Ten years since the financial crisis in Iceland, the noise of the computer servers mining for bitcoin on a former Nato airbase is many decibels louder than the vast turbines spinning away in the hydroelectric power plant down the road.
Having come through the crisis a decade ago, Iceland is now enjoying an economic revival, with technology, renewable energy and tourism replacing the unsustainable boom in banking. Visitor numbers have quadrupled and output per head is among the strongest in Europe. The employment rate is the highest in the world.
But there are fears the economy could bubble out of control once more as tourist money floods in, pushing up the value of the Icelandic króna – which is among the most volatile free-floating currencies in the world, given the tiny population behind it. The price of cod used to push the króna around even before the hot money from the banking industry arrived; now it’s visitors arriving at Keflavik airport, next to the shimmering, sulphurous Blue Lagoon, that shift it.
Ten years since the collapse of the Icelandic economy, the country’s government has invited the Observer to see how things have changed. Touring a room with thousands of box-sized supercomputers – LEDs blinking and cooled by the arctic wind, each consuming more energy from geothermal and hydroelectric power than the average household – would suggest quite a lot has happened in a decade.
Sigurður Hannesson, director general of the Federation of Icelandic Industries, says: “Historically we had fishing, now we have tourism. But we need to diversify further to make the economy more stable.”
There could hardly have been a more unlikely victim of the financial crisis than a country of about 350,000 inhabitants – equivalent to the population of Bradford – occupying a volcanic island midway between Europe and North America. The landscape is weather-beaten and the capital, sleepy Reykjavik, seems a world apart from the City or downtown Manhattan. Remote and full of crashing waterfalls, glaciers and geysers, Iceland had been best known for decades to outsiders for the northern lights, fishing and the fermented shark dish known as hákarl.
Yet the island’s boom-bust-boom economy has punched above its weight for years, with Iceland adding sporting prowess this year as the smallest nation ever to send a football team to the World Cup.
The problems came as the country began to emulate the neoliberal policies of Ronald Reagan and Margaret Thatcher by cutting taxes to stimulate private investment throughout the early 2000s. Inflation soared and the central bank was forced to use dizzyingly high interest rates to keep control, jacking them up to 15.5% in the months before the 2008 crash.
Money came flowing into the country’s private banks as depositors from across Europe sought world-beating interest rates on their savings. The lenders stretched themselves further with funding from financial markets and went on a buying spree of assets around the world – acquiring foreign firms, property and football clubs and taking their assets to about 10 times the size of the domestic economy.
When the global economic storm of 2008 landed, with the US sub-prime bubble bursting and the world’s banks ceasing to lend to one another for fear they would never be repaid, Iceland’s big three lenders – Kaupthing, Glitnir and Landsbanki – had debts worth more than six times national annual economic output. They quickly came crashing down. “Even compared to other very highly financialised centres such as Luxembourg or Singapore, Iceland looked ridiculous,” says Jessica Hinds, European economist at Capital Economics. “What was driving growth back then was very much a financial-sector bubble, which of course ended disastrously.”
But rather than stepping in with taxpayers’ money like the British and Americans did, the Icelandic government let its banks go bust. Unlike the complex UK economy and its globally significant financial system, so the argument went, relatively small Iceland could afford to do so.
The repercussions were still significant, as protesters took the streets throwing snowballs and eggs. The prime minister, Geir Haarde, was found guilty in a special trial staged after the crash – ostensibly for failing to hold emergency cabinet meetings in the run-up to it – and the country replaced him with Jóhanna Sigurðardóttir.
Driving through Reykjavik past the government house (originally constructed as a prison before its use in politics), Edward, a taxi driver from the city, says “people were pissed” about the bankers’ and politicians’ actions. “And justifiably so … Look at what happened.”
Iceland became the first European country since the UK in 1976 to go to the International Monetary Fund for a bailout – requiring $2.4bn, equal to nearly $7,000 for every man, woman and child – before imposing capital controls that were not removed until last year. The króna lost half its value in the three years to the end of 2010, while GDP plunged by 15% during the slump – the biggest contraction recorded by a wealthy economy during the crisis.
The impact was similar to the one seen by the British economy after the sudden drop in the value of the pound straight after the Brexit vote, which triggered a jump in inflation and a fall in consumer spending – only amplified for a country 1,000 miles from mainland Europe and reliant on imports. Household spending fell by a quarter and investment dropped by almost three quarters.
Despite the turmoil, the weak currency was also Iceland’s saving grace, sparking an export revival and encouraging tourists to the country.
The ash cloud of 2010 spewing from one of its volcanoes, grounding flights across Europe, raised fears that Iceland’s recovery could go up in smoke. But tourist numbers have steadily risen by about 25% a year since 2010, hitting 2.2 million last year.
The country has now more than made up for the fall in GDP since the crash. By 2016 the economy was growing by as much as 7.2% before the pace moderated as a result of the króna appreciating in value. However, it is still forecast to maintain a growth rate of about 3% over the next two years – more than double the UK’s.
Investment has also returned, including from the UK’s richest man – Brexit-supporting Ineos chief executive Jim Ratcliffe – who has bought swaths of land in the north, including three salmon rivers.
Locals thank the tourists for rebooting the economy but are almost overrun, and grow annoyed by hire car drivers pulling over on the side of the single major road around the island to snap pictures of the landscape. There are plans for investment but currently the national infrastructure – which can be difficult to upgrade with only 350,000 people to raise taxes from – sometimes struggles to cope during the peak summer months.
Iceland’s finance minister, Bjarni Benediktsson, recognises that the huge number of tourists brings its own challenges. “It’s not just the roads … The health minister just told me in a cabinet meeting that 10% of visits to the emergency room are from tourists. We need more nurses and doctors and staff to accommodate all of the people.”
Having reached near maximum capacity, the country is now seeking to diversify its economy into new avenues to make sure its current upswing can be sustainably maintained, without spiralling out of control like last time. “People who used to work in banking have now moved into technology,” says Kristinn Árni Lár, founder of tech website Northstack. “Technology jobs are becoming more and more important for the economy.”
Tech startups focused on increasing the sustainability of cod fishing at places like the Ocean Cluster, a hip startup hub in Reykjavik, could be one way forward, as could the bitcoin industry at the Verne Global data centre – although, having witnessed an economic collapse in a country where the banks were not regarded as too big to fail but, says Benediktsson, “too big to save”, the finance minister is wary about Iceland becoming an important centre for cryptocurrency mining.
“It cannot be excluded as a risk factor … it might affect our economy if it’s a sector that continues to grow and collapses. I’m not saying that will happen, but it would have an effect.”
But whatever happens in Iceland’s economic future, one growth industry its citizens will never hope for again is banking.
This article provided by NewsEdge.