— “The Financial World According to Inya” Column, by Inya Ivkovic, MA
I just returned from an amazing trip to Iceland, an unexpectedly exotic country situated on the world’s largest lava rock, where a ray of sunshine can turn a not-of-this-world landscape into a truly magical place in which trolls, elves and fairies reign. As any dutiful tourist would do, my husband and I took a horseback riding tour on absolutely adorable Icelandic horses, went to and behind magnificent waterfalls, and swam in the milky blue thermal waters of the Blue Lagoon. We did our homework before travelling to the country of such a misleading name that implies it is a land covered in ice when, in fact, the Northern Atlantic current keeps Iceland’s climate temperate and ice restrained to the country’s glacier area.
Part of our homework was also learning about the voltage and electricity, about the exchange rate, domestic currency, where the great places to eat in Reykjavik are, what the fuss about geothermal pools is, and other things to do when in Iceland. Of course, we could not avoid reading up on the global economic crisis either and the extent of it in Iceland. But no amount of reading could have prepared us for all the contrasts and contradictions we have seen in Iceland, particularly in Reykjavik.
After spending a few hours walking down Reykjavik’s main shopping street, our first impression, aside from strangely growing as if stumped trees and incessant rain, was that Icelanders drive fantastic cars for a country deeply in economic crisis. During our wanderings on the streets of Reykjavik, we managed to find only two old-looking cars, both “Chevys,” one an old pickup truck and the other a caravan with those wood-like side panels that were so in vogue during the 1970s and early 1980s. These were not the so-called oldies. No, simply, we saw only two cars that were actually old, rusted and in a not-so-cared-for state. The rest were “BMWs,””Volkswagens,” “Peugeots,” “Mercedes Benzes,” “Jeeps,” “Lexus” SUVs and sedans, “Nissans,” even a few mini monster trucks with steel-spiked tires for driving on glacier ice, all brand-new looking, shiny, and donning sleek European designs.
We only later learned after one of our tour guides gave us his personal view on Iceland’s economic crisis just how deeply it runs. Our guide talked about how, three years ago, he bought a brand new “Mercedes” SUV, “ML550” I think he said, for which he paid close to US$80,000, but in Icelandic krona. He put a chunk of money down and got a loan for the rest from one of Iceland’s three banks. Interestingly, the bank structured his loan in yens, but failed to mention that to our guide and he never thought of questioning it, because he paid the installments in Icelandic krona.
For a year, our guide paid every monthly installment without fail, as he still does, thinking that he would be in the clear within the next five years. In 2007, his loan was about US$50,000 and his borrowing rate was very low, which made monthly installments easy to maintain. Currently, his loan is again around US$80,000, his monthly payments are higher and, for the time being, mostly going towards paying the interest. And, while our guide emphasized that he is very happy to still have his job, unlike far too many Icelanders, he fears, and justifiably so, that he will not be able to maintain his car loan for very much longer, because his wages not only did not go up, but were also actually cut by five percent.
When the global economic crisis struck in 2008, it brought Iceland to its knees. While the effects may not have been felt so early on a personal level, many Icelanders started to wonder if their country and lifestyles were going to be affected. Sure enough, they were, in the worst possible way. From being the third top country in Europe measured by economic output per capita and from being the best country in the world to live in, Iceland tumbled down rather ungraciously to being the pauper of Europe, owing huge amounts of money, primarily to central banks of the U.K. and Netherlands. Incidentally, this helped Iceland to structure the complex interest rate, and the credit and currency swaps that perpetuated the illusion of Iceland’s wealth and economic stability. Unfortunately, no one in Iceland, including about 30 greedy bankers according to our guide, fully understood such complex derivatives, or the enormity of the potential counterparty and default risks, both of which ultimately led to Iceland’s undoing.
Our guide’s story then went on to his daughter, who bought a house just a month before Lehman Brothers had collapsed. He said his daughter bought the house with very little money down and it cost 80 million Icelandic krona (or about $640,000). She managed to pay the principal down to about 70 million krona before Iceland felt the worst of the crisis. However, when it became clear just how deeply the country’s economic woes ran, her house had declined in price to about 55 million krona, while her loan, due to rising borrowing costs, skyrocketed to 120 million krona. Even if the poor woman were able to sell the house (finding a buyer among a tiny population of 319,500 Icelanders would be no easy feat), she would still owe two times more than her house is currently worth.
One more thing about Iceland’s real estate market is that, unlike the U.S., Icelanders cannot give the keys to their house back to the bank and simply walk away from it, usually by declaring personal bankruptcy. This is a tiny nation and the only way to be free and clear from a mortgage is to sell a house at profit or pay off the loan. If neither is an option, as it is not for so many Icelanders, if they sell the house at a loss, the bank is going to hound them for the remaining balance for the rest of their lives. Social activists are lobbying to change the law, but so far, they’ve made no progress.
Our guide then stopped talking and no one on the bus said anything for a while, perhaps contemplating his story or perhaps finding many similarities with his or her own. But, as we turned toward Skogarfoss, a magnificent waterfall 61 meters high, water running all the way from the glorious glacier, our guide turned to talking about Iceland’s great ability to survive at times of even greater adversity, regardless of whether disasters were manmade or nature-induced.
This is an island the size of Ohio, yet it has been poked by over 200 volcanoes that had spewed one third of the earth’s total lava flow over the past 500 years. In 1783, a mountain called Laki erupted, belching out 2.9 cubic miles of lava, covering 218 square miles of land and releasing acidic ashes into the air that had been traced as far away as Syria, nearly destroying Iceland’s livestock and farmland, and inducing a famine that killed 25% of Icelanders. In 1973, a volcano on the small island of Heimaey erupted, an event that lasted several months and destroyed about one-third of the town called Vestmannaeyjar, which is also Iceland’s prime fishing center. Authorities had to evacuate Vestmannaeyjar’s residents within hours and prevent total destruction of the town by spraying seawater on the lava flows.
If I have learned anything about this amazing country and its people, it is that Icelanders are an incredibly industrious and resourceful nation. I believe the Vikings of old still live in them and, if they could figure out how to settle a seemingly impossible-to-settle land during the harshest of times for the humankind, I am certain they will find a way out of the Great Recession, too.