Iceland recovers from its financial delusions

7th July, 2012

How was Reykjavik, then?

Very nice, very nice indeed. Whale watching. Hot tubs, geysers, waterfalls and glaciers. All in a day’s work.

I thought you were working?

I was working. I was at a conference on the subject of “resilience”. After the unpronounceable volcano and the catastrophic crisis, it seemed an appropriate place to discuss bouncing back. I don’t think I can be blamed for taking a little break after such weighty considerations.

And has Iceland bounced back?

From Eyjafjallajökull, sure. And you can buy T-shirts with pretty good Eyjafjallajökull jokes, too.


“What part of Eyjafjallajökull don’t you understand?” That was my favourite. Not much sign of a financial disaster, either, although I am aware that the experience of a tourist strolling around the prosperous bits of Reykjavik is hardly representative. Still, Iceland has become something of a poster child for how to bounce back from a banking crisis.

And it was quite a crisis.

It was. Iceland managed to create three massive global banks. The economy itself is tiny: Iceland has the same population as Coventry, although arguably the scenery is better. That’s really not big enough to support a lot of globally competitive export industries. Iceland had three: fish, aluminium smelting and tourism. Four if you count Björk. Can you blame them if they fancied dabbling in something a bit sexier, such as investment banking?

Investment banking is sexier than Björk?

I don’t think investment banking even manages to be sexier than aluminium smelting these days, but eight or nine years ago it must have seemed like a great gig. So these Icelandic banks borrowed loads of cash and used it to buy pretty much anything they wanted. In particular, they bought from each other at rather ebullient levels, which made for substantial profits on paper. The whole thing was a classic bubble.

And when the flow of loans dried up?

The banks crashed and there was clearly nothing the government could do to save them – they were far too big. And the party came to a grinding halt.

It doesn’t make a lot of sense.

No. It’s hard to understand why anyone wanted to lend them the money, and just as hard to understand why they thought they could instantly learn the craft of global investment banking.

Well, since the craft of global investment banking seems to consist of blowing wads of cash in doomed transactions, they appear to have learnt the craft all too well.

Quite. Still, it is odd. There’s a telling moment in Michael Lewis’ “disaster tour” of Iceland in which a fisherman-turned-banker describes with love and awe the unending process of learning to be a master fisherman. Then Mr Lewis asks him, if fishing requires a lifetime of learning, why did he think he could succeed in investment banking without a day of training?

But you were saying Iceland has bounced back?

Well, not entirely. The economy has shrunk, but not as much as you might expect and less than other crisis-torn states such as Ireland, Estonia or Latvia. But some big guns in the economics blogosphere have been arguing about whether Iceland has weathered the storm well or not.


Because it symbolises a heterodox response to the crisis: keep control of your own currency, devalue, impose capital controls, abandon your own banks and bolster your welfare state.

Is Iceland really relevant?

As a symbol, perhaps. As a model, surely not. Iceland is unique – a tiny, highly-educated place almost entirely dependent on fish exports. But I think it has coped far better than we might expect, given the size of the crisis. Mr Lewis, writing over three years ago, gave the impression of a metaphorical volcano about to explode in rage and chaos. People are angry but the only volcanic eruptions have been literal.

It’s a country used to coping with crisis.

If you like. One volcano-response expert mused that it was a shame that Iceland didn’t find the same calm and co-ordinated response to the banking crisis that it produces when there’s a natural disaster. But the thing that stuck in my mind was a statement by Margret Pála, a noted pre-school educator. She said that now the bubble had burst and the private jets at Reykjavik airport had been replaced by wild geese, she was very glad that the Icelandic people had reclaimed their country.

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