Saturday, 6 December 2008

Iceland - One Year On

The trip to Iceland was a year ago when the country appeared to be riding the crest of a wave, top of the United Nations index on human development and according to a study at Leicester University the fourth happiest place to live in the world. Iceland had one of the richest economies in Europe, but it had a problem brewing because its three main private sector banks had become so large that their assets amounted to more than ten times the gross domestic product of the country and things have now gone spectacularly wrong.

Today the economy is in unbelievably horrible shape and the three banks, Kaupthing, Landsbanki, and Glitnir are in receivership. The stock market has lost 90% of its value, the central bank is technically insolvent and a mountain of liabilities dwarfs its modest pile of assets, the krona has lost more than half its value and unemployment will probably hit a forty year high next year.

Following negotiations underway with the IMF since October, a package of $4.6bn was agreed on 19th November, with the IMF loaning $2.1bn and another $2.5bn of loans and currency swaps from Norway, Sweden, Finland and Denmark. In addition, Poland has offered to lend $200M and the Faroe Islands have offered 300M Danish kroner. Poland is the biggest net beneficiary of the European Union so it could probably afford to give a bit back but for the Faroe Islands it is the equivilent of the UK lending 300 billion danish kronas or 35 billion pounds! How generous is that. (Thanks Egill, for putting me straight on that one!)

Iceland retained its top spot in the index on human development in 2007 but it is doubtful it will still be there at the end of 2008 and I’m not sure if Icelanders are still as happy. The króna had declined more than fifty percent against the euro, inflation is almost out of control and interest rates had been raised to 18% to deal with it. The króna's rapid decline is only beaten by that of the Zimbabwean dollar.

The assets of Icelandic pension funds are expected to shrink by up to 25% and the Icelandic Pension Funds Association has announced that benefits will in all likelihood have to be cut in 2009. Iceland's GDP is expected by economists to shrink by as much as 10% as a result of the crisis, placing Iceland in an economic depression. Inflation may climb as high as seventy-five percent by the end of the year. Unemployment has more than tripled with over seven thousand registered jobseekers (about 4% of the workforce) compared to just over two thousand at the end of August.

With things this bad and Iceland crying out for customers this could be a good time to take advantage and visit again. In the United States it is in the top five of bargain destinations because of the fall in the value of the Krona and as long as that keeps ahead of the prices in the shops and the restaurants that should make it nicely affordable. I hope we would still be welcome there because it does have to be said that Iceland does partly blame the United Kingdom for its economic woes because we did turn down requests for assistance and then invoked anti-terrorist legislation to seize Icelandic assets, which does sound a bit extreme.

The Iceland national tourist web site is reassuring however and says:

‘While Iceland and most other countries are currently dealing with a serious financial crisis, business in Iceland is being conducted as usual. All services - including banking services – are functioning as on any other day. Hotels, restaurants, airlines, car rentals, currency exchange facilities, offices, shops, etc. are all open for normal business.

Visitors can be assured that they will be treated with same friendly hospitality that Icelanders have become known for throughout the travel world. There is no reason to fear that a visit to Iceland will be anything other than an enjoyable experience’.

I think I would be prepared to risk it and so are lots of others because visitor numbers from the United Kingdom have increased by 20% since September. We British know a bargain when we see one!

At the top is the Town Hall when I visited in 2007 and all was well and here it is with an angry crowd of protestors in 2008.


Egill from Iceland said...

but how embarrasing must it be to borrow money from the Faroe Islands?

I must comment on this. I doubt that you could find any two countries that have a deeper ties, friendship and respect for eachother as the Faroe Islands and Iceland. Icelandic and Faroese are basicly the same language and the two countries. When Iceland has been in trouble in the past, the Faroese have always responded very quickly to help us, like in the eruption in the Westman Islands in 1973 and in the avalanches in 1996. Iceland also has alowed the Faroese people to fish in Icelandic waters.

The loan they offered us is 300 million danish Kronas, which the Icelandic government has to pay back when they feel like it, and the loan bears the same interest rate as is on Faroese loans. It´s not alot of money, but considering their small population it is huge. It´s like England would lend us 300 billion danish kronas or 35 billion pounds!

So in short. . . It´s not at all humiliationg getting a loan from the Faroe Islands. So very far from it.

Andrew Petcher said...

Sorry Egill, it wasn't my intention to offend!

Egill said...

I know :)

I just wanted to explain. I enjoy your blog.