By Chad Thomas and Omar Valdimarsson
Oct. 12 (Bloomberg) -- Arni Hallgrimsson lost his job as a public relations consultant when Iceland’s three biggest banks collapsed last year, putting him out of work for the first time since 1980. After a stint cleaning the docks at a whaling station during the summer hunt, he’s unemployed again.
“Nightmares come to an end when you wake up, but this one just goes on and on and on and on,” the 53-year-old father of three said at his home in Reykjavik, Iceland’s capital. “I’ve applied for many jobs that fit my profile. Sometimes I’ve been on the short-list, but eventually not been offered the job.”
A year after the banking crisis brought Iceland to the brink of bankruptcy, the island nation is mired in the deepest recession among advanced economies. The stock market has lost 97 percent of its value, and more than 780 companies have buckled under the weight of foreign currency loans as the krona plunged. Consumers refuse to borrow at Europe’s highest interest rates, and international banks reject requests for new financing.
Prime Minister Johanna Sigurdardottir, who took office in February, pinned hopes for a recovery on the International Monetary Fund after Kaupthing hf, Landsbanki Islands hf and Glitnir Banki hf racked up $80 billion in debt, 16 times Iceland’s economic production. Now she says the economy may implode again as a dispute over Icelandic savings accounts held by overseas depositors delays a promised $5.1 billion bailout.
“It’s been a year since all hell broke loose and there hasn’t actually been much done to ease the situation,” said Almar Gudmundsson, secretary general of the Federation of Icelandic Trade, which represents importers, exporters, wholesalers and retailers. “We don’t think that we as a nation are doing enough to make the wheels get going again.”
Worst Recession
Iceland’s economy will shrink 8.5 percent this year and consumer prices will climb 11.7 percent, both the worst performances among the world’s 33 advanced economies, according to the IMF’s latest forecasts. As the rest of the world begins to recover, Iceland’s recession will stretch into next year, with the economy contracting 2 percent, more than any developed nation except Ireland.
Unemployment will rise to 8.6 percent this year, from less than 1 percent in December 2007, the IMF estimates. Iceland will still trail the eurozone average of 9.9 percent and Spain’s 18.2 percent jobless rate, the highest in the developed world.
One of the hardest-hit industries has been construction, where 202 companies filed for bankruptcy in the 11 months after the crash, 67 percent more than in the same period a year earlier, according to data compiled by Statistics Iceland.
Construction First to Go
Hallgrimsson’s firm primarily helped builders sell their projects and persuade the public that all environmental concerns were being met.
“The contractors were the first to go bust,” he said. “They couldn’t secure financing, meaning they completely threw out marketing and PR. Before we knew it, there wasn’t a single contractor on our list of clients.”
The crash followed four years in which the economy grew at an average annual rate of 4 percent following the sale of Icelandic banks to private investors from 1998 to 2002. The banks and investors, including Jon Asgeir Johannesson’s Baugur Group hf, went abroad to escape the shackles of a nation of 320,000 people. The expansion was financed by international investors who bought bonds paying as much as 10 percent. They defaulted as the credit crisis dried up financing.
Reintroducing the Banks
The chief executive officers of New Kaupthing hf, Islandsbanki hf and Landsbankinn hf, the state-owned successors of the failed banks, said they’re still trying to win the trust of overseas lenders and as yet are unable to obtain foreign- currency loans. The CEOs, all brought in after the collapse, said the banks no longer have global ambitions.
“We are starting with just introducing ourselves,” said Islandsbanki CEO Birna Einarsdottir, who worked at Royal Bank of Scotland Group Plc in Edinburgh for six years before returning to Iceland in 2004, in an interview. “What we do internationally is going to be very, very focused.”
The krona’s official exchange rate has declined 53 percent against the dollar since Nov. 2, 2007, making it the laggard of 175 currencies tracked by Bloomberg.
Iceland’s benchmark stock index plunged 77 percent on Oct. 14, 2008, when it resumed trading after a three-day suspension. It is the world’s worst-performing equity index since reaching its high in July 2007, according to data compiled by Bloomberg. Listings have dropped to 10 from 22.
The central bank left its benchmark rate unchanged last month at 12 percent, the highest in Europe. Only Pakistan and Lebanon, at 13 percent, have higher rates among the 58 central banks tracked by Bloomberg. The European Central Bank’s benchmark rate is 1 percent.
‘People Aren’t Buying’
Companies are struggling as the krona’s decline and high interest rates wipe out consumer demand on the North Atlantic island, which imports about 70 percent of the products it uses, including raw materials such as lumber and oil.
“People aren’t buying flat screens, they aren’t buying furniture, they aren’t traveling abroad or buying luxury goods,” said Bogi Thor Siguroddsson, owner of Johan Roenning hf, an importer and retailer, who says his sales volume has dropped 50 percent. “What is selling now is food, drugs and gasoline.”
Before the crash, Hallgrimsson and his wife were reducing their debts and making extra payments on their mortgage. That became harder and harder because the loans were indexed to inflation. Now he says he worries about every krona.
“Recently my daughter asked if she could take a drama class and we had to think hard about whether or not we could afford it,” Hallgrimsson said. “Eventually we decided to let her go, and I’m glad we did because she loves it, but just the fact that we had to think about it is a little sad.”
Office Waterfall
Borrowing rates charged by New Kaupthing, Islandsbanki and Landsbankinn remain at a prohibitive level of about 15 percent, New Kaupthing CEO Finnur Sveinbjoernsson said in an interview.
“Credit will be more expensive and less abundant,” he said at the bank’s waterfront offices, which sport a glass wall covered by a waterfall, warehouse-style furnishings and a coffee bar, all built during the boom. “A more responsible fiscal attitude will have to be the norm going forward.”
The government of former Prime Minister Geir Haarde, whose Independence Party oversaw the privatization of the banks, crumbled in January. Voters in April elected a coalition of Social Democrats and Left Greens, who have promised more welfare and bigger government.
IMF Debate
Sigurdardottir, 67, said this month that more transparency and tighter financial regulations are needed. She also plans to pursue European Union membership and possible adoption of the euro to protect Iceland against swings in the krona.
IMF funding hinges on efforts to settle the claims of overseas depositors who had accounts with Icesave, a unit of Landsbanki Islands. The U.K. and Dutch governments have stalled funding until Iceland agrees to cover the claims. Opposition politicians say the demands are unfair, and members of the Left Green Movement are split on the issue, threatening to leave Sigurdardottir’s government in the minority.
The government estimated Oct. 1 that Iceland will post a deficit of 182.3 billion kronur ($1.5 billion), or 14 percent of gross domestic product this year. The proposed 2010 budget includes new energy, environment and natural resources taxes.
“If the government is taxing its way through the fiscal problem, it will just prolong the crisis,” said Gudmundsson, the head of the trade federation. “We think heavy cost cuts in the expenditures of the government are necessary.”
Political Comeback
Some of those in power during the good years are beginning to make a comeback. Former Prime Minister and central bank Governor David Oddsson was named editor-in-chief of Iceland’s oldest newspaper, Morgunbladid, last month. The day before the announcement, 40 of 100 employees were fired.
Oddsson, 61, was Iceland’s longest-serving prime minister, holding office for 13 years after he was first elected in 1991. He became foreign minister in 2004 and was central bank governor in 2005. He refused to step down after the economy collapsed, so parliament passed a law that removed him from office.
Thus far no one has been charged with a crime in connection with Iceland’s economic failure. Gunnar Andersen, director of Iceland’s Financial Supervisory Authority, said Aug. 5 that 20 cases of banking malpractice have been sent to a special prosecutor, and the FSA is investigating another 20 cases.
Truth Commission
A commission, created by parliament to “seek the truth” about events that led to the banks’ downfall, is scheduled to announce its findings Nov. 1. Chairman Pall Hreinsson, a Supreme Court judge, has said that never before has any group had to break such bad news to the Icelandic people.
Icelanders have already taken it upon themselves to punish those they think are responsible, spray painting the homes of Hreidar Mar Sigurdsson and Bjarni Armannsson, the former CEOs of Kaupthing and Glitnir. A Hummer owned by Bjorgolfur Thor Bjorgolfsson, the former chairman of the Straumur investment bank, was doused with red paint.
Baugur Chairman Johannesson, 41, whose firm owned 32 percent of Glitnir, blamed the collapse on the global recession.
“Due to the size of the banks in comparison with the economy, due to a worthless currency and way too little reserves, the central bank had a limited ability to provide the banks with short-term loans or assistance,” he wrote in a letter published Dec. 29 in Morgunbladid. “The owners of all three banks didn’t have the financial capabilities to increase the banks’ capital following difficult times and recent losses, as was also the case in many places abroad.”
Baugur Claims
The banks’ freewheeling activities dragged down companies that received cheap money to speculate on financial derivatives or borrowed against shares in one business to buy stock in another. Others failed as payments on foreign-currency loans soared after the krona’s plunge.
One example was Baugur, which bought retailers in London and New York during a 10-year acquisition spree. Baugur filed for bankruptcy in March with debts that exceeded assets by 148 billion kronur. Johannesson didn’t respond to messages seeking comment.
Erlendur Gislason, an attorney with the Logos law firm in Reykjavik, has spent the past six months piecing together the financial picture at Baugur. His conclusion: little of any value is left to pay 158 claims made by 60 unsecured creditors.
“Most of the assets in Baugur were mortgaged before the bankruptcy,” Gislason said. “It’s quite a meager piece of assets that are left.”
Gambling Iceland’s Reputation
Landsbankinn took control in February of Baugur’s U.K. unit, which had stakes in department store chain House of Fraser Plc, Iceland Foods Ltd. and jewelry chain Goldsmiths.
Hekla, a 76-year-old car dealer and importer in Iceland, is now owned by New Kaupthing.
Standing in Hekla’s showroom, marketing manager Brynjar Oskarsson is surrounded by new Volkswagens and Audis. There are no customers, and Oskarsson doesn’t expect any.
People aren’t buying cars because prices have risen 66 percent in the past two years as the krona slumped in value, Oskarsson said. He estimates that just 2,100 vehicles will be sold this year in Iceland, down from a peak of 18,058 in 2005. Hekla has cut its staff to 160 workers from a high of 250.
“I feel disappointed with how a few individuals ruthlessly gambled with many of our best companies and, without blinking, used Iceland’s reputation and good image as their best weapon,” Oskarsson said.
Fishing and Tourism
The only winners in Iceland’s collapse are companies paid in foreign currency.
Along the waterfront, the smell of fish pervades the headquarters of HB Grandi hf, Iceland’s largest fishing company. Grandi hauls in 12 percent of the island’s annual catch, including cod, halibut and haddock, and exports all of its fish.
The company hasn’t laid off any of its 650 workers and employees received a raise this year.
“In today’s business world in Iceland, that’s all good news,” said CEO Eggert Gudmundsson, 45, who joined the company five years ago from a Silicon Valley technology firm, after he and his family decided to return to their native Iceland.
It’s been even better for the tourism industry as the krona’s decline makes Iceland a bargain for foreign travelers. A record 353,110 people visited the country in the first eight months of the year, selling out hotels, filling restaurants and inundating tour companies such as Ishestar travel, where a sign outside the office door reminds visitors to take off their boots after visiting the stables for Icelandic ponies.
“This difficult year has been by far our best,” said owner Einar Bollason, adding that he’s had to turn away customers because he didn’t have the capacity to serve them. “Of course, this is a wonderful problem to have.”
Smaller Banks
As for the banks, Iceland’s financial industry will probably get smaller, with consolidation likely, the CEOs said.
Johann Bergthorsson lost his part-time job at Landsbankinn’s predecessor when the lender was nationalized. He has since founded Dexoris, which is creating video games for Apple Inc.’s iPhone and iPod Touch.
“When the whole economy of the country collapses, you just have to change your plans,” said Bergthorsson, a 22-year-old mathematician. “When the bank went overboard, the decision was made. I decided to do something different, something more creative.”
The ownership of Islandsbanki, formerly Glitnir, and New Kaupthing will be determined this month when creditors decide whether to exchange debt for stakes in the banks. Landsbankinn’s future is less certain because of the Icesave talks.
‘Burned Many Bridges’
Eventually, the banks plan to sell shares to the public, the CEOs said. Such a move is probably years away, and requires rebuilding the trust of investors, they said.
“I don’t expect them to forget what happened,” Landsbankinn CEO Asmundur Stefansson, said at the bank’s wood- paneled headquarters in Reykjavik’s old downtown. “I mean, what happened was terrible. We have obviously burned many bridges in the process. We cannot deny that.”
Hallgrimsson said he can’t move on because he’s struggling to pay his bills and waiting to see whether the whaling station will hire him as a maintenance worker this winter.
“Nobody seems to have learned a thing,” he said. “Instead of dealing with the enormous tasks at hand, politicians are playing the blame game. I’m not optimistic.”
To contact the reporters on this story: Chad Thomas in Reykjavik via the Helsinki newsroom at cthomas16@bloomberg.net; Omar Valdimarsson in Reykjavik at valdimarsson@bloomberg.net.
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