Saving Iceland

By Ben Holland, Bloomberg

It was the week before Christmas in Reykjavik, and all through the town Eva Hauksdottir led a band of 60 whistle-blowing, pan-banging, shouting demonstrators. “Pay your own debts,” they yelled as they visited one bank office after another in Iceland’s capital. “Don’t make the children pay.”
When she isn’t leading one of the almost daily acts of protest in this land devastated by the global financial meltdown, Hauksdottir sells good luck charms made from the claws of ptarmigans, a local bird, and voodoo dolls in the form of bankers. She says she expects to lose her home, worth less than when she bought it two years ago, after the amount she owes jumped more than 20 percent.

Unrest following the end of a five-year economic boom is overshadowing the holidays in a country of 320,000 near the Arctic Circle, where the folklore is filled with magic, trolls and elves. Expansion ended with the collapse of the U.S. subprime mortgage market. The fallout in Iceland may presage civil disruptions elsewhere, as job losses multiply and credit bills come due. Few nations can count themselves safe, says Ian Bremmer, president of the New York-based Eurasia Group, which analyzes political risk for businesses.

“As people have their expectations changed radically, you can have protests come out of nowhere,” even in developed countries, Bremmer said.

‘Maybe Axes’
Riots in Greece this month, sparked by the police shooting of a teenager, became tinged with economic dissension. A group of Kuwaiti equity traders marched on the emir’s office in October to demand the closing of the stock exchange to stem losses. Even in U.S. cities, civil disorder is “conceivable” if unemployment rises above 10 percent from November’s 6.7 percent, Bremmer says.

Hauksdottir, the owner of a Reykjavik witchcraft shop, says over a cup of thyme and juniper tea that only civil disobedience can force banks to stop collecting debts that people can’t pay.

“We’ll use our voices, and then if we have to we’ll use our hands, and maybe axes,” Hauksdottir says.

At Reykjavik’s half-built concert hall, a symbol of the good times that juts from the harbor toward the North Pole, the visitor center is closed to visitors. The principal owner, Landsbanki Islands hf, failed in October. Marketing director Thorhallur Vilhjalmsson says he’s making ends meet on severance pay.

“Iceland right now is like Chernobyl after the blast,” Vilhjalmsson says. “It looks normal, but there’s radiation.”

Kicking Down Doors
The protests may escalate as bills come due and severance pay runs out for those who lost jobs at the three biggest lenders, including Landsbanki, the second-largest, says Stefan Palsson, a historian. He once led the Campaign Against Militarism, opposing NATO bases in the 1960s.

He said he’s surprised ordinary people are backing activists once considered “hooligans.” There was public outrage three years ago when environmentalists poured yogurt over aluminum representatives to protest a new plant.

“Now you have protesters kicking down doors at police stations, and respectable elderly people saying ‘Well, they’re young and full of enthusiasm, and anyway, they’re right!’” he said.

Inflation rose to 18.1 percent this month, and the International Monetary Fund predicts that Iceland’s economy will shrink 9.6 percent next year. The Washington-based global lender of last resort put together a rescue package for the country worth as much as $5.3 billion last month.

No-Debt Ethics
The decline in the krona and surge in prices are creating a triple whammy for borrowers whose home loans are typically linked to inflation or foreign currencies. Households owed more than double their disposable income at the end of 2006, almost twice the level in the U.S., according to the IMF.

Some Icelanders say the easy money of the past decade eroded the island’s traditions. A sheep farmer in the 1934 novel, “Independent People,” by Iceland’s only Nobel laureate, Halldor Laxness, preferred freedom from debt to any material comforts. His motto was: “I don’t owe anyone a penny.”

That philosophy may return, says Birgir Asgeirsson, 63, the priest at Reykjavik’s Hallgrimskirkja Lutheran church.

“I grew up learning that you work for what you get, but kids today just get what they want,” Asgeirsson says. “Now I can hear parents say ‘No, my little boy, it’s not that easy.’”

Gunnlaugur Gudmundsson is an astrologer and chief executive officer of a company that provides horoscope predictions for phone operators such as Vodafone Group Plc. Customer numbers have more than doubled since the crisis broke, he said.

“The classic question used to be, ‘I’m in love with this guy, will he marry me?’” he said at a table strewn with star- charts. “Now the questions are about jobs, and when the good times will return.”

Two-Year Contraction
The answer may be 2011, according to the IMF, which projects two years of economic contraction first.

That may take Iceland back to the income levels of five or 10 years ago, “and we weren’t badly off then,” said Hannes Holmstein Gissurarson, professor of politics at the University of Iceland and a central bank supervisory board member. Banks and politicians were victims of an “external shock,” and weren’t behaving much worse than their counterparts elsewhere, he said.

The difference was one of scale. As governments worldwide pumped money into stricken banks, Iceland couldn’t follow suit. By the end of last year, local banks had accumulated assets almost nine times the size of the country’s $12 billion economy, according to the IMF.

The lack of backup was a “systemic error no one thought of,” Gissurarson said.

‘Cocktail Party’
The Reykjavik concert hall was budgeted at 170 million pounds ($252 million), Vilhjalmsson says. That was more than 2 percent of gross domestic product — equivalent to a $250 billion project in the U.S. Pointing to miniature models, Vilhjalmsson says the building’s glass shell was designed to refract the low Arctic sun in kaleidoscopic shades.

In midwinter in the world’s northernmost capital the sun appears for just four hours a day, leaving long evenings for Icelanders to figure out how their country got caught up in the global boom-and-bust. Vilhjalmsson has his own version.

“The West is having this great, long cocktail party,” Vilhjalmsson says. “And then, late in the evening, in comes this cute little dwarf, Iceland. And he gets drunk.”