Tag Archives: Economic Crisis

Iceland – What Went Wrong?

1000 krona

The trip to Iceland was eighteen months 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 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 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.  GDP is expected to drop by 10% in 2009, and unemployment will probably hit a forty year high.  The Government of the country is in meltdown and in January the Prime Minister resigned and called a general election.

Following negotiations underway with the IMF since October 2008, 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 cash handout so it could probably afford to give a bit back but for the Faroe Islands it is the equivilent of the United Kingdom lending 300 billion danish kronas or 35 billion pounds!  How generous is that.

Iceland retained its top spot in the index on human development in 2008 but it is doubtful it will still be there at the end of 2009 and I’m not sure just how happy they are now either.  In the New Economic Foundation’s 2009 Happy Planet Index Iceland came ninety-fourth.  The Icelandic króna has declined more than fifty percent against the euro.  Inflation of prices in the economy is almost out of control and interest rates had been raised to eighteen percent to deal with it.  The króna’s decline is reportedly only beaten by that of the Zimbabwean dollar.

The assets of Icelandic pension funds are expected to shrink by up to twenty-five percent 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 percent 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.

Borgarnes Iceland old ferry terminal

Iceland, which has previously always resisted membership, has also formally applied to join the European Union. The bid must now be approved by the EU, after which Iceland’s people will be asked to vote on it in a referendum.  Iceland, with its tiny population of just 320,000, has traditionally been sceptical about joining because some fear that quotas could hurt Iceland’s fishing industry but many people there have warmed to the idea of membership following the devastating economic meltdown, which saw the top Icelandic banks collapse in a matter of days.

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 turned down requests for assistance and then invoked anti-terrorist legislation to seize Icelandic assets.

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 2008 .  We British know a bargain when we see one!

Iceland protest