How Iceland Copes with a Broken Economy

A year after the island nation's savage economic collapse, unemployment and import prices are higher. But Iceland seems remarkably placid—even happy

By Niels Reise

The prize came almost exactly a year later. The managers at Iceland's four banks—Kaupthing Bank, Landsbanki, Glitnir Bank (now renamed Islandsbanki) and the Central Bank of Iceland—were honored for "demonstrating that tiny banks can be rapidly transformed into huge banks, and vice versa." The top brass were also lauded for showing "that similar things can be done to an entire national economy."

The satirical "Ig Nobel" prize for economics was awarded to the Icelandic Banks by Harvard University. Financial institutions that no one had heard of a year ago became household names this time last year as the Icelandic economy imploded.

To recap: Iceland's small banks had vastly expanded since the middle of the decade. Hundreds of thousands of savers had put money into online bank accounts with enticing names like Icesave or Kaupthing Edge. The billions of euros and pounds came primarily from Germany, the Netherlands and Great Britain. At the same time the Icelanders got heavily involved in the international speculation business—with dramatic results. When the American investment bank Lehman Brothers collapsed in September 2008, debts at Kaupthing, Glitnir, and Landsbanki multiplied fivefold. Within a few days the Icelandic economy went into shock, the banks became insolvent and were put under state control. The last bank to fall was the Kaupthing on Oct. 9, 2008.

Furious Protests Ran Out of Steam

What followed were the last throes of a tiny country, which within a few days had fallen victim to the vagaries of the global financial crisis. The Icelandic Central Bank and the government did everything they could to fend off disaster, taking over responsibility for the banks and pledging to include foreign bank customers in the state deposit insurance. However, they had to give in to outside pressure, particularly from Great Britain. London first of all applied anti-terrorism legislation against what was essentially a friendly country, using the so-called Landsbanki Freezing Order 2008 to freeze the banks assets in the United Kingdom.

The Icelanders may have protested vehemently at suddenly finding themselves on a par with rogue states like Libya and North Korea. Yet Reykjavik still had to give in eventually. It agreed in the end to a plan to write off the banks' debts and in exchange to get loans from the International Monetary Fund, the European Union and other Nordic countries. The furious street protests that hounded the government from office also ran out of steam. They still continued to vent their anger with charming home videos that were widely viewed on YouTube.

And yet, one year later it is surprisingly difficult to find traces of the consequences the crisis has had on the island of fire and ice. Particularly when one thinks of the horror scenes that were played out in the weeks following the collapse of Kaupthing. Of course there is now some unemployment, something the Icelanders had little experience with up until one year ago. In the second quarter of 2009 the unemployment rate had reached 9 percent, before the crisis it had been around 3 percent. The figures weren't higher because most of the poorly paid guest workers from the former Yugoslavia and other countries, who had few legal rights, were simply sent home. Still, in comparison with other countries such as Spain or Ireland, where almost one in five is out of work, the figure is surprisingly low.

Imports Have Become More Expensive

At the same time, Icelanders do feel the crisis in their daily lives: Imports from Europe have become extremely expensive, including the goods available in the country's supermarkets. Large supermarket chains like Bónus and Hagkaup have more or less doubled the prices for many popular products.

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