Wednesday, November 05, 2008

'We're left with nothing'



When John Carlin first went to Iceland five months ago it was still officially the happiest country in the world. But that was then... Here, he returns to Reykjavik to find the broken Viking nation banking on its women to bail it out

Old people seeing their life savings going up in smoke; middle-class families unable to meet their mortgage payments; young graduates, their dreams of affluence crushed, obliged to abandon their first homes... these are the new norms in Iceland, whose people, the most hard hit until now by the world's catastrophic financial crisis, are in a state of shock. 'Like the survivors of an earthquake,' said one. 'Our 11 September,' lamented another.

Iceland, a miniature caricature of the prosperity without end the developed world seemed until recently to be enjoying, offers suddenly a frightening vision of the pit of despond into which Europe, the United States and the rest of the world's hitherto wealthy nations risk falling. With the country's foreign reserves gone, the greater part of the banking system nationalised and the country declared by the prime minister to be practically bankrupt,

Iceland is at the epicentre of a global earthquake whose impact the most crazed participant in the attack on New York's World Trade Center would not have dared to imagine.

The national trauma - ex-pressed in shame, anger, fear - comes from the clash between the vast self-satisfaction accumulated over two decades of rampaging growth and the brutal suddenness of the fall. A United Nations report earlier this year identified Iceland as the best country in the world in which to live. A survey published in serious newspapers in 2006 said that the Icelanders (who, contrary to myth, do not have a high suicide rate - it is lower than France's and Australia's) were the happiest people on earth. Today, Iceland's future is at the mercy of the International Monetary Fund, as if the country occupied not the first place in the United Nations Development Programme's latest Human Development Index rankings, but had replaced Sierra Leone in the last. In a measure of the general despair, the government has been flirting with what most Icelanders seem to view as the dire notion of accepting a big loan from Russia, whose people, according to that same survey, are the unhappiest in the world.

The criteria used by the UNDP report did not focus only on the fact that this country of 300,000 inhabitants, located in one of the most inhospitable eco-systems on the planet, had managed to achieve the sixth highest GDP per capita in the world. As I found when I went there six months ago to check up on this unlikely marvel, there remains a lot more for the Icelanders to cherish and preserve.

The quality of their public health and education systems (even the fleetingly filthy rich saw little need to use private schools or private medicine) may be equalled somewhere, but not surpassed; the state plays a decisive role in ensuring that mothers have the same access to the labour market as fathers, and this in a country that has the highest childbirth rate in Europe; an extraordinarily enlightened attitude towards divorce, in which the overwhelming priority is the welfare of the children, means that the notion of 'broken homes' is something Icelanders read about in foreign magazines; as for clean and renewable energy - hot water from the island's volcanic depths is the principal source of electricity - Iceland is a world leader; and as for a generalised love of reading and music, there is nowhere quite like it.

It was for these reasons - far more than for the hip bars and gourmet restaurants and super-cool hotels, amid plenty more visible measures of abundancy in the capital, Reykjavik - that I bought into the conclusions of the UNDP report. My work takes me all over the world and I have lived in eight countries, but never have I encountered such a concentration of open-minded, intelligent, enterprising people as I have in Iceland.

Too enterprising, as it turns out. The achievements built up over 1,000 years of human habitation on this windy, chilly island are at risk now, owing to the Viking exuberance that many had chosen to identify as the engine of the Icelandic miracle, as the reason why in half a century Iceland passed from being the poorest country in Europe to one of the richest, with zero unemployment. The president himself, Olafur Ragnar Grimsson, had boasted as recently as May, in a speech in London, that the ancestral Viking virtues immortalised in the ancient 'sagas' - the alpha-male derring-do of those fearless bands that ventured out into an unmapped world to plunder and subjugate - were the secret of 'why daring Icelander entrepreneurs are succeeding where others hesitate or fail'.

Four weeks ago, with the finance system in freefall, Grimsson underwent a heart operation. He emerged to make a TV appearance in which he begged his compatriots to forgive him for making what - he could see in retrospect - was a buffoonish spectacle of himself as head of a country now perceived globally as an ostentatious upstart, and by some (such as Gordon Brown) as a debt-defaulting pariah.

Iceland's bankers, the Viking vanguard, operated in 20 countries (this is a nation, it must be remembered, with a population barely bigger than Hull's) and had bought themselves big businesses in Britain and Denmark (not excluding, as if they were Arab sheikhs or Russian oligarchs, a London football club, West Ham). But in so doing, the national debt outstripped the country's real wealth by a factor of 12. The ties that bind the global banking system broke and the Icelandic bubble burst.

The Icelanders are divided between those who chiefly blame the government, for having deregulated the financial laws to such an extent that - short of outright piracy - anything went, and those who blame the bankers, whose extravagance the rest of the citizenry beheld in the spontaneous parties they hosted in the swankier bars of Reykjavik, swilling £1,000- a-bottle champagne as if it were beer.

Thorir Bergsson is among those who are inclined to blame the government, reasoning as he does that people whose business it is to do money will by their very nature stretch the boundaries of what the law allows. It is his view that it is up to the government now to come up with a solution to his pressing, and absolutely typical, dilemma.

Bergsson, 39, is a chef in what had been until now a successful restaurant in Reykjavik's equivalent of Regent Street (taking into account that Reykjavik from the outside has the feel of a Faroe Island fishing village). Today the clientele is down by 40 per cent, some employees have been let go and he himself is contemplating the prospect of accepting a reduction in his salary. His wife is an anthropologist who works for the Reykjavik city council in a department that deals with immigrants. It is a post that could cease soon to have much relevance.The foreign population, largely from Poland and the Baltic states, is beginning to dwindle, driven elsewhere by the plummeting local currency, the krona. Suddenly, as Bergsson noted, it seems highly likely that Icelanders will find themselves competing for 'the dirty hands' jobs they had imagined they would never have to touch again.

But that is not the worst of it. The worst of it is that Bergsson simply cannot pay his monthly mortgage payments, nor those of his car loan, without the four children who live with him and his wife going hungry. The couple have two small children of their own, but each has an adolescent child from a previous relationship - a state of affairs that is not only common in Iceland, it is considered entirely natural. Between the two of them they earn around 850,000 krona a month. That was worth around £7,000 two months ago; now it is worth less than £4,500, and falling.

Following their bank's advice, they had opted, as many Icelanders had done, to take out their mortgage in a 'basket' of foreign currencies. In the all-day and all-night light of summer they were making monthly payments of 160,000 krona; the next payment due, as the long black winter sets in, is for 400,000. On the car, Bergsson and his wife have to pay 60,000. 'If we then add the 36 per cent we pay in tax, we're left with practically nothing,' says Bergsson, when we meet for lunch at a city centre restaurant that is otherwise empty at 1.15pm on a Wednesday. 'This is why I am left with no option but to go to the bank and inform them that I have no intention of paying this month. Everyone is in the same boat. The whole country is on hold.'

They are waiting to see, for example, what the effect will be of a loan freshly agreed with the IMF, whether it means that the country's bare coffers will now be further replenished with money from the Russians or, as many wish (given the widespread fears that a big Russian investment might undermine Iceland's sovereign identity), from their cousins in Scandinavia. Only once a loan package is on the table will it be possible for the government to try to come up with some sort of rescue plan. 'Yet there is another thing I prefer almost not to think about,' says Bergsson, who insists that he is staying calm, though his eyes betray an air of anguish bordering on physical pain. 'Our home, in which we had invested so many dreams and so much money, is losing value with every day that passes.'

Bergsson recognises, all the same, that there are many people worse off than he is. Among them, the thousand or so young bank employees - in many cases the cream of the Icelandic education system, people with Masters degrees and doctorates from foreign universities - who have been fired in the past month, and who had bet on the good life with more rash credit-taking exuberance than he had done. 'But those that make me the saddest, because after all

I still have time to reconstruct my life, are the old people who have lost their savings.'

It has been a surprise to discover how reluctant Icelanders are (Bergsson is a rare exception) to talk about the dramas they are enduring. This is shown in the fact that when I was there, two weeks into the full-blown crisis, the Icelandic newspapers hadn't published any stories about the ordinary victims of the crash - at least, none mentioning any names. It was as if the journalists understood that Icelanders were too ashamed to look at themselves in the mirror. That was why the majority of case histories that I heard were second-hand.

Such as the one - again, entirely typical - of the father-in-law of a writer who retired on the Friday before the Monday on which his bank, Glitnir, had to be nationalised. 'He is 70 years old. He was an executive of a hydroelectric power company,' said the writer, who asked not to be named. 'Early this year the bank convinced him - as they had done many others of his age and circumstances - to transfer his life savings from a solid account that yielded interest of 14 per cent to one that yielded 20. They assured him that the move was riskier in theory, but not so in practice. The solidity of the world banking system was his guarantee, they told him. So he transferred the funds and, within barely 48 hours of his retirement, he saw how the money he had saved with a view to enjoying the last years of his life had gone forever.'

The writer, who has three small children, enjoys the good fortune of having almost paid off his mortgage. Yet he does not consider himself to be safe. On the one hand, his wife risks losing her job in an organisation which depends for its existence on the sponsorship of an Icelandic bank. On the other hand, because of the worrying economic prospects his publishers have told him they cannot afford to print three books he has written, and that they had commissioned. What is more, there are signs that the biggest book-selling chain in Iceland could go under, which could have a catastrophic effect on the biggest publisher. 'And all this,' the writer says, 'in a country where, until now, individuals have been buying more books than anywhere else!'

As for Iceland's musical tradition, the country suffered another blow to morale when it was announced two weeks ago that a planned tour of Japan by the Icelandic Symphony Orchestra had been cancelled. The organisers wrote to say that, given the crisis, it would be best if they did not come.

One way out for musicians and others able to compete internationally is to emigrate. And this is precisely the biggest fear of the dozen or so people I talked to for this article. 'If we are going to get out of this mess, if we are going to rebuild the country on a solid and enduring base, if we are going to take the essential step of diversifying our economy, what we must not see is a brain drain,' says Svafa Gronfeldt, rector of the University of Reykjavik. 'We are a survivor nation, by definition. To have managed to create a good life here has been the result of a tremendous imagination and great practical resourcefulness. Our great advantage today is that we have a lot of highly trained young people able to function in the global market. We must retain them.'

Thorir Bergsson is not a typical case in the sense that he is a chef (though one of the many symptoms of the Icelandic success story has been an abundance of excellent restaurants in the capital), but he does reflect the attitude of many others who share his option of finding employment abroad. 'We don't want to go, even though my wife and I both know that we could get jobs elsewhere,' he says. 'But it would be terrible if people of my generation were to abandon ship now. Although, of course, if the welfare of our children is at risk, our idealism won't last for ever.'

Dagur Eggertsson, ex-mayor of Reykjavik and a doctor by training, says that the trauma the country is undergoing intensifies, especially in the case of the older people who have lost their savings, at the prospect of the best and the brightest leaving.

'It's not only that it would cost us so much more to build up the economy again,' says Eggertsson, 'it's that this is a country in which families are very united - maybe more united than ever right now - and the pain of separation would be terrible. I know a man who works for the government whose three children - two of them bankers, one a telecoms executive -have all just lost their jobs. He sees it as virtually inevitable that the three will go abroad.'

Yet Eggertsson shares the opinion of Svafa Gronfeldt that Iceland could end up giving the world a lesson in how to emerge out of this great crisis. 'We must reflect on the humiliation we have endured, abandon those mythical old Viking values - after all, most people just stayed at home and worked - and replace them with something new,' he says.

Such as what? Gronfeldt, and another half dozen women I interviewed, think they have the answer: 'Feminine values.'

Iceland is the country with the highest percentage of women in full-time employment in the world, but, as Gronfeldt points out, almost all of them have remained stuck in the second or third tiers of management. 'The fact is, however, that women in this country are ready, able and willing and this crisis will accelerate their rise to the next step.'

This has already started to happen, and in dramatic fashion. The new chief executives of the two big banks that have just been nationalised, Glitnir and Landsbanki, are both women, a development which one male minister described as an attempt to instil 'a new culture' in the banking world. The Financial Times headline on the story was: 'Icelandic women to clean up "male mess"'.

'Yes,' says Halla Tomasdottir, 'but this time, after cleaning up, we're going to stay.' Tomasdottir has emerged as something of a spokeswoman for an energetic new current in favour of women occupying key leadership posts in the new Iceland that, it is hoped, will emerge from the ruins of the old. 'Before we only rowed; now we're going to decide where the boat is headed.'

Tomasdottir has the attributes of a great captain. And today more than ever. She is the president of Audur Capital, a financial services consultancy whose clients are the only ones in Iceland not only to have not lost money in recent months, but to have made some. 'The last four years I'd been watching, incredulous, the screaming gap between the reigning model of investment and what ought to have been the sensible reality. Everything short-term, without taking into account the social consequences; betting on huge profits without seriously evaluating the risks; a shocking excess in the bonus payments to executives; and, shaping everything, a classically masculine way of doing things.'

Women in Iceland, as elsewhere, are generally more practical than men, they have their feet more squarely on the ground and they study the consequences of the risks they take with greater diligence, says Tomasdottir, who on the week I was in Reykjavik gave a speech on the subject that was received with almost evangelical excitement by the 100 influential women present. Among them was Oddny Sturludottir, a Reykjavik city councillor, who emerged from the meeting eyes blazing.

'We are all furious in Iceland but women especially so,' she said. 'We trusted the men at the helm and now we feel fooled, and totally convinced that if it had been women in charge we wouldn't be owing all these billions right now. They talk about the Viking model! What is the Viking model? Rapists and robbers! That's no model for the 21st century.'

Which does not mean, as far as Tomasdottir is concerned, that it is the end of the capitalist model. 'Not at all. It's the beginning of a new improved capitalism, one that is led not by women alone - of course not - but one that is guided by a more feminine concept of life.' That consists, she explains, 'in thinking more long term, in working more as a team, and in taking into account not only the immediate profits of investors but also wider values such as the welfare of society as a whole'.

Tomasdottir, a fashionably dressed woman of manifest dynamism and extravagant good humour, says she is excited by the challenges ahead. 'We will surprise the world!' she declares. 'We shall emerge stronger from all this and the world will imitate our example. You'll see!'

But before then - and even she does not deny this - three or four tough years will have to elapse. There will be significant unemployment for the first time since the Icelandic economy's first stirrings at the end of the second world war; the currency will go down before it goes up; some of the country's finest brains will depart and many elderly people will forever lament the opportunity lost to enjoy their long-awaited retirement.

'The party's over,' said the writer whose books the publishers cannot afford to print. 'I'll tell my children one day about the drunken nights of champagne excess the young bankers used to indulge in, and they'll think I'm making it up.'







Iceland

Hedge funds count the cost of trading losses

Hedge funds and banks are expected to bear the brunt of derivative losses estimated at $15bn (£9.4bn) linked to the collapse of Iceland's three major banks - Landsbanki, Glitnir and Kaupthing - which failed in rapid succession last month.

The complex unwinding of trades linked to debt issued by the banks began yesterday with a settlement auction to determine the payout price on credit default swap (CDS) contracts - insurance taken out against the risk of debts going bad - for Landsbanki.

Payouts on all three banks are expected to be some of the largest ever seen in the $54.6tn CDS market - greater than those relating to Lehman Brothers, whose collapse triggered the meltdown of the global financial system.

The high settlement prices for Icelandic bank CDSs will be a blow to hedge funds, banks and other derivative traders who insured the debt.

The payout price for those firms that sold insurance on Landsbanki debt was set at 98.75 cents in the dollar - higher than market expectations. According to the Depository Trust & Clearing Corporation, net outstanding Landsbanki CDSs amount to $1.8bn, implying losses of $1.78bn.

"I didn't expect [the payout price] to be quite that high," said Michael Hampden-Turner, credit strategist at Citigroup. "I think this result implies the settlements will be pretty high for Glitnir and Kaupthing as well."

Among those having indicated an interest in Icelandic bank CDS settlements are Royal Bank of Scotland, Barclays, HSBC, Standard Chartered and hedge funds Citadel, RAB Capital and Tudor. It is not clear which firms have incurred CDS losses and which have received payouts.

In addition to £1.78bn losses on Landsbanki, analysts estimate losses of a similar scale are likely to be incurred on hybrid credit derivatives known as synthetic collateralised debt obligations (CDOs).

The payout price on Glitnir CDS contracts will be set today and on Kaupthing tomorrow. If prices are set at similar levels to Landsbanki, combined losses would reach $7.5bn - more than the $5.2bn payouts on Lehman CDSs. Add in estimates for related CDOs and losses could reach $15bn.

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