Iceland’s Big Thaw
Lars Tunbjork for The New York Times
Fish Entrepreneur Armann Olafsson, a former member of Parliament and advertising executive, now sells fish products. More Photos
By JAKE HALPERN
If you want to understand what happened in Iceland — the whole story of the crash, the banks failing, the recent signs of recovery — start at the prime minister’s office in downtown Reykjavik and continue east for a bit until you ascend a steep bluff overlooking the icy waters of Faxafloi Bay. There you will arrive at a used-car lot. Ask for the owner of this establishment, who is a short, 61-year-old man with extremely thick glasses named Gudfinnur S. Halldorsson — he goes by the name Guffi (pronounced Goofy) — and have him to tell you the story of the Porsche that kept on giving.
During Iceland’s boom years, which lasted from 2003 until 2008, a customer showed up at Guffi’s dealership wanting to buy a Porsche on credit, no money down. Guffi didn’t inquire about the man’s line of work; in fact, he didn’t care if the man paid back the loan — that was the bank’s problem, not his. Guffi sold the Porsche, and the customer drove it for a month or so until the first payment was due. The man had no interest in making the payment, and so Guffi, who always aimed to please, helped the man resell the vehicle for a profit. Guffi did the same thing a month later, and again a month after that; all told, Guffi sold the same car five times in six months, amazingly charging a higher price on each successive sale.
To understand how this strategy was even possible, it helps to know a little about banking in Iceland. In 2001, the Icelandic government began relinquishing control of the banking sector to allow for privatization. One consequence, says Gylfi Zoega, a professor of economics at the University of Iceland, was that “ownership of the banks went to a few wealthy businessmen.” These businessmen, Zoega says, hired local bankers, who had very limited experience in international banking, to run things; they issued bonds on the international market, where institutional investors were only too happy to buy them. After all, this wasn’t Argentina — this was Iceland, a Scandinavian country whose national banks had no history of defaulting on their loans. “It appeared to be a sound investment,” Zoega says. Money poured into the country, and the economy boomed. With the help of the banks, investors went on spending sprees, buying large stakes in foreign and domestic businesses; the prices of everything from houses to used cars soared; Iceland’s stock market spiked, rising 900 percent between 2002 and 2008; and, of course, money flowed into the hands of all sorts of Icelanders, like Guffi.
Guffi sold a lot of cars during the boom, but he didn’t save much. When I asked him what he spent his money on, he replied that he traveled widely, skied often and entertained a number of girlfriends from abroad. “Take a look at the beautiful girls from Ukraine and Switzerland,” he told me wistfully. “You’re like a kid in a toy store. Several times, I’ve brought them home so that they can have a vacation here. Then I show them Iceland.” He added, thoughtfully: “What I was doing was good for the tourism business.”
At first, it was all going splendidly for Guffi as he Rollerbladed down Laugavegur Street with voluptuous girlfriends and sold and resold the same luxury cars. Then he became tired — exhausted, really. He was working 13-hour days. “Do you know how much time it takes to bring all those papers to the bank every time someone takes out a loan for a car?” he asked me. The girlfriends also proved enervating. “I found girls on the Internet; that’s heavy work. You’re reading all these stupid letters that they send.” By the time the crash hit, in late 2008, Guffi was relieved. Nowadays he sells fewer cars; he no longer regularly earns more money each time he sells the same car, but he still gets a commission, and his lifestyle is simpler. “I do nothing stupid, and then I have no stress,” he explained happily. “I have no more Ukrainian or Swiss girlfriends. I have an Icelandic woman now.”
As we chatted, a young couple entered Guffi’s shop, and in no time he sold them a black 2005 Ford Focus. Guffi noted proudly that this was the second time he had sold this car. It was no Porsche, but Guffi looked pleased.
During the boom years, Iceland became a nation obsessed with banking. “Everyone was working for the banks — from the physicists to the philosophers,” one Icelander told me. I met two women in their mid-20s who said that when they graduated from college, virtually all of their classmates were jockeying to get into finance, and for a brief spell, they both became bankers. I asked one of the women, who trained to be an engineer, if she ever paused to consider whether she really wanted to be a banker. “It was just the coolest,” she recalled giddily. “Everybody was like, Yeah, give me a high-five!”
The success of the nation’s banks, however, was deceptive to say the least. The assets of Icelandic banks were equal to 174 percent of the nation’s gross domestic product in 2003, and rose to 744 percent in 2007, while the G.D.P. itself rose by an average of 5.5 percent per year. The economy was fueled almost entirely by foreign money. Then, as the global financial infrastructure teetered on the verge of collapse, the bonds came due, and Iceland’s banks couldn’t repay them. Depositors in other countries raced to pull their money out of Icelandic banks. The government didn’t have the resources for a bailout; the banks failed. The government did guarantee that Icelanders would not lose the money in their savings accounts, but other financial assets — including the many investment funds that the banks offered — plummeted in value, and many ordinary Icelanders lost large sums that they believed were safely invested.
To make matters worse, many Icelanders are now deeply in debt. During the boom years, when Iceland’s currency was strong and the banks were taking in money from abroad, it was easy for Icelanders to get “foreign-currency loans.” Consumers borrowed Japanese yen, for example, at very low rates on the condition that they repay the loan in yen. After the crash, Iceland’s currency (the krona) plunged in value, and suddenly the payments that people had to make on their mortgages and car loans doubled. A low krona has led to a number of other problems: since 2007 the price of imports has risen by 85 percent and consumer prices have gone up 34 percent.
There is an upside to a weak currency — namely Iceland’s exports are now cheap for people in other countries to buy. Which has prompted such questions as: What should this island nation export besides fish? And if Icelanders are not world-dominating bankers, what are they? Gudjon Mar Gudjonsson was one of dozens of Icelanders I met seeking answers. Gudjonsson is an entrepreneur who has founded a number of successful start-ups, including Oz Communications, a software company that was eventually purchased by Nokia. When money was easy, he said, “innovation was at a minimum in the country.” The prevailing sense was that it was a waste of time to invent things yourself when you could just “buy innovation from someone else.” The boom, Gudjonsson concluded, “made us lazy thinkers.”
Other entrepreneurs shared Gudjonsson’s sentiment and were determined to reinvigorate business innovation in Iceland. With the help of two local universities, they founded an incubator, known as the House of Ideas, where people could congregate and work. Early one February morning, I paid a visit to the House of Ideas, which is located on the waterfront of downtown Reykjavik, in a former fish-processing plant. Inside was a cavernous, concrete space, furnished with couches, orange hanging lamps, a potted plant or two and an espresso bar. It was a veritable refuge for the financial sector. I met a 26-year-old man named Agnar Sigmarsson, who introduced himself as a former stockbroker at what he described as “one of the most corrupt banks ever.” Sigmarsson told me that his bank was buying large tracts of land in order to build a new city from scratch. “Personally, I was like, ‘Why would anyone buy this land, because there was a perfectly nice town that had a lot of space right next to it?’ ” he recalled. Sigmarsson has since gone to work at a software company. I met two women, both former bankers, who invented a board game. And there was an architect, Gunnar Sigurdsson, who during the boom years was working on a massive new headquarters for a bank and was now collaborating with another architect, Astridur Magnusdottir, to design a park.
Sigurdsson and Magnusdottir drove me out to the proposed park site and explained how they incorporated ideas from drawings done by neighborhood children into his designs. As we stood together in the howling wind and snow, Sigurdsson spoke fondly of his young collaborators: “We really have some good future designers in them. A few guys really drew some crazy and nice lighting. You see these boring lamp posts? They’re going to go.”
At the House of Ideas, there was something like euphoria that the age of banking had come and gone. One man observed that the banks were “brain-draining the nation,” but since the crash these same banks “were off-loading lots of people — lots of good and clever people — who became available for us.” Another entrepreneur remarked, “I think there was a lot of pent up pressure — creative pressure –—and companies and people were dreaming of making interesting things for years without being able to do so.”
Some of this was simply the rhetoric of the unfailingly optimistic businessman trying to put a shine on things. Just a month after my visit, the House of Ideas had to close its doors because of budget cuts. The incubator’s former managers are looking for new investors so they can reopen. And yet despite the challenges that Icelandic entrepreneurs face, they do seem to share a genuine sense of relief that their nation had given up its vision of becoming an island of Porsche-driving, Armani-wearing financiers. Gunnar Grimsson, an Internet entrepreneur, told me that Oct. 6, 2008 — when Iceland’s economy hit rock bottom, and the entire country was seized by panic — was also his son’s 16th birthday. “I went up to my boy, and I had already congratulated him on his birthday, but then I said, ‘Congratulations, you will now be able to live in a society which is closer to realizing what it is.’ ” I pressed Grimsson, asking why exactly he was so happy for his son. “After this,” Grimsson replied, “he had a much better chance of growing up to be a real person instead of a vapid airhead.”
Historically, Iceland was a nation of farmers and fisherman. Just a century ago, more than half of all homes were made of turf. What money people had, they spent on food. Icelanders proved ingenious at making their food last, and they did that, in part, by eating everything that was even arguably edible.
When I visited Iceland in mid-February, the country was observing a holiday known as Thorrablot — a kind of Icelandic version of Thanksgiving, featuring the traditional food that helped sustain Icelanders of the past. Instead of turkey, sweet potatoes and cranberry sauce, the meal was rotten shark meat, sheep’s head and ram’s testicles. I partook in this cuisine in a restaurant in Reykjavik called Mulakaffi, whose walls were adorned with pictures of the owner — a burly man, rifle in hand, dressed in a bright orange full-body snowsuit. “The owner is a big hunter,” one regular patron told me. “He kills almost everything he sees.”
I loaded my plate and was promptly invited to take a seat at a table of large, boisterous and very muscular men. Gudmundur Sigurdsson and Hjalti Ursus Arnason were both former professional strongmen; Arnason was also something of a local celebrity known to many by his nickname, the Great Ursus.
“We only get to eat this food for two weeks of the year,” Arnason told me as he savored his meal.
“Even the dogs in Greenland would not eat this,” another man at the table said proudly.
For Arnason and his compatriots, this holiday represented the ethos of Iceland — a willingness to do whatever needs to be done to survive. “I lived in Norway, and they’re well organized, but they don’t take risks,” remarked Hallur Magnusson, who, along with me, was the only other man at the table who did not look as if he could bench-press 400 pounds. “The Icelanders came from Norway, but they were the younger sons, who didn’t inherit land, so they went to Ireland and got all the most beautiful women, and then they brought them here. That’s why we are the bravest men and the women are so beautiful.” This was also why, the men at the table explained, Icelandic men have won the World’s Strongest Man title eight times and Icelandic women have won the Miss World competition three times, despite the country’s size. (There are only about 300,000 inhabitants.)
At the mention of women, I noted that I had yet to see a single female patron at the cafe. “This is not a fag place,” said one of the men somewhat defensively. “It is because there are no salads or that kind of stuff,” Magnusson added.
In general, Icelanders are quite proud of their rugged Viking past. Politicians made much of this during the boom years. In 2005, the president of Iceland, Olafur Ragnar Grimsson, visited London and talked at length about “why daring Icelandic entrepreneurs are succeeding where others hesitate or fail.” He explained that the “success of this voyage” is “rooted in our traditions and national identity,” and “we are succeeding because we are different, and our track record should inspire the business establishment in other countries to re-examine their previous beliefs and the norms.” He concluded by vowing, “You ain’t seen nothing yet.”
The men at Mulakaffi conceded that it was precisely this kind of thinking that led the nation’s bankers to take such enormous risks and that ultimately led to the economic meltdown. But this didn’t seem to give them much pause. One of them told me that when the economy was flying high, he owned a construction company that employed 500 people, and then his business “went straight off a cliff.” “I didn’t want to cry over it,” he assured me. “I feel no regrets.”
Sigurdsson, the former strongman, agreed. “We are a bit like bulldozers,” he said. “You cannot tell an Icelander they can’t do something. Of course there are some mistakes, but you go to the end, even if it’s the hard way.”
Eventually, Arnason offered his opinion and, as the Great Ursus spoke, his friends listened with deference. “Like most Icelanders, I had some stocks, and I lost all that money overnight,” he explained. “I had a show on the sports channel — a strongman and power-lifting show — and all of a sudden the advertisers disappeared. We had to continue doing it for much less money, and we couldn’t even give away prizes. Even so, I wouldn’t want to go back to when people were being crazy — buying everything without paying for it.”
I asked Arnason if, like so many Icelanders, he had taken out large loans from the bank. “I thought there was something wrong with me because I wasn’t taking millions in loans,” he admitted. “Everyone had brand-new cars and built big summer homes and boats. You felt like a loser or something if you didn’t have it. This is the feeling that many regular people felt if they weren’t making trillions, but maybe we weren’t so stupid.”
The real value of the economic crash, one young woman told me, was that “people are rethinking, Who am I as an Icelandic person?” A number of people suggested to me that the nation, as a whole, was going through a period of intense introspection and that the consensus seemed to be that Icelanders needed to return to their roots. “Everyone is knitting” is how Steinunn Knutsdottir, a drama teacher, put it. “People are also making jam.” I thought that Knutsdottir was joking, until one day I saw a woman standing directly across the street from my hotel, perched on a chair, yarn in hand, stitching some so-called “knit graffiti” into place around a tree.
The knitter’s name was Ragga Eiriksdottir, and ever since the crash, she has been earning a living with her knitting. Before that, she had several other jobs, including working for a pharmaceutical company and writing a sex column for a national newspaper. “I touched on the topics that might be forbidden, like masturbation or fantasizing while having sex with your partner,” Eiriksdottir said from her perch. She started a business that publishes books and produces popular DVDs on the art of knitting. She also runs a series of “knitting tours” in which she escorts knitters from all over the world on trips around Iceland. Eiriksdottir’s first book came out around the time of the crash. The timing was perfect, she said, because Icelanders finally realized that “we weren’t good with money and that we should do something that we are actually good at.”
“Knitting is the opposite of idolizing money,” she explained. “Knitting embodies thriftiness and is something old that has been with the nation forever. In the 1800s, the state actually published documents that outlined how much citizens should knit. It was said, for example, that a child from the age of 8 should finish a pair of socks each week.”
Eiriksdottir continued with her work. I noticed that she was using a bizarre-looking needle.
“Is that a bone?” I asked.
“Yes, it’s a cow bone,” she replied, explaining that this is what they used in the old days. “I prefer it to the modern needle, especially with all the fuzzy Icelandic yarn.”
If Icelanders are truly interested in getting back to what they’ve always done best, that means getting back to fishing. Fishing still accounts for approximately 40 percent of the nation’s exports. It offers a great deal of promise for economic growth because Iceland has managed its fisheries well and maintained a healthy stock of fish.
No one knows this better than Armann Kr Olafsson. Olafsson, a 44-year-old former member of Parliament and advertising executive, found himself out of work after the crash. Uncertain of his future, he accompanied his brother, the owner of a successful fish farm, on a trip to Boston to attend the city’s annual seafood convention. At the convention, an American asked Olafsson and his brother if they knew how to get a hold of some foie gras de la mer. The brothers inquired what that was. Monkfish liver, the American explained, and it was now a hot item at high-end sushi restaurants. “Our faces were just big question marks,” Olafsson recalled. “In Iceland, we usually threw this liver out.”
Almost overnight, Olafsson became Iceland’s leading exporter of foie gras de la mer. Instead of throwing out the livers, fisherman sold them to Olafsson, who then flew them via Iceland Air to New York City and Japan. When monkfish season came to an end, he found another niche to capitalize on, codfish milt. Milt is fish sperm, which, Olafsson discovered, after doing a bit of research, was in demand in a number of upscale restaurants in the United States, Japan and Korea.
One morning, hours before the arctic dawn broke, I accompanied Olafsson to the plant where he obtains his milt. We donned full body suits and shower caps and entered a vast room where countless codfish were being sliced, packaged and sent along conveyor belts dripping with slime. Olafsson led me past several large containers filled with a coiling, gelatinous substance that looked like mashed-up human brains.
“What’s in those vats?” I asked uneasily.
“That’s the product,” Olafsson replied proudly. He then reached into the vat and scooped up a huge handful of milt. “This is the sperm,” he declared. “It has a lot of protein, just like your sperm.”
I marveled for a moment that what he was holding was a marketable commodity. But would he really eat the stuff?
“You know,” he replied, “in Iceland we eat ram’s testicles, so believe me, it’s no big deal to eat cod sperm.”
After talking to so many bullish entrepreneurs, I felt the need to speak with some of Iceland’s unemployed. The current unemployment rate in Iceland is 9 percent, which doesn’t seem so bad given the declivity of the economy, until you consider that, on average, over the last two decades, unemployment held steady at 3 percent, and before that at 1 percent. Pretty much since the end of World War II, Iceland has had a labor shortage, and in recent times the country has relied on workers from Eastern Europe. I had to wonder what it was like to be out of work in a country where unemployment was, more or less, a foreign concept. In search of answers, I contacted Sveinbjorn Fjolnir Petursson, who is a highly visible spokesman for the jobless and runs a support group called Unemployment? No, Thank You.
Petursson, who is 54, formerly worked in marketing for a tourism Web site but has been jobless since the summer of 2008. His unemployment pay, which the government now provides for up to four years, is roughly $1,200 a month. That covers his mortgage. His wife works part time as a yoga instructor and a practitioner of alternative medicine, which helps some; but to meet the rest of their expenses, they have spent virtually all of their savings: some $31,000.
Despite being unemployed, Petursson has stayed busy. “The time I was unemployed gave me a lot of experiences and a lot of things that I wouldn’t have been able to do if I just stayed at my regular job,” Petursson told me over lunch. He took advantage of a program that offered the unemployed free tickets to attend cultural events. In his first year of being jobless, he went to the theater 10 times and to the symphony just as often. “Being unemployed, you have a lot of freedom, and you have to grab the opportunity,” he told me. Unfortunately, he added, there are no more free symphony tickets.
“When the low-wage workers found out about this, they said that their wages weren’t all that different from what unemployment benefits were, and they wanted free tickets, too,” Petursson told me. Petursson did, however, manage to stay active in the arts. He created a program that sets the unemployed up with jobs as extras on television shows, movies and commercials. Some of Petursson’s extras have even found bigger parts. “I help place them,” he explained. “I am like an agent, only I don’t get paid.”
I wondered whether any businesses were actually hiring in Iceland. When I visited the small town of Patreksfjordhur, which is accessible only by plane, boat or by driving for 40 miles on a rutted gravel road, I met with the mayor, Asthildur Sturludottir, a statuesque woman, who, at 6-foot-2, towered over me. (“I would have been taller if I hadn’t taken growth inhibitors,” she told me.) She said that there were jobs to be had at the fish plant, but that the only people who would take the jobs were Polish immigrants. This didn’t surprise me; if you are a college-educated Icelander in Reykjavik, would you want to give up your unemployment check to gut fish? At another fish plant outside of Reykjavik, also staffed largely by Poles, a manager told me, “The Icelanders don’t want to do this work — and it has nothing to do with the salaries — it’s just not fancy enough for them.”
In the aftermath of Iceland’s economic meltdown, the prime minister resigned and the conservative government, led by the Independence Party, collapsed. Johanna Sigurdardottir, a Social Democrat and a former stewardess, and the world’s first openly gay head of state, became prime minister. She pursued an agenda that included both bank reform and the banning of all strip clubs. But it was last May’s mayoral election in Reykjavik that proved to be the real litmus test of just how fed up people were with the government. One candidate was a comedian named Jon Gnarr, whose credentials included a stint on the radio in which he made prank calls to the White House, the C.I.A. and various police stations in the Bronx in search of his lost wallet. Initially, Gnarr’s campaign appeared to be a joke. He promised polar bears at the local zoo and a drug-free Parliament. Then he was elected.
I caught up with Gnarr one afternoon, and we took a stroll around a park in downtown Reykjavik. Gnarr, who is in his mid-40s and has a mop of red hair, was wearing a heavy wool sweater. As we walked, he talked about all the budget cuts he had to make, and how he was heckled recently while leaving City Hall. “They were shouting and booing at me,” Gnarr said. He looked genuinely hurt. I asked him if he ever second-guessed his decision to become mayor. He nodded and replied: “I have these moments when I’m like: What the hell was I thinking? I need to get the hell out of here!”
Gnarr said that the biggest issue facing Iceland right now was whether it should try to stabilize the economy by adopting the Euro. “People think that we should go to the Euro, but it doesn’t look cool,” Gnarr said. “The design has no charm to it. I don’t understand why we can’t just take up the dollar. The dollar is cool. It’s the dollar that you see in movies — it has the image.” I waited for Gnarr to smile, but he didn’t. “You could put the dollar on a CD album and it would be cool, but you couldn’t put a Euro on it — it would look silly.”
There are certain things you can do only in a nation as small as Iceland; for instance, I wanted to visit a bank, so I contacted Asgeir Jonsson, the chief economist at the nation’s largest bank, and asked if I could swing by later in the day.
No problem, he said.
Arion Bank is made up of the domestic assets from the former Kaupthing Bank. Its headquarters are magnificent. Walls of sun-drenched windows enclose a soaring atrium; smack in the middle, a waterfall cascades down a towering, free-standing slab of glass. There is also a small espresso bar. It is, or was, the kind of building that inspires supreme confidence. I finally understood why the young Icelandic women I met had been high-fiving one another. The only sign that there was anything awry was that the place was more or less deserted. During the boom years, Kaupthing was an international bank — with 70 percent of its assets held by its overseas branches. When Iceland’s banks defaulted on their bonds, however, Iceland lost access to international capital. Iceland is now, in effect, a banking pariah; in April, Icelanders only reinforced this dynamic when they voted against a measure to guarantee payments to Britain and the Netherlands for the billions of dollars that their citizens lost when the banks in Iceland failed. Britain and the Netherlands are now suing Iceland in the court of the European Free Trade Association. “It’s doubtful that this will cripple the Icelandic economy,” says Zoega, the economics professor, “because Iceland would likely only have to pay a portion of what its banks actually owed.”
Jonsson met me in the lobby and led me through a maze of glass corridors until we reached a small meeting room. Jonsson wore a tight black suit and had the shaggy blond beard of a sea captain. He explained that he had been at the bank since 2004, through the boom and the crash, and as it turned out, that very day he was packing up his office. He had taken a job at the University of Iceland’s economics department. “I’m haunted by the memories both of the bubble and the collapse,” he told me. “It is better basically to start anew.” Jonsson looked melancholy. “I analyzed the two other Icelandic banks, but I was unable to analyze my own bank,” he confessed. “I was psychologically unable to admit that we were doomed.”
I asked Jonsson what it was like in the old days, before the crash, when business was good. “I was the chief economist for the bank — I was on the news, and I was known,” he said. “It was very cool to be a banker — now it is very uncool.”