a new ice age

‘We are not terrorists,’ insists Magnus Skulason, real estate economist and head of Iceland’s ‘In Defence’ campaign. To illustrate his point, he turns to a slide show on the group’s website, where he enlisted the support of a third of the country’s population to protest against Iceland’s inclusion on the UK Treasury’s ‘terror’ list.

There are more than 400 other photos uploaded by Icelanders – featuring their families, office workers, pets and local livestock – all protesting at being branded ‘terrorists’ by the UK government. One includes a gaunt, bearded fisherman holding a piece of paper saying ‘A terrorist – moi?’ Another is a child holding a toy pistol and a sign addressed to the British prime minister: ‘I am not a terrorist, Mr Brown’.

In October, Iceland briefly sat alongside Al Qaeda, the Taliban and North Korea as an international security threat to the UK, after the British government used the Anti-terrorism, Crime and Security Act 2001 – introduced after 9/11 – to freeze 230,000 British savers’ assets in IceSave, the UK savings arm of Icelandic investment bank Landsbanki.

Now that Iceland is in the throes of a financial collapse, many Icelanders feel Britain is inflicting its own brand of economic terrorism on the island. ‘Our economy has been devastated,’ says Skulason. ‘We would have had a crisis anyway, but it would never have been so severe were it not for the use of terror legislation. All our assets burned instantly, diminishing the possibility of paying the UK back. The UK government would never have dared do that to a state bank in any other NATO country. They bombed Iceland with this legislation as an example because they thought they could get away with it.’


Before the onset of the global banking crisis in September, Iceland boasted the world’s fourth highest rate of GDP growth. But its economy is now in tatters following the collapse of three of its biggest banks – Glitnir, Kaupthing and Landsbanki – at the beginning of October. The banks are barely functioning under state control as they await a $10bn (£6.6bn) rescue package from the International Monetary Fund (IMF) and other European countries.

And, most ominously for Icelanders, the emergency nationalisation has saddled a population of only 320,000 with colossal debts that could amount to 80% of its GDP. Overnight, the whole country lost its savings.

Since the crisis struck, the equity market plunged 80%, while the Icelandic kronur has tumbled by 70% and is now worth ISK135 to the dollar and ISK212 to the pound. Interest rates have spiralled to 18%, matching the 18% inflation, while house prices have plummeted by 30%. This has left Icelanders unable to pay interest on 100% mortgages, many of which were taken in foreign currencies. With unemployment expected to soar from 0.3% to between 8% and 10% by January, the grim reality is beginning to sink in.

The fallout has been apparent for all to see on stock markets around the world. But at ground zero, on the streets of the capital, Reykjavik, there is little evidence of economic trauma. Contrary to urban myths that have circulated in western Europe, the cash machines still work, shops still accept debit and credit cards, and there has been no surge in crime or homelessness. But people are angry and worried.


So far, frustration has been channelled through dry humour and creativity, and this has permeated to Reykjavik’s high streets. A spectacle shop has mounted a giant posterReading: ‘Thanks Gordon Brown for destroying the Icelandic economy as a diversion from your own domestic mess.’ Further down the street, a trendy clothes shop sells T-shirts emblazoned with ‘We are not terrorists’ across the front. The girl who made them says they have been selling well – but not as well as her ‘Brown is the colour of poo’ design.

"We are a very practical people. If you don’t have work, you can’t get an apartment, which means you won’t get a girlfriend, which means you are a loser."

Ásgeir Jónsson, Kaupthing Bank

But two months into the crisis, people are losing patience. Every Saturday there is a protest of around 4,000 people demanding political change in Iceland. And for the first time in the country’s history, the prime minister, Geir Haarde, has been forced to hire bodyguards. This is a big change in a city of 200,000 people – two-thirds of the population – where even Haarde can be found waiting in line at the sandwich shops at lunchtime.

In Reykjavik’s bohemian bars and cafes, people air their frustrations. ‘We are in the dark here,’ says Helga Markúsdóttir, an independent financial adviser whose company is dealing with the 30,000 Icelanders who are struggling to surrender their policies with UK life insurers in an effort to rescue their remaining savings.

‘It is not transparent what the government is doing and we feel that we are only being told a small amount of what is happening,’ she says. ‘We don’t know if we can sell any more products to the UK. Those that had savings, if they didn’t hide them under the pillow, lost them.’

Judy, a 42-year-old hotel receptionist, says her mother, a 68-year-old pensioner, is an example of this. She has now lost everything, and will have to take out a new loan from the same bank that confiscated her savings if she is to keep her house.

Eirinie Souri, a 24-year-old Greek citizen who has been living and working in Iceland for almost two years, has lost her savings and, despite having a degree in political science, is unable to find a job.

She says this is because she is a foreigner. The only offer she has received is for the role of a kindergarten assistant – a poorly paid job that now receives up to 30 applications per vacancy. Souri is considering abandoning her Icelandic boyfriend, for whom she emigrated, and joining the 30% of the population looking to leave the country.

Ásgeir Jónsson, chief economist at Kaupthing Bank, says unemployment is the biggest problem the government faces. The construction sector was the first to be hit by job losses, and many of the victims were foreign workers. Next was the 5,000-strong financial services sector, which has lost 800 jobs already – something Jónsson has seen at first hand at Kaupthing, where his research team has been culled from 17 to just three.

‘Job losses are increasing much faster than I expected,’ says Jónsson. ‘Iceland is a consensus-driven society, so we will have some companies that will demand a 20% pay cut and that will be accepted. For Icelanders, being without work is the most terrible thing that you could think of. We are a very practical people. If you don’t have work, you can’t get an apartment, which means you won’t get a girlfriend, which means you are a loser.’

To illustrate the social origins of this work ethic, he points to his own family. ‘My father was a farmer.

Now he is an MP. Things have changed very quickly. Icelanders can still remember worse times, and so there is a return to a DIY mentality. People are making Icelandic haggis, “sleuter”, again. There have been lines at stores as people wait to buy cheap meat. We all fear a benefits culture.’

These values could be set to change. A trip to the job centre reveals snaking queues of people of all ages, murmuring among themselves and clutching white folders of documents. Staff working at the grim, out-of-town office building say that, until a few weeks previously, it had been all but deserted.

"Many Icelanders are spending regardless of having no money. It is in our nature to want everything yesterday."

Gardar, a 28-year-old teacher

One man queuing up for work says the company he worked for axed everyone under 17 and anyone with a foreign name. A Polish builder who had worked for three years at a construction firm is considering moving to Greenland or Norway to find work.

At Kringlan, the biggest of the two shopping centres in Iceland, the atmosphere is more opportunistic. Gardar, a 28-year-old teacher, has lost most of his money, but is still buying a new iPod from an electrical store. ‘Many Icelanders are spending regardless of having no money,’ he admits. ‘The bargains are just too attractive to miss after years of having to go abroad to shop. It is in our nature to want everything yesterday. But we are supposed to keep buying. If we don’t, then everything will stop.’


This is a message that the government is at pains to promote. Public buses bear the slogan: ‘Buy Icelandic – it helps our economy’. Meanwhile, shoppers say the price of imported food has almost doubled and that fruit and vegetables are in short supply. Iceland imports 40% of its food and relies entirely on imports for commodities such as electronics and car parts. Increased demand means transactions that previously took only a minute have been taking up to two weeks. As a result, retailers’ primary concern is not about spending, but about supply.

Örn Kjartansson, managing director of Kringlan’s owner, Landic, says that, for now, things are not all bad. Retailers are bracing themselves for tough times, but they expect Christmas to be relatively healthy as Icelanders cancel holidays and buy domestically instead. ‘The inflation means our income has increased 10%-12% in line with rents,’ says Kjartansson. ‘So far, rent payments have gone from very good to some retailers owing us money, but we are not seeing any major bankruptcies yet.’

However, Landic will not only be concerned about the future of retail. Iceland’s property market has been ravaged by the economic collapse. There is limited available information about yields, rents, supply and demand – and with no deals on the investment market to act as a Benchmark, pricing is largely down to guesswork.

The weakness of the kronur means properties are already on the market at 40% discounts. It is said that a further 20% discount can easily be added to this as a result of the banking crisis.

Added to the falls in both values and demand, as financial services companies and retailers cut back, is oversupply. Driving out of the centre of Reykjavik, the extent of this becomes evident. Cast against the flat, snow-topped mountains are frequent, ominous silhouettes of cranes hanging over unfinished developments. Figures from research company Reykjavik Economics confirm a 12% increase in office and retail space since January, and 5.9m sq ft (547,000 sq m) of building planned over the next two years.

‘In 2006 there was an excess demand for retail and offices,’ says Jónsson. ‘These buildings are now being completed. There are no buyers. We don’t know how much has been built because there is no central data, but it is very clear that there is a large excess of supply. It is very bad in the residential sector. But in the commercial sector it is a much worse story.’

While the future of property looks bleak, there are some sectors that are readying themselves for a boom. The World Travel Guide says tourism has increased by 20% since the crisis, as visitors are drawn to falling prices. A night in a four-star hotel in the city centre now costs £45, down from an average of £148 in April.

Jónsson sees the weak kronur as Iceland’s best hope for economic recovery. ‘The currency is both the problem and the biggest part of the solution,’ he says. ‘Its fall in value means people will now buy Icelandic products instead of imports because it is cheaper. It has made certain parts of the economy profitable – tourism for example. We can export fish, beer, chocolate and aluminium. The future of our economy depends on how quickly we can start exporting again.’

"Our economy has been devastated – all our assets burned instantly."

Magnus Skulason, real estate economist


However, there can be no real progress without an injection of foreign currency into the Icelandic banks. The IMF has pledged $2.1bn (£1.4bn), and Iceland’s European neighbours have pledged a further $7.9bn (£5.3bn), including $3.3bn (£2.2bn) from the UK to guarantee IceSave depositors.

The uphill struggle to obtain funds during a global credit crisis is being worsened by a lack of trust in the Icelandic government – from Icelandic businesses that feel they have been kept in the dark, and from foreign governments that have seen Iceland resist meeting its obligations to overseas depositors.

The UK government is adamant that Iceland should pay back the full sum of ISK600bn (£2.96bn) that it owes the UK – a figure that amounts to 60% of Iceland’s GDP. However, the Icelandic government is disputing the payment, and comparing it to the Treaty of Versailles that ended World War I – it says the punitive reparations imposed on Germany in 1919 were a third of what Iceland is being asked to pay now, and Germany only finished paying off these debts in 1984.

This dispute, coupled with the UK government’s seizure of Kaupthing’s UK arm, Kaupthing Singer & Friedlander, means diplomatic relations between Iceland and the UK are fraught. There have been heated exchanges between both sides, as memories of the 1970s ‘cod wars’ over fishing rights resurface. Before the IMF loan was secured, Andrés Magnússon, CEO of the Icelandic Federation of Trade, claimed the UK was blocking its payment. At the time, he said the UK government was ‘blackmailing us to pay for the UK IceSave depositors’ savings. It is absolutely obvious that we will not get our economy back on track until we get some kind of loan.’

The UK Treasury denied there was any attempt to block the loan. A spokesman said: ‘We fully support the loan and want it to go ahead as soon as possible. Without a resolution we cannot get back any of the taxpayers’ money paid out to compensate savers. It is very frustrating for us, because the Icelanders clearly want to pin this on the UK government.’

Alongside bargain-hungry tourists, lawyers are the most regular visitors to Reykjavik. They have flocked in the hope of capitalising on the underlying resentment, and so far they are doing rather well. The Icelandic government has hired City of London law firm Lovells to advise in its dispute against the UK government. And Kaupthing is taking legal action which its London-based law firm, Grundberg Mocatta Rakison, says could lead to claims of ‘billions of pounds’ against the UK government.

The bank argues that the UK government’s seizure of Kaupthing Singer & Friedlander, which forced it into technical default and nationalisation by the Icelandic government, was negligent. Skulason says Kaupthing’s lawyers are also examining the legality of the UK government’s use of anti-terror legislation.

The blame game may last for years and cost millions, while Iceland’s economy continues to pay the price for its ambition. But Icelanders, queuing for cheap meat in their ‘I am not a terrorist’ T-shirts, will increasingly be concerned about long-term international perceptions. It is not yet clear whether Iceland will be remembered as the victim or the culprit of a wider banking crisis.

‘History does not play with losers, so I think that the banks will get a very bad epitaph,’ says Jónsson. ‘We should have foreseen some of this. We always assumed that our sovereign, which had no foreign debt, would be able to inject liquidity and that other nations would lend. We were so wrong.’


Baugur The retail investment company’s portfolio comprises large stakes in 20 international high street chains, among them House of Fraser, toy shop Hamleys, clothing chain Jane Norman, jeweller Goldsmiths, fashion retailer Principles and frozen-food supermarket Iceland. It also has a 49% stake in fashion group Mosaic – in which Kaupthing also controls 20% – which owns Oasis, Karen Millen, Coast and shoe stores Nine West and Pied à Terre. Baugur also has stakes of up
to 20% in quoted retailers Debenhams, French Connection, Moss Bros and Woolworths.

Stodir The investment holding company, controlled by Baugur executive chairman Jón Ásgeir Jóhannesson, has a 32% stake in Glitnir and followed the bank into a ‘moratorium’, whereby it has been allowed to suspend debt repayments while it attempts restructuring. It also owns 39% of Landic (see below), and was on the verge of buying a 39% stake in Baugur before the banking collapse.

Landic Iceland’s largest property company is also one of the biggest in the Nordics. Its portfolio is split 60% in Sweden, 20% in Iceland and 20% in Denmark. It has €4.7bn (£4bn) of assets, many of which are trophy buildings in city centres, with 28m sq ft (2.6m sq m).

Eik Iceland’s second-largest property company manages around 1.8m sq ft (170,000 sq m) of offices, retail and logistics property. It also has a 64% stake in the Glitnir Real Estate Fund, a NOK500m (£48m) Norwegian closed-ended private equity fund that focuses on opportunistic investments in Scandinavia.


Iceland is in urgent need of capital to refloat its financial system after three of its biggest banks – Glitnir, Kaupthing and Landsbanki, whose combined asset value was close to 1,000% of Iceland’s GDP – were taken into state ownership in October.

It is likely that the island will need three times the $2.1bn (£1.4bn) loan it has secured from the International Monetary Fund (IMF) if it is to resuscitate its financial system. There is therefore growing pressure on Iceland’s prime minister, Geir Haarde, to carry out a rapid fire sale of the banks’ assets – including the debt owed by domestic property investors.

So far, few assets have been brought to market. And as it is not clear which companies were funded by these banks, or how much money they received, it is hard to determine the full impact of their failure. But investors have already begun to pick over the remains of the early casualties.

UK retail magnate Sir Philip Green, who owns Arcadia Group, was one of the first to show interest. After failing to buy £1.5bn of debt owed to the banks by Icelandic investor Baugur in October, last month he bought Baugur’s 28.5% stake in UK high street menswear retailer Moss Bros – a block of 26.9 million shares at 24.95p each. Fears over Baugur’s viability arose following the collapse of Glitnir – which precipitated the fall of Stodir, the investment vehicle of Baugur’s founder and main shareholder, Jón Ásgeir Jóhannesson, which owns one-third of the bank.

The rest of Baugur’s interests, which include big stakes in UK department store chains House of Fraser and Debenhams, fashion retailer French Connection and ‘variety goods store’ Woolworths, look increasingly vulnerable as the company comes under financial pressure.

The property market will also be keeping an eye on the fate of Iceland’s largest real estate company, Landic (see box above). Like Baugur, the company boasts strong assets and its shareholders are in trouble.

Following the collapse of Glitnir, which owns 5% of Landic, the government already has a stake in Landic. But it now stands to become the major shareholder because Stodir, which owns 39% of Landic, is already in a moratorium process, whereby it has been allowed to suspend payments while it attempts to restructure. Stodir has until January to raise funds to ward off bankruptcy, which would leave the Icelandic government in control of 44% of Landic. The rest of the ownership is a complex network of debt and equity spread across another 200 shareholders. The company says it is ‘business as usual’ and that it does not expect any further sales any time soon.

Vagner’s magnum opus

But its €4.7bn (£3.9bn) empire is already attracting interest. Ole Vagner, the Danish property entrepreneur and former CEO of Keops, which Landic bought last year, has purchased a 10% stake in Landic through his company, Vagner Holding. It has also bought a Danish office-based portfolio, called ‘portfolio 9’, for an undisclosed sum with an option for Landic to buy it back in January and an agreement to pass on a share of profits if a sale goes ahead.

The government may need to take drastic action to raise the capital it needs. Potential buyers say prices are not yet low enough to account for the risk they will be taking. As Valad’s Nordic director, Michael Bruhn, says, price tags for Landic assets are still too high.

‘We have been offered investment opportunities in their portfolio and in the company from various sources,’ says Bruhn. However, he adds that while the products are ‘really good’, the price will need to fall by 40%-50% before Valad would consider buying.