Economy — Scandinavia Iceland Tries to Dig Out Of Its Financial Freefall by Seth McLaughlin Iceland’s new ambassador in Washington recently paused after he was asked whether his country’s currency was dying. Less than a month into the job, Hjálmar W. Hannesson explained that he wanted “to be diplomatic, but also to tell you I have a view on it.” Then he flatly said, “I don’t know.” The answer reflects a haunting reality that has loomed over Iceland since its banking sector and currency, the krona, collapsed last October. Saddled with inflation-indexed loans and car payments in foreign currencies they can no longer afford, everyday Icelanders are in financial shambles. The construction boom that symbolized the small volcanic island’s white-hot prosperity has dried up, an unheard of 14,000 people are unemployed (the equivalent of 14 million Americans), and the government, forced to bail out its private banks, is drowning in a sea of inherited debt. “The uniqueness of Iceland and the collapse of the banking sector is that the banking sector was so large as compared to Iceland’s economy,” explained Hannesson, who holds a master’s degree in political science from the University of North Carolina. “The liabilities of the three banks that were taken over by the government were over 10 times the GDP of Iceland. That is just huge.” Now the mere possibility of the krona’s death is forcing the country of some 315,000 people to ask some very tough questions about their future — namely will the financial meltdown, and the likely policy changes to come, cut into the island’s independent spirit and proud Nordic culture. With life savings and jobs wiped out, many Icelanders have also had to deal with the fact that the debt-driven lifestyles they enjoyed for roughly a decade — buying Land Rovers, Prada shoes and swanky homes — were an illusion built on blind trust in the system, poor governmental oversight, and the greed of a small number of bankers (some blame as few as 30 men and women). Speaking at an October citizens meeting, Icelandic author Einar Mar Gudmundsson summed up the country’s disgust by comparing the crash culprits to cannibals. “A cannibal is flying first class,” he said. “The stewardess brings a menu with several options. The cannibal is quite polite, as cannibals are upon first impression. The cannibal scans the menu and then says to the stewardess, ‘I don’t see anything appetizing on the menu. Would you be a dear and fetch the passenger list?’” Cold Wakeup Call for Iceland It became clear to Hannesson, 62, that the financial hurricane gathering speed across the globe had hit Iceland’s shores after Prime Minister Geir Haarde left the 63rd session of the U.N. General Assembly early to return home — even as Iceland made its final pitch for a rotating seat on the U.N. Security Council. (Thanks in part to the financial mess, Iceland lost its bid for a Security Council seat.) “We realized there were things happening that were unexpected and difficulties were ahead,” said the ambassador, who before coming to Washington served for five years as Iceland’s permanent representative to the United Nations in New York, where he was vice president of the 62nd General Assembly from 2007 to 2008. Haarde’s swift departure back home didn’t save his job though. In fact, he became the first political casualty of the economic implosion. After violent protests that were uncharacteristic for this seemingly idyllic country, he resigned, citing health concerns. On Feb. 1, Johanna Sigurdardottir was named head of Iceland’s new left-wing coalition government after her Social Democrats and the Left-Green Movement joined forces. The event was historic not only for Iceland but for the world. She became the country’s first woman prime minister and the world’s first openly gay head of government in modern time. In hindsight, Haarde’s political — and the country’s economic — fate was decided years earlier when former Prime Minister Davíd Oddsson successfully pushed to deregulate the banking system. For him and his backers, Iceland’s economy was overly prone to inflation that was tied to periods of rapid growth. It was also dependent on a few key exports, including fish, which often fluctuated greatly year to year. Next Page