"It was like promising to bring back [the boom of] 2007," reflects the Left-Green former finance minister Steingrimur Sigfusson.

However, the Icelandic electorate loved it.

And with creditors’ interests still locked in slow administration processes, and behind tight capital control walls, Gunnlaugsson believes he has a strong hand to play.

During the election campaign this year, he said: "This does not revolve around the confiscation of assets. The loss has already been incurred. It was mostly borne by foreign creditors who have recognized the loss and got out. In their place came hedge funds that have profited enormously from the collection now of much that was considered lost and written off."

"It cannot be accepted that Icelanders should slave away to increase such collections," Gunnlaugsson said.

Creditor groups remain circumspect, keen to get into private discussions with the new administration as quickly as possible. Behind the scenes, however, they are examining their legal options. Their goal is to strike a deal that will allow foreign creditors to access more than US$8 billion of foreign currency assets tied up with the three banks’ administrators and barred from exiting Iceland.

"We have been attempting to engage for some time and fail to understand the lack of progress from the authorities," said one source close to the creditors.

Gunnlaugsson’s rise to power shocked some observers outside Iceland, who thought the electorate might give their backing to the Left-Green-led coalition that had taken power after the banking crash and steered the country through the strictures of an IMF program.


Instead, the Left-Greens suffered the heaviest defeat in Icelandic history after an election campaign dominated not by economic achievements, but by the fallout from the Icesave saga.

Bouncing back into office came a coalition of the two rightwing parties <<->> the Independence Party and Gunnlaugsson’s Progressive Party <<->> that had been in charge for much of Iceland’s discredited boom years between 2003 and 2008.

Not all of the foreign creditors are the vulture funds Gunnlaugsson talks of. British and Dutch taxpayers still have significant exposure to the Landsbanki administration. As priority creditors they have had almost 55 percent of their claims repaid, though the remainder will take a good deal longer. There are UK local authorities and charities, too, which entrusted more than **P**1 billion (US$ 1.6 billion) with failed Icelandic banks and are still waiting to get much of their money back.

Gunnlaugsson has promised to give further details of his populist program for tax cuts and home loan debt relief next month, and will be under pressure to show how he expects to fund such moves. It remains to be seen if he gains more from squeezing foreign creditors than he loses in terms of the damage to Iceland’s reputation among international investors.

Last month he flew to London to address the Iceland Investment Forum, finishing his speech by declaring: "Hope to see you, and your money, in Iceland."

The response, from an audience largely of Icelanders and representatives of the foreign creditors, was a ripple of nervous laughter. Gunnlaugsson will not want that laughter to grow any louder.

Full steam ahead

The Guardian, REYKJAVIK

Icelanders are fast on their way back to becoming among the richest people in the world, just five years after experiencing one of the most dramatic financial meltdowns in history.

"If you say Iceland was a ship, it [the 2008 banking crash] caused a lot of damage to the bridge, but the body of the ship and the engine were still in good order," said then-Icelandic Prime Minister Geir Haarde.

By August 2011, Iceland had graduated from its IMF bailout program with flying colors.

Since then, with government borrowing receding, Iceland has been able to return to the international debt markets, and has begun repaying its emergency loans. Meanwhile, the economy <<->> having shrunk more than 10 percent in two years <<->> bounced in 2011 and last year, and will grow by about 1.9 percent this year.

Many Icelanders wince at the suggestion that they have escaped lightly from their IMF ordeal. Disposable income fell by a quarter after the crash, and 30,000 people <<->> 10 percent of the population <<->> have fallen into serious loan default; thousands of homes have been repossessed.