26
Nov
08

Iceland; life in a frozen state

What a difference a year makes. Only last November, Iceland’s status as one of the most successful economies in the West was underlined when it was judged the best place to live in the world.

Iceland had ousted Norway from the head of the UN’s league table of 177 countries that compared per-capita income, education, health care and life expectancy – which, at 80.55 years for males, was third highest in the world.

This was only one in a string of glowing assessments of a country (population 313,000) which had pulled off a modern-day economic miracle. No wonder they are also said to be the happiest people on the planet. The inhabitants of this newly discovered Utopia, with its much-admired free health and education systems, bought the most books, owned most mobile telephones per head, and included the highest proportion of working women in the world.

The dramatic change in Iceland, from the poor relation of Europe to one of its wealthiest and apparently most successful, and now back again, dates from the mid-1990s with the privatisation of the banks and the founding of the country’s Stock Exchange.

Iceland had also presided over the fastest expansion of a banking system anywhere in the world. Little did anyone know that the expansion once so admired would go on to saddle the country with liabilities in excess of $100 billion – liabilities that now dwarf its gross domestic product of $14 billion.

Iceland overreached itself in spectacular fashion, and the party is coming to a messy end.

Since then the Icelandic stock exchange has dropped by more than 90%, and the Icelandic króna has declined more than 35 percent against the euro from January to September 2008. Inflation of prices in the economy was running at 14 percent. Iceland’s interest rates had been raised to 15.5 percent to deal with the high inflation,and the króna’s decline is reportedly only beaten by that of the Zimbabwean dollar.This depreciation in currency value put pressure on banks in Iceland, which were largely dependent on foreign debt.

Then in October, the three biggest banks, Kaupthing Bank hf, Landsbanki Island hf and Glitnir Bank hf have collapsed under the weight of about $61 billion in debts, 12 times the size of the economy, according to data compiled by Bloomberg. Then the UK got cold feet over the money Iceland owed it.

So in the UK, the Landsbanki Freezing Order 2008, passed at 10 a.m. on 8 October 2008 to come into force ten minutes later, the UK Treasury went on to freeze the assets of Landsbanki and assets belonging to the Central Bank of Iceland, and the Government of Iceland relating to Landsbanki. The freezing order took advantage of provisions in sections 4 and 14 and Schedule 3 of the Anti-terrorism, Crime and Security Act 2001, and was made “because the Treasury believed that action to the detriment of the UK’s economy (or part of it) had been or was likely to be taken by certain persons who are the government of or resident of a country or territory outside the UK.”

Then UK Prime Minister, Gordon Brown, announced that the UK government would launch legal action against Iceland over concerns with compensation for the estimated 300,000 UK savers.

No longer smiling, office workers hurry home wondering out loud if they will have jobs to go to by the end of the week. Car showrooms are deserted. Estate agents are closing early. There are few takers for the thousands of unsold houses on their books. An unexpected cold spell is keeping many people inside their homes, another reason why the shops, many of which have discount sales, are quiet.

Iceland’s rugged, treeless terrain, a barren stretch of volcanic rock, geysers and moss, means the country imports most of its food, other than meat, fish and dairy products. So for weeks now  Iceland’s largest supermarket chains has been unable to get any foreign currency to make purchases abroad and another retailer’s electronic payment didn’t go through. Iceland has begun to see shortages of “regular goods'”. Wholesalers are demanding that importers pay before any goods are shipped, said Knutur Signarsson, head of the Reykjavik-based Federation of Icelandic Trade.

Icelanders are paying more for the goods they do get. The cost of fruits and vegetables, nearly all of which are imported, have gone up about 50 percent in recent months, said Steinunn Kristinsdottir, a 33-year-old Reykjavik resident who was leaving the Bonus store with her cart full.

“This situation really has been a bit troubling for people,” she said. “They don’t know what’s going to happen.” 

So all this has lead to growing protests in Reykjavik calling for the government and heads of the banks to resign over its handling of the economy. On Novemeber 23, a breakaway group of several hundred protesters gathered outside the city’s main police station, after a larger demonstration, to demand the release of a man jailed in a previous demonstration. Some in the group tried to storm the police building. The man they wanted to release was later freed, after a fine he owed over a previous demonstration was paid by an “anonymous benefactor”.

Perhaps the police realized they were outnumbered and couldn’t win. Resign already.

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