A new mood of proud nationalism is emerging in economically resurgent Iceland after an out-of-control banking system sank the country into financial meltdown exactly five years ago.
Riding this wave of confidence is 38-year-old prime minister, Sigmundur Davíd Gunnlaugsson, elected in April on populist promises of mortgage relief for every homeowner.
Gunnlaugsson earned his spurs in years of outspoken campaigning against the foreign creditors who still haunt Iceland, particularly the British and the Dutch governments, which intervened after the collapse of Landsbanki – the bank behind Icesave – on 7 October 2008.
Hundreds of thousands of ordinary British and Dutch savers had previously switched their savings into online Icesave accounts, attracted by market-beating interest rates and promises that: "You can also rest assured that with Icesave you are offered the same level of financial protection as every bank in the UK."
When the crash came, however, Iceland's deposit guarantee proved worthless, forcing the UK and the Netherlands to use their own taxpayer funds to compensate ordinary savers and sparking a poisonous diplomatic row.
It was a spat that, against the odds, Iceland won. While many other politicians in Iceland had urged a policy of appeasing the enraged British and Dutch governments, Gunnlaugsson had insisted they should go hang. "Icelanders, as descendants of the Vikings, are highly individualistic and have difficulty putting up with authorities, let alone oppression," he said in one of his first speeches as prime minister on Iceland's Independence Day in June this year.
"This was clearly demonstrated in the Icesave dispute, in which the people rejected an agreement they considered unfair. This was later upheld by an international court, which showed that the people's sense of justice was a reliable indicator to follow."Having helped win the famous Icesave victory from outside government, Gunnlaugsson has promised to carry that uncompromising approach with him as prime minister, hinting at a new wave of attacks on the interests of foreign creditors to Iceland's three failed banks: Kaupthing, Glitnir and Landsbanki. Between them, these institutions had assets more than nine times the size of Iceland's economic output when they failed in 2008.
From the wreckage, only three modest domestic banks emerged, allowing Iceland to keep functioning. The country was also able to let its overheated currency devalue, and impose capital controls to bring some stability.
Meanwhile, however, international bondholders and depositors were left out in the cold, waiting to recover what scraps they could from the banks' administration processes. Five years on and they are still waiting.
Meanwhile, Gunnlaugsson's main pre-election pledges were to squeeze these foreign creditors – characterised as "hedge funds" or "vulture funds" – in order to bankroll a 10% mortgage relief programme for all homeowners and a string of pro-business tax cuts.
Political opponents savaged the pledge. "It was like promising to bring back [the boom of] 2007," reflects the Left-Green former finance minister Steingrímur Sigfússon. But the Icelandic electorate loved it.
And with creditors' interests still locked in slow administration processes, and behind tight capital control walls, Gunnlaugsson believes he has a strong hand to play.
During the election campaign this year, he said: "This does not revolve around the confiscation of assets. The loss has already been incurred. It was mostly borne by foreign creditors who have recognised the loss and got out. In their place came hedge funds that have profited enormously — on paper — from the collection now of much that was considered lost and written off …
"It cannot be accepted that Icelanders should slave away to increase such collections and regain that which had already been lost without getting any share in it."
Creditor groups remain circumspect, keen to get into private discussions with the new administration as quickly as possible. Behind the scenes, however, they are examining their legal options carefully should Gunnlaugsson's aggression go too far. Their goal is to strike a deal that will allow foreign creditors to access more than £5bn of foreign currency assets tied up with the three banks' administrators and barred from exiting Iceland. "We have been attempting to engage for some time and fail to understand the lack of progress from the authorities," said one source close to the creditors.
Gunnlaugsson's rise to power shocked some observers outside Iceland, who thought the electorate might give their backing to the Left-Green-led coalition that had taken power iafter the banking crash and steered the country through the strictures of an International Monetary Fund programme, and back to growth.
Instead, the Left-Greens suffered the heaviest defeat in Icelandic history after an election campaign dominated not by economic achievements but by the fallout from the Icesave saga.
Bouncing back into office came a coalition of the two rightwing parties – the Independence Party and Gunnlaugsson's Progressive party – that had been in charge for much of Iceland's discredited boom years between 2003 and 2008. "The old rascals are back," laughs Geir Haarde, former Independence Party leader and prime minister at the time of the crash.
The previous government had twice negotiated terms under which Iceland would repay the UK and the Netherlands, with interest, for the cost of bailing out Icesave savers. It was made plain to ministers at the time that continued IMF support depended on such a deal.
But both proposals, despite being passed by the Icelandic parliament, were overwhelmingly defeated in public referenda thanks in part Gunnlaugsson. Popular opinion in Iceland had railed against what Gunnlaugsson grass roots campaign group InDefence portrayed as bullying forces from overseas, set on extracting reparations from Reykjavik akin to those sought from Germany in the Treaty of Versailles.
InDefence attacked Britain in particular, accusing Gordon Brown's government of deliberately damaging Iceland's standing in international markets in 2008 by using anti-terrorism laws to freeze the UK assets of Landsbanki. The bank, together with Iceland's finance ministry, was even place on a UK list of financially sanctioned regimes alongside North Korea and al-Qaida.
As time went on, however, eminent economists began to reassess Iceland's reputation as a pariah state, contrasting it favourably with, among others, Ireland, which had been similarly laid low by an outsized banking sector and forced to seek emergency help from the IMF.
"Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net," noted Paul Krugman, admiringly. Iceland, he found, had demonstrated the "case for letting creditors of private banks gone wild eat the losses".
Nobel prize winner Joeseph Stilitz agreed. "What Iceland did was right. It would have been wrong to burden future generations with the mistakes of the financial system." For Financial Times economist Martin Wolf too, it was a triumph. "Iceland let the creditors of its banks hang. Ireland did not. Good for Iceland!" Less good, of course, for the foreign creditors. And Not all of the foreign creditors are the vulture funds Gunnlaugsson talks of. British and Dutch taxpayers still have significant exposure to the Landsbanki administration. As priority creditors they have had almost 55% of their claims repaid, though the remainder will take a good deal longer to be paid out. There are UK local authorities and charities, too, which entrusted more than £1bn with failed Icelandic banks and are still waiting to get much of their money back. Meanwhile, taxpayer-controlled Royal Bank of Scotland had been one of the largest investors in Icelandic bank bonds, a position that has left it a non-priority claimant, expecting only minimal returns in its claims.
Until recently RBS had remained on the banks' creditor lists but sold its positions to distressed debt specialists earlier this year — at a heavy loss — as the outlook for creditors began to look more uncertain in the face of Gunnlaugsson's rising fortunes.
The Icelandic prime minister has promised to give further details of his populist programme for tax cuts and home loan debt relief next month, and will be under pressure to show how he expects to fund such moves. It remains to be seen if he gains more from squeezing foreign creditors trapped within Iceland's capital controls than he loses in terms of the damage to Iceland's reputation among international investors.
Last month Gunnlaugsson flew to London to address the Iceland Investment Forum, finishing his speech by declaring: "Hope to see you, and your money, in Iceland."
The response, from an audience largely of Icelanders and representatives of the foreign creditors, was a ripple of nervous laughter. Gunnlaugsson will not want that laughter to grow any louder.
Return to riches
Icelanders are fast on their way back to becoming among the richest people in the world, just five years after experiencing one of the most dramatic financial meltdowns in history.
"If you say Iceland was a ship, it [the 2008 banking crash] caused a lot of damage to the bridge, but the body of the ship and the engine were still in good order," said Geir Haarde, prime minister at the time. He added: "Our growth prospects for the future are tremendous."
Haarde's government was ousted three months after the crash in the face of noisy street demonstrations which became known as the "pots and pans revolution". A new Left-Green led coalition pushed the country through the strictures of an IMF bailout programme.
"We raised almost every tax there was – and introduced new ones," recalled the then finance minister, Steingrimur Sigfusson, adding that there were considerable cuts in public spending too as government debt swelled to eye-watering levels.
By August 2011, Iceland had graduated from its International Monetary Fund bailout programme with flying colours. "We became a poster child for them," suggests Sigfusson, noting how the fund is still struggling to right many other sinking economies on Europe's peripheries.
Weeks after the IMF exit, a conference was held in Reykjavik, where the mood was close to celebratory. "As the first country to experience the full force of the global economic crisis," the IMF said, "Iceland is now held up as an example by some of how to overcome deep economic dislocation without undoing the social fabric."
Since then, with government borrowing receding, Iceland has been able to return to the international debt markets, and has begun repaying its emergency loans. Meanwhile, the economy – having shrunk more than 10% in two years – bounced in 2011 and 2012, and will grow by about 1.9% this year.
Many Icelanders wince at the suggestion that they have escaped lightly from their IMF ordeal. Disposable income fell by a quarter after the crash, and 30,000 people – one-tenth of the population – have fallen into serious loan default; thousands of homes have been repossessed.
But that is not the whole story. Throughout the crisis, the Icelandic population has maintained the lowest risk of poverty or social exclusion in Europe. Unemployment, which briefly rose to 9.2%, has dropped back to 5.1%. Inflation is falling back to its target range, and house prices in Reykjavik are on the rise. Credit rating agency Fitch gave this assessment of the recovery in February: "The upgrade reflects the impressive progress Iceland continues to make ... [and] is underpinned by high income-per-capita levels. Rich natural resources, a young population and robust pension assets further support the rating."
Although Iceland has a small population of 317,000, supporting one of the smallest currencies in the world, its resources are mighty in comparison. One in 84 fish caught around the world is caught by Icelandic trawlers in the nation's rich north Atlantic waters. Meanwhile, glacial meltwater powers the nations hydro power stations and, together with geothermal generators, produce electricity five times the requirements of the local population.
Haarde, who has left politics, says: "We are used to living quite well. Actually we were only set back a few years. Let's leave aside why this happened, and the blame. When the crisis came to Iceland we were fortunate enough to do what was necessary. The banks never closed, people were able to go to their banks and use their credit cards. There were older people who didn't even realize their had been a crisis."
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