By Michael Stothard in Reykjavik
A visitor seeking a sense of how Iceland’s clique of powerful financiers saw themselves before their empire came tumbling down need look no further than Reykjavik’s Harpa concert hall. The extravagant steel and glass structure, which has more seats than London’s Royal Opera House, looks like a futuristic beehive glowing above the grey buildings that make up most of the capital.
It was commissioned by Bjorgolfur Gudmundsson, one of the “Icelandic oligarchs” who exploited cheap credit following the aggressive financial deregulation of the early 2000s to create a billion-dollar empire. He set out in 2007 to build a cultural venue to match the country’s new found wealth – but when the global financial crisis hit the next year, and Iceland’s overleveraged banks collapsed, he went bankrupt, leaving the state to complete the project.
The Harpa finally opened last May amid grumbling about the cost to overburdened taxpayers. But nearly a year on, like Iceland itself, it is proving surprisingly successful. A source of growing national pride, it has played host to musicians including Vladimir Ashkenazy, Bjork and Yoko Ono, as well as half a million visitors.
Now, in a month where the country has put on trial Geir Haarde, the former prime minister, begun legal proceedings against its once almighty bankers, and received a steady stream of good economic news, many in government and beyond argue that the Harpa should serve not as a symbol of hubris but as a monument to a nation putting the past behind it.
Iceland’s recovery from the shock of the crisis matters more than its small size and 320,000 strong population would suggest. Formerly one of the richest nations in the world in terms of income per head, it won the dubious honour of being the first and among the most calamitous victims of the crisis, a prime example of the risks of financial deregulation. Today Iceland is not only the first country to put its political leader on trial for the crisis but it also offers a test of the advantages of indebted nations simply letting their banks collapse and default on their loans.
Steingrimur Sigfusson, minister for economic affairs and one of those who sings the praises of the Harpa, points to the significance of the trial of Mr Haarde, who ran the country from 2006 to 2009. It “is one of the big things that needs to be dealt with . . . before the country can return to normal”, he says.
It is the first of a series of legal procedures designed to salve national anger at the cost of the crisis, which led to a 10 per cent decline in gross domestic product and a sevenfold increase in unemployment. Mr Haarde is, in effect, charged with failing to do everything in his power to prevent the demise in 2008 of the three biggest banks by assets – Kaupthing, Landsbanki and Glitnir. Their downfall and default on $85bn of debt led directly to the collapse of the currency, the government and much of the economy.
The proceedings have so far disappointed those expecting substantial revelations of wrongdoing, but people on the streets of Reykjavik say there was satisfaction at seeing a politician face his accusers in court. The former prime minister faces two years in jail if found guilty next month. He denies the charges.
Some say it is the trial of the bankers, which began a few weeks ago, that will help Iceland shake off the demons of its financial crisis. Prime minister Johanna Sigurdardottir said in a recent speech that “the wide-ranging criminal investigation that is being conducted against reckless financiers” will help bring about “a national reconciliation” and “heal the wounds that the collapse inflicted”.
In a biscuit factory turned trendy café in Reykjavik, Elias Petursson, whose 20-year-old construction company failed following the crisis, agrees: “The Haarde trial is a step in the right direction but it is political and cannot give us the whole truth.” What is important is that “this is the year when the bankers hopefully are made to pay”.
Last month the special prosecutor’s office moved against a handful of bankers, charging Hreidar Mar Sigurdsson, Kaupthing’s former chief executive, and former chairman Sigurdur Einarsson with fraud and market manipulation. Both have denied the charges. It has about 100 open cases on its books, which are likely to come to a head in the next year after more than three years’ work. “This is the important step for the country,” says Olafur Hauksson, the special prosecutor. “The public has been calling for justice to be done and I think it will be a relief to see the courts dealing with these cases.”
Neither criminal charges nor cultural symbols will matter much if Iceland’s economy does not continue to improve. The centre-left coalition’s solutions must work and be seen to work if bitterness and mistrust are to be reduced.
There has been visible progress in recent months. In February, Iceland’s debt was upgraded from “junk” to investment grade by Fitch, the rating agency. This “reflects the progress that has been made in restoring macroeconomic stability, restructuring the financial sector and rebuilding sovereign creditworthiness since the banking and currency crisis”, says Paul Rawkins, an analyst at Fitch. Iceland’s net debt stands at 65 per cent of GDP, according to the International Monetary Fund, far below the 100 per cent of Ireland.
In August, Iceland completed a three-year IMF-supported restructuring programme, including loans of $10bn, and has started borrowing again on global credit markets. It has been held up by the IMF as a model of crisis management. GDP is set to expand by a respectable 2.5 per cent this year – which, added to last year’s 2.5 per cent, solidifies the sense of a country on the mend. The figures contrast with the 0.3 per cent contraction the European Commission expects in the eurozone this year.
Iceland has abundant natural resources that even the most overexuberant financiers and politicians could not damage too much. The recovery has been led by fishing and tourism, which have been helped by the boost to competitiveness from the 50 per cent depreciation of the krona against the euro during 2007-08. Today, the wealthy men and women buying the tickets for galas at the Harpa are the heads of the companies with government fishing quotas and airlines rather than traders in derivatives.
Bjorgolfur Johannsson, chief executive of Icelandair, says the crisis helped tourist numbers reach record levels since, like the volcanic eruption that brought air traffic over Europe to a standstill in 2010, it got everyone talking about the country. “All publicity is good publicity,” he says.
Iceland’s outlook is being watched closely by policy makers and economists worldwide because, just as its growth was an experiment in aggressive financial deregulation, its recovery represents another experiment. In 2008 it chose to let its inflated banking sector collapse – unlike countries such as the US and UK, which decreed their troubled institutions too big to fail. While the domestic assets of Iceland’s lenders were protected – costing the state 20 per cent of GDP, according to the IMF – the lion’s share of the collapse was borne by foreign creditors.
This contrasts with the policies of indebted European nations such as Ireland, which stood behind its banking system, injecting billions to prop it up. “Our approach . . . was widely considered heresy back in 2008,” Arni Pall Arnason, a minister of economic affairs after the crisis, said at a recent IMF conference in Reykjavik. “But it is now reflected and recognised in one way or the other in recent reform proposals in most countries.”
The country remains committed to paying foreign creditors large sums of money following the banks’ collapse, although at its own pace. The UK and the Netherlands particularly, which compensated their nationals who lost savings in online accounts owned by Landsbanki, are owed about €4bn. The government announced two weeks ago that it had repaid the IMF £280m ahead of schedule.
The news of recent weeks and months all paint an uplifting picture of Iceland rising from catastrophe. But substantial problems remain and, like the oversized hall at the Harpa, are a persistent reminder of what went wrong.
The average household has suffered a 30 per cent fall in purchasing power since 2008. The private sector remains heavily indebted, with household debt levels exceeding 200 per cent of disposable income and corporate debt 210 per cent of GDP, according to Fitch. Partly because of this, domestic companies are reluctant to invest.
Capital controls, an unorthodox measure imposed by the IMF following the crisis, may have prevented money leaving the country but are widely seen as a drag on foreign investment. Mr Sigfusson, the economics minister, says the controls are going to be slowly lifted in the next few years, “but it should not be done too fast or we risk another shock to the system”.
Trust in financiers and government remains desperately low. On the streets of Reykjavik, the mood is bitter about the government. “I dislike the politicians only slightly less than I dislike the bankers,” says Linus Orri, speaking at a community centre.
Visions of what the country will look like in five years vary widely. For some in government the solution to its problems lies in joining the European Union. Pointing to the krona’s illiquidity and potential volatility, Ms Sigurdardottir told Morgunbladid, one of Iceland’s biggest selling daily newspapers, that “we need to change currency . . . I think that those who say that the krona is all right are in denial”.
Iceland began formal negotiations to join the EU last summer – but any outcome looks a long way off, with many in the country desperate not to share rights to its fertile fishing grounds. Opposition parties are against joining, and Ms Sigurdardottir’s majority is wafer thin. A referendum is likely.
Either way, the Iceland of the future seems set to be a quieter place than in the first decade of the 21st century. It will, perhaps, be less about power and ambition – and less worthy of the kind of opera that might be performed at the Harpa.
“All this used to be filled with private jets,” says Mr Johannsson, with a sweeping gesture towards the empty runway overlooked from his corner office at Icelandair’s headquarters in Reykjavik’s domestic airport. “But it was easy when you are spending other people’s money,” he says. “Now we work with real things – with fish and with tourists.”