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Opinion

Inside investment: The Icelandic Saga

The Saga of Iceland’s involvement in the financial crisis has elements of tragedy and farce. But it would be unwise to underestimate this nation of warriors, poets and volcanoes.

Last February I ventured to Iceland in the company of two worthies to assess the extent to which the recent economic upheaval had uncovered investment opportunities. We approached this dark and distant land with some trepidation for, if history is a guide, the Icelanders are a fearsome people.

My fears appeared to be misplaced as the greeting we received was as cordial and warm as the days were cold and dark. Moreover, I was impressed by the learning and cultural achievements of Iceland. As well as having an internationally renowned symphony orchestra its many large bookstores are filled with works, both ancient and modern, written in Norse, a language that the people of Iceland have faithfully preserved.

Iceland’s more recent history is one of intrigue and woe. Ásgeir Jónsson, an economist, likens the crisis to one that occurred in the third week of June 1000AD, when the world’s oldest parliament, the Althing, convened to respond to an ultimatum from Norway’s King Ólafur Tryggvason the Cruel, who threatened to come in his great dragonship, Worm-the-Long, with 70 other longboats to force the island to adhere to the Christian religion. The Althing thought it best to comply.

Quiet and productive

The next 1,000 years were quiet ones. The Icelanders made good use of their splendid isolation to preserve Norse culture, study their own genealogy, play chess and perfect the national cuisine, notably hákarl (putrefied shark) and slátur (sausages made from sheep entrails). They also became one of the world’s richest and best-educated populations.

In the 1990s, the country emerged from its isolation and with this came the deregulation and privatization of the banking system, followed by the breakneck expansion of the financial sector. This led to the crisis of 2007/08. In a nutshell, or a longboat, the three main banks borrowed in various currencies amounts well in excess of Iceland’s GDP.

The banks’ managers and controlling shareholders were generally inexperienced in international finance but they knew how to write cheques to themselves

The three banks were Glitnir, Kaupthing and Landsbanki. Landsbanki collected deposits in Europe through Icesave and Kaupthing gathered money through Kaupthing Edge. As interest rates were high and indexed to inflation in Iceland, the majority of mortgages on the island were issued in currencies other than the króna, as were auto loans and credit cards, creating big cross-currency risk. The banks’ managers and controlling shareholders were generally inexperienced in international finance but they knew how to write cheques to themselves. Kaupthing was controlled by Sigurdur Einarsson the Reckless, born in 1960. Landsbanki was run by Björgólfur Gudmundsson the Felon and his son, Björgólfur Thor Björgólfsson the Opulent (born 1967), who was listed by Forbes in 2007 as the 249th-richest person in the world, with $3.5 billion.

Jón Ásgeir Jóhannesson the Black, and his Viking raiders, built a huge retail empire across Europe on the back of loans from Icelandic banks and is being sued for $2 billion for siphoning off this money from Glitnir. These banks lent more to their owners than to anyone else, leaving external obligations of $5.3 billion when they went bust, too much to be repaid by a country of 300,000 souls.

When in 2008 Iceland refused to pay the guarantees that Icesave had made to UK depositors, UK prime minister Gordon Brown invoked terrorism laws and froze related assets in the UK. Various indictments have been issued and arrests have been made. Not for 1,000 years have the Vikings spread such terror across Europe.

On the edge

The country has slid from AAA to BBB-/Baa3/BB+. The currency has dropped by half, effectively bankrupting most households and businesses that borrowed in other currencies, and the money is now not convertible. The stock market has virtually shut down, with only 10 listed companies today. On June 16, 2010, the country’s Supreme Court banned loans indexed to foreign currencies; this is likely to push the banks into bankruptcy again.

What comes next? Former airline stewardess and left-leaning prime minister Jóhanna Sigurðardóttir the Unlettered, born 1942, daughter of Sigurður Egill Ingimundarson and Karítas Guðmundsdóttir, was swept into office in January 2009. The population is overwhelmingly opposed to making good on the banks’ external bad debts. Isolationism is on the rise.

In seeming retaliation, the Eyjafjallajokull volcano has been unleashed on Europe, possibly by loyal elves. Björk the Songstress has joined the campaign to oppose the sale of the country’s geothermal resources to Magma Energy of Canada. Perhaps the Icelanders will retreat once again to their northern island fastness and wait another 1,000 years before making their next move. I can’t wait to see what it will be.


Lincoln Rathnam, PhD, CFA, is an investment professional based in Singapore and Boston. In a career spanning almost 30 years he has managed equity, debt and venture capital portfolios and was a pioneer investor in emerging markets in the late 1980s

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