"Iceland Is No Longer A Country, It's A Hedge Fund"
Vanity Fair's April cover story is on Iceland's banking massacre — detailing how the the tiny, well-to-do country committed "one of the single greatest acts of madness in financial history."
From Vanity Fair:
Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to Reykjavík to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He'd never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations' 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. "You have to understand," he told me, "Iceland is no longer a country. It is a hedge fund."
Wealth tripled, the stock market multiplied nine times, and a country the size of Kentucky with as many residents as Peoria, IL found itself at the forefront of investment banking. Trouble is, they didn't really have any idea what they were doing.
Marketplace Money took a look at how Iceland is coping with their bankrupt nation — (their debt is 850% of their GDP). Apparently, they're eating porridge and slowter, a kind of haggis.
Teitur Thorkellsson: It's made from intestines and blood and fat of the sheep, meaning everything but the meat.
Teitur Thorkellsson says that during the boom no one bothered with slowter. Now, it's become almost chic.
Thorkellsson: Right after the economic crash, then this became the most fashionable thing ever. You know, families were getting together and friends were invited to stand with their hands bloody in the kitchen making this slowter food, because it's extremely cheap.
And if you thought our mortgage situation was bad, check out what Iceland was doing. They were using something called a foreign currency mortgage:
Vanity Fair:
For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn't afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising.
...
It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders-especially young Icelanders-own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them.
Whoops.
Marketplace Money talked to a woman with a foreign currency mortgage who is about to lose her home:
Hognadottir: It has been good for Iceland.
Beard: The collapse?
Hognadottir: Yes, in a way. Because the greed of the people. There was so much greed. But now people are more caring. We're becoming more human again. And that's what I like. And if I lose my house for that, that's a good cause.
Wall Street on the Tundra [Vanity Fair]
Iceland Warms Up to Frugality [Marketplace Money]
(Photo:Kristin Sig)
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Comments:
Yeah, this is going to be used as one of those "Don't do this" lessons in finance classes.
850% GDP? That's just ugly.
Wow...um, what? How is this not a bigger story? Right, probably because we're wrapped up in our own crisis...
Bah, no worries, Sportacus will save the day!
"And if I lose my house for that, that's a good cause."
And the winner of the award for putting the best possible spin on a complete disaster goes to Sissa Hognadottir.
I have to ask. Is there any precedent or procedure for the bankruptcy of a country? What actually happens? Will Iceland still have an operating government (or does it now?)?
I'm stopping over on the way to Europe for my honeymoon this summer...maybe I'll pick up an Icelandic chateau while I'm there!
Because the greed of the people. There was so much greed.
Ugh. I'm tired of hearing "greed" being blamed. Making a financial decision that benefits you is not "greed". The apparent problem is that no one hedged their foreign currency trades. That would be "poor planning".
Some of the best music I've ever heard has come out of Iceland. And, no, I'm not talking about Bjork.
Being born in Iceland, mom born and raised there, half of my family there... the bigger issue is that the previous prime minister, most recently fired, nationalized the 3 banks in Iceland ... I don't know all the intricate details, but from my what my family's told me, that killed their monetary system.
Wow, that would be like the US having $117 trillion dollar debt.
@Canino: I don't think she's blaming greed for the collapse. I think she's saying that greed was the result of the enormous wealth that so many were enjoying. Now that they've lost so much, they're focusing on things they need rather than what they want.
OK... first of all, I would hope that, despite Iceland's debt, it retains the ability to remain a Democracy. Some of the talk here and with the IMF types is that, well, they blew it, now they have to do what we say. Trouble is, Iceland is NOT a corporation, its a Democratic country, and the soveriegnty of the people of Iceland should not be corrupted just due to this issue.
@GMFish: Yeah. It was a really good spin. The only positive thing that came out of this clusterf***. Which is kinda depressing if you think about it.
@Shane Elliott: Not if the IMF gets their hands on them, which it looks like they have/will already.
well.... if the banks didnt know what was going on how could anyone else have know either? just b/c it was a country it should have known better? ya right.
@JGKojak: Part of having rights is having responsibility. I'm not disagreeing with you- I'm just pointing out that if somebody wants to be treated like a responsible adult, they have to act like a responsible adult first.
This is an amazing article. Tragic and heart-rending.
Just as we start to see the havoc that the Conservative/Free Market Fundamentalists ignited here, and we're beginning to understand the depth and scope of the damage, stories like these (and Ireland) come up.
Truly awful.
@Canino: She was saying that greed caused people to be blinded by their decisions. When times are good, no one contemplates when it might end, or when it might be bad. But financial crises such as this force people to better appreciate what they have.
Personally, I appreciate the importance of mental health, as I've had a pretty crappy few months. The prevailing thought through those months has been: It could be worse. I could be alone. At least I have family, and friends who understand. And that's the silver lining that people have to find - also, websites like stuffunemployedpeoplelike.com help ease the pain a little.
"with as many residents as Peoria, IL"
Woo! Peoria shoutout!
Okay, serious comment -- I've been following Iceland's crash, and I've felt that their government has been very open, as government's go, in addressing the issues. In interviews I've heard and read, they've been pretty frank and upfront and frequently freely admitted they have no clue what to do next. I don't know if that's a result of "complete catastrophe breeds honesty" or if Iceland has a historically open government (perhaps because it's so small), but that has impressed me. And governmental openness is typically tied to a country's attractiveness to investors, so that's hopefully a good thing.
I'm surprised no one in the article blamed America for Iceland's mess. That certainly seems to be the fashion among European leaders these days.
My husband and I had been planning a trip to Iceland for our anniversary. Fortunately nothing was booked yet; looks like it'll be either Montreal or New York again.
@JGKojak: Hee.
It's wryly amusing that when the IMF comes into 3rd World countries and does what they do, it's stern but much-needed reforms. But when done to 1st World ones, it's an affront to Democracy. They need strong reforms - their situation is dire.
I think we'd be a stronger country faster if the IMF would come to the US and make us make hard, necessary changes.
Oh, by the way: Iceland is, and will stay a Democracy. They had a brief, disastrous flirtation when run by Free Market Fundamentalist types (and isn't it shocking how short of a time-frame these ideologues need to completely destroy a nation? Amazing!) but they'll dig themselves out of it without becoming a tyranny. :)
@GMFish: Well, yeah. If she were an American, it would somehow be the government's fault or a worldwide cabal of evil corporations.
@JulesNoctambule: Well it's not like they're rioting, or they're in abject poverty or overthrowing the government. It might be good to put a tiny amount of money into the hands of those whose small businesses are struggling.
I don't think there is much industry there, other than fishing and a little travel & tourism. But that's only for 2-3 months of the year.
If these people don't have jobs, and if there are no jobs, and the banks can't lend money for new business startups, how do they climb out of their hole?
How much to buy the Iceland?
You could also probably get some steals on lodging and the like - in fact, the end of the first page of the Vanity Fair article says that the author got a huge penthouse room with a view for half-price thanks to the downturn.
@jasonpeek: Maybe it should get added to the monopoly board?
Why don't we have Monopoly: The Recession Edition yet? AIG is just prime for some little red hotel buildings.
@JulesNoctambule: I'm not seeing anything that says that people should not go to Iceland. When Argentina went through a somewhat similar situation a few years ago, it suddenly became super affordable, and more people started to visit. It was safe to go, it's just that your bank account may not have appreciated you actually living there. I see the situation in Iceland the same way.
@Harry Pothead: They have more or less unlimited free power there - so they are concentrating on some high power usage industries like aluminum manufacturing.
Also due to their small gene pool and national health records, companies like DeCode Genetics are doing quite well in the biotech industry - e.g. researching which genes are impacted by which drugs.
The next pin to fall will be Eastern Europe. They are involved in this kind of madness too. This rescission is not over credit it is from over leveraging. 850 % GDP is very high and our US banks are leveraged at 26-30 to 1 and that is very scary. God I hope our houses don't fall in value any more. We will all lose our shirts.
@flyboyJ:
My family's told me that Barack Obama was in the Mafia. They were born in America so they must be right.
I can only think of one word after reading this article, and it starts with F.