The Credit Crunch Lab: Iceland's Warning to the World
First came the financial crisis, then the uproar: Iceland is the first European country to suffer the full effects of the global financial crisis. Is this a taste of what's in store for the rest of the world?
It's snowing and soon it will be dark again. The evening begins here at about four o'clock in the afternoon, followed by a long, long night -- an Icelandic night here in Reykjavik, latitude 64 degrees north, just south of the Arctic Circle. If countries could export darkness, then Iceland would have nothing to worry about.
Kristin Gunnarsdottir parks her small car in front of her modest home in the city's Garbabae district, gingerly walks along the slippery path to the front door and knocks the snow off her boots. She's in the mood for some hot coffee and a seat by the fireplace. She has a new, exhausting pastime -- demonstrating. "We have to save Iceland," she says.
For the past three months, Kristin Gunnarsdottir has spent many of her days in downtown Reykjavik. Armed with a pot and spoon, she and her fellow protesters have taken up position in front of the Icelandic parliament, the Althing, accompanied by a few hundred or -- as is usually the case -- a couple of thousand other demonstrators. Recently, she says, the wrath of the people was so great that the crowd was on the verge of storming the Althing, dragging out the government, and hanging them from the huge Christmas tree. The tree is no longer there.
Things are heating up in Iceland as a result of the financial crisis.
Kristin Gunnarsdottir grabs a thermos full of coffee, switches on the TV and is just about to settle down by the fireplace when she is stopped short. She stands there, awestruck, and points to the screen.
Kristin is in her mid-40s, red-haired and cheerful. She used to be a TV journalist, but is now a writer who has produced three bestsellers. But since the beginning of the financial crisis, she has been one of the leaders of a revolt the likes of which Iceland has never seen before, a revolution from below that aims to sweep away everything that existed before.
"Incredible," she says, pointing to the television.
Foreign Minister Ingibjörg Solrun Gisladottir is being interviewed. She is from the left-leaning Social Democratic Alliance, the smaller of the two coalition partners, and looks exhausted as she gazes into the camera and explains that she will only continue to support the government if a series of demands are met. Then come politicians who say that these demands cannot be fulfilled.
"That's it," says Kristin, "I guess we won't have a government soon -- it's better that way."
A few hours later, a government that once seemed unshakable collapses. The stronger of the two coalition partners, the conservative Independence Party, ruled the country for nearly 18 years. This party led a government that was responsible for some 315,000 Icelanders who are all related to each other in one way or another and are, for the most part, very blonde, very nice, educated, pleasant people. Now the financial crisis and the scandals that it has brought to light have cast Iceland into turmoil and chaos. On the surface, life continues, yet everyone is shaken to the core by an unfathomable feeling of uncertainty. In that sense, Iceland is like a crystal ball that reveals the future of the rest of Europe.
Iceland has become a kind of laboratory for the credit crunch: a small, compact country, closely linked to the international economy, without any safety buffer. It's a place where the effects of a crisis are felt intensely.
The first waves of layoffs have started to roll across the country. Everyone knows someone who has already lost his job or will lose it soon, everyone knows someone who knows -- and hates -- an investment banker. The coolest bars in downtown Reykjavik are conspicuously empty, like "101" and "b5", where financial high flyers were still enjoying wild parties during the midsummer nights of 2008. The country's image has been seriously tarnished. "How do we look now in the eyes of the world?" says Kristin. "Like the financial maniacs, the gamblers of Europe."
Where -- and, more importantly, who -- are the culprits responsible for this mess? No one in Iceland is sure. Since the collapse of the country's three large banks over three months ago, the government has presented no answers and has not even bothered to launch a serious investigation.
This has sparked wild rumors throughout the country. According to one story, the richest Icelanders left the country months ago, their bags packed with cash as they boarded a private jet bound for Portugal. Supposedly they will return soon to cover up their tracks. The Icelandic krona has lost a third of its value against the euro within one year and remains volatile. Nobody in the shops knows the current exchange rate anymore. An interim left-wing minority government, led by newly appointed Prime Minister Johanna Sigurdardottir, is now in charge of the country until new elections can be held, and it's very possible that the Left-Green Movement, with its Marxist leanings, will then emerge as the strongest party.
Nowhere else in the world, so it seems, is the crisis as visible as in Iceland, nowhere else is it so concrete. The small size of the country also means that every citizen can easily calculate how much debt has accumulated in his or her name. Before they were nationalized, the three large banks had amassed arrears of $166 billion (130 billion), equivalent to 10 times Iceland's gross domestic product. That comes to an additional $527,000 for every man, woman and child. An Icelandic plumber or fisherman who has a wife and two children to feed would thus all of a sudden find himself $2 million more in debt. How can the current generation ever work off this debt? Economists anticipate double-digit inflation and predict that the economy will shrink by 10 percent.
- Part 1: Iceland's Warning to the World
- Part 2: 'The Cleanup Work Will Be a Bloodbath'
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