Wonder Island
As Icelandic Prime Minister Geir Haarde stated in a recent address to the nation, "we are facing a real threat that the global financial crisis will suck in our national economy and bankrupt it." A default of an entire state is not unique in itself, but Iceland, as in the case of genetics, attracts attention with "the purity of the experiment." The economy of the island state consists of only two spheres - the fishing industry and the financial sector. But if the islanders have been fishing for herring since ancient times, as mentioned in the Icelandic sagas, then the international financial center appeared in the country of the Vikings only 20 years ago, which provides a rare opportunity to trace the "genetic" link between the development of modern financial markets and the current crisis. This is all the more relevant because Iceland, thanks to its completely liberal approach to market regulation and a high level of development of the financial system, was considered a country with a so-called model emerging economy.
Nothing pleases the pride of Icelanders as much as comparing their country with prosperous Norway. The same fairly independent foreign policy, the same high standard of living and colossal investments in foreign assets. But if everything is clear with Norway - its treasury is literally bursting with gas dollars - then the rapid growth of the Icelandic economy raises the question: who is paying for the party? A complete lack of mineral resources and industrial enterprises, even arable land accounts for only 0.07% of the territory...
Moreover, in recent years, Icelandic investment funds have been making one sensational purchase after another. First, the European discount airline Sterling is acquired, then a large stake in one of the leading American carriers, American Airlines. The Icelandic Baugur Group buys up shares of seven House of Fraser department stores in England. It also has a significant stake in the American Saks Fifth Avenue. Aggressive expansion was carried out on both sides of the Atlantic, and soon everyone was talking about the Icelandic economic miracle.
In a sense, the miracle did indeed take place. Back in the early 80s, the island's economy was in ruins. Wages were then paid daily, usually at noon, so that employees could run to the nearest store during their lunch break and quickly stock up on everything they needed. It was not recommended to linger - by evening, the money could completely depreciate due to hyperinflation.
And then the miracle happened. Just like in the sagas: epic heroes returned from across the sea to the homeland of their ancestors - the first Icelanders who received education at prestigious universities in America and Europe. These yuppies, distinguished from other Icelanders by their ability to dress and their manners, quickly came to the conclusion that you couldn't sail out of the crisis on herring alone. It was decided to turn Iceland into a major financial center. The older generation of islanders, traditionally engaged in fishing and sheep shearing, viewed the construction of a local Wall Street with undisguised irony. But the yuppies turned out to be no fools. In 1985, a stock exchange opened in Reykjavik, which at first very much resembled the infamous Russian exchange "Alisa". But just two years later, it was already trading securities in a completely civilized manner. The emergence of the stock market noticeably revived the economy and, above all, the banking sector. In fact, the glorious history of the formation of Iceland's financial and credit system could have ended on this upbeat note, if not for one thing: young Icelandic financiers got a taste for big money. Show me a person who, having won at roulette or poker the first time, would not return to the casino again.
Living on it is easy and simple
Characteristically, the global financial market at that time really resembled a casino. Stock speculators from Wall Street and various hedge funds turned it into a real Las Vegas. Icelandic financiers who studied in the USA quickly caught on to the trendy trend. Especially since the brand-new financial sector of Iceland was ideal for mastering intricate exchange schemes due to the absence of any state regulation. The rules were created on the fly by the players themselves. Everything matched, except for one thing - Iceland is not America, there is no room to truly spread out. But that's nothing. The Vikings, as is known, were accustomed to seeking happiness in distant lands. They even discovered America, it is said, long before Columbus. And their descendants set about "discovering" Europe. More precisely, the wallets of its wealthy citizens.
Three leading banks of Iceland – Kaupthing Bank, Landsbanki and Glitnir – rushed to develop European markets. How did the Icelanders manage to "poach" the fastidious European depositor from national banks? Elementary – with a high interest rate on deposits. Overregulated European banks promise their clients no more than 2-3% per annum. The hot Icelandic guys gave five percent. For such a margin, the European depositor is ready to send money if not to the ends of the earth, then at least to the edge of Western Europe.
A cash flow poured onto the island. With the money of foreign clients, solid offices stuffed with the latest electronics were built. Icelandic banks very quickly acquired a veneer of respectability, and with it the opportunity to receive cheap Japanese, American and Swiss loans. With this money, Icelandic investment funds grew, buying up everything in Europe and America.
The rumor about the generosity of Iceland's "three-bank system" quickly spread across global financial markets. Following depositors, foreign businessmen in need of loans flocked to Reykjavik. Understandably, those who were primarily borrowing in Iceland were financiers who, for various reasons, could not obtain money in their home countries. Simply put, the partners of Icelandic banks were not always reliable. A classic financial pyramid scheme was at work - cheap loans obtained in developed countries were lent at high interest to all those in need, even those whose solvency was questionable.
The wheel of Fortune began to spin. The lawless game on the most liberal Icelandic financial market attracted stock speculators from around the world like a magnet. Ultimately, the total assets of Icelandic banks exceeded Iceland's GDP by almost ten times.
Holders of quickly amassed capital surprise with the similarity of desires and habits. "New Icelanders" differed little from "new Russians" in lifestyle - luxury cars, yachts. Expensive delicacies and wines began to be imported to Reykjavik. According to Gudvardur Gislason, owner of the most fashionable restaurant in the Icelandic capital, Fish Market, just three months ago his establishment was packed. To help people better appreciate refined cuisine, Gislason and his colleagues organized a global chefs' competition - not "Miss Universe," of course, but still a pompous event. Some fellow journalists managed to attend these "competitions" several times. And when recalling the culinary championships, their eyes glistened sweetly. Naturally, all this was paid for by Icelanders, who launched a noisy and expensive campaign to present their prosperous country. Tourists did not flock to Iceland en masse, but the PR efforts were not in vain. At the end of 2007, the UN recognized Iceland as the best country in the world to live in. Icelanders finally took the palm from the Norwegians - fittingly, just two months before the collapse of the island's economy.
Our Happiness
The crisis in Iceland does not look as hopeless as ours in the post-perestroika years, but some analogies are quite apparent. For example, the noticeably empty shelves of grocery stores. Icelanders are diligently stocking up, although there have been no supply disruptions so far. In this case, the logic of islanders kicks in - almost everything in Iceland is imported; due to the harsh climate, only potatoes manage to grow locally. Therefore, the 41% drop in the Icelandic krona caused a sharp rise in the price of imported food. The instant transformation of the Icelandic krona from a hard currency to a "wooden" one caused a rush in electronics stores and furniture showrooms - the population is getting rid of rapidly depreciating money.
Acute credit shortage has paralyzed the Icelandic economy. Local banks simply stopped receiving cheap loans. In turn, island banks could not settle accounts with clients to whom they had promised high returns on their investments. The scale of the problem is impressive. To maintain liquidity, the Icelandic banking system needs about $100 billion. This amount is simply exorbitant for a country with a population of three hundred thousand. It turns out that each Icelander "owes" about $300,000.
The government decided to nationalize two of the three largest banks - Glitnir and Landsbanki - and thereby assumed their debt obligations. But Iceland can only pay them off if it borrows itself. The treasury cannot cover such a liquidity deficit because, as a reminder, we are talking about an amount almost ten times the country's GDP.
Having lost economic equilibrium, the country rushed for help to its friends, but they politely refused. Burned economic fakirs are not liked. Moreover, Iceland was too independent in previous years: sometimes with America, sometimes with Europe, sometimes on its own. As the Icelandic prime minister said: "Old friends refused us. We had to look for new ones."
The news that Russia could provide Iceland a loan of €4 billion at a very moderate interest rate (at LIBOR+0.3-0.5% per annum) stirred analysts. Headlines like "Let's Buy Iceland. Expensive" appeared in newspapers. It remains to be understood - why? Iceland had never been in the sphere of Russia's economic and strategic interests. And now the whole world is guessing about Moscow's true motives.
Western media claim that Russia intends to obtain specific geopolitical benefits (even mentioning the former American airbase in Keflavik). That version is unlikely. Now, when bills must be paid, both America and Europe have no time for Iceland. But as soon as Moscow hints at any preferences to Reykjavik, especially of a strategic nature, the entire West will rise to defend "little and freedom-loving" Iceland, a NATO member, by the way.
Russian analysts tend to believe that this loan is nothing more than an image move designed to show that, despite the financial crisis, Russia can not only cope with it but is also ready to lend to Western states that ask for help. But even a non-specialist understands: such an insignificant country as Iceland is hardly suitable for a real PR campaign.
There is another version. Allegedly, several large Russian entrepreneurs who entrusted money to Icelandic banks did not manage to withdraw their funds. If so, the possible decision to allocate a stabilization loan to Reykjavik appears in a somewhat different light.
Be that as it may, the experience of Iceland's model economy is largely instructive, as everything could be modeled - from the birth of the financial market to its complete collapse. If humanitarian aspects are disregarded, from a purely scientific standpoint the experiment succeeded. It clearly demonstrated that no most sophisticated financial market can replace a real economy. Banks on an island devoid of industrial development will inevitably burst.