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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