Iceland Premier Tells Nation to Go Fishing After Banks Implode

By Niklas Magnusson

Oct. 10 (Bloomberg) -- Iceland Prime Minister Geir Haarde has some advice for his fellow citizens after the country's banking system imploded: Go fishing.

``We are too small a country to sustain such a big banking system,'' he said in an interview. ``We have fantastic resources and an abundance of green energy and we will now utilize that and the other resources we have, the ocean and human capital.''

Over the past decade, Iceland's banks backed a buying binge that saw local investors take stakes in retailers such as Saks Fifth Avenue, jeweler Mappin & Webb, and the parent of American Airlines, while the nation's banks snapped up financial services firms abroad. That foreign adventure came to an end this week with the government seizure of Iceland's top three banks, including Kaupthing Bank hf, the nation's biggest lender.

Now residents are betting that the Atlantic island's natural resources, primarily fish and geothermal energy, will help the country survive.

``We can live off the land as there are not so many of us, and we have heating, clean water and fish,'' said Reykjavik resident Kristinn Johansson, 50, outside a branch of the now- nationalized Kaupthing. ``We will be fine. We can eat what we can fish.''

Haarde was Iceland's finance minister from 1998 to 2005 and assumed his current position two years ago. He advocated the sale of state enterprises and bank investments abroad to diversify the economy.

Banks Encouraged

As Iceland's global ambitions grew, the country's top three lenders amassed assets valued last year at 12 times the country's $19 billion gross domestic product. The island's population of 320,000 puts it on a par with Cincinnati.



Iceland's export of marine products made up about a third of total exports in August, according to Statistics Iceland in Reykjavik. Most trawlers hunt for cod and haddock.

Catch volumes have been in gradual decline since a peak in 2000, when Iceland's haul nudged 2 million tons. The contribution from fisheries to GDP dropped to about 7 percent last year, from 12 percent a decade earlier.

Iceland has fought to protect its Atlantic fishing territory. The country's navy clashed with the U.K. during the 1950s and 1970s as Britain sent frigates to guard trawlers it said were being harassed by Icelandic gunboats. The U.K. remains the largest customer for Iceland's fish, accounting for more than $400 million of fish exports last year.

Tensions With Britain

Now relations with Britain are frayed again, this time over the fallout from the banking crisis.

Iceland's government said this week that it wouldn't cover losses for British customers after the collapse of Landsbanki Islands hf, whose U.K.-based Icesave unit had 300,000 account holders. Britain's Conservative Party said local governments, called councils, may have had as much as 1 billion pounds ($1.73 billion) deposited with Icelandic banks.

``We used to stick to what we do up here and then we went abroad, into new economics for Iceland, and that went wrong,'' said Vilhjalmur Bjarnason, the director of the Association of Small Shareholders in Iceland. He held stock in the Icelandic banks, including Kaupthing and Glitnir Bank hf.

The volcanic island sits on an oceanic ridge in the Atlantic that provides a continuous flow of magma, keeping the crust warm and providing natural energy. Iceland has more than 200 volcanoes and more than 600 hot springs.

Industry Expansion

The government is trying to lure power-intensive industries to harness the resource. Aluminum producer Alcoa Inc. is expanding its Fjardaal smelter, which will produce 300,000 tons of aluminum this year.

``Given the bank situation, which is like an earthquake, the state is likely to speed up the building of new aluminum smelters,'' said Hjoerleifur Hringsson, director of sales and marketing at Icelandic real estate management company Stutulaut ehf, as he relaxed in the nude in a sauna at a Reykjavik geothermal spa.

Iceland has potential generating capacity from known high- temperature fields of about 25 terawatt hours a year, according to the Ministry of Energy, equivalent to about 20 nuclear power plants. In 2004, geothermal plants in Iceland generated 17 percent of the nation's electricity, and that proportion may reach 20 percent by next year, the government said.

``Icelanders are considering all opportunities now on how to use our hydropower and energy resources, which could bring investments and jobs,'' said Bragi Arnason, a professor of chemistry at the University of Iceland and a geothermal energy researcher.

Still, the country will need foreign investors to underwrite any expansion of non-service industries. European nations haven't offered financial assistance, forcing Haarde's government to turn to Russia for a loan of as much as 4 billion euros ($5.48 billion).

That bailout will be the first step in Iceland's economic recovery, according to residents.

``We will rise again,'' Arnason said.

To contact the reporter on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net