Financial Crisis Sends Iceland Into Economic Deep Freeze

Iceland is on the verge of national bankruptcy, with the small but wealthy Nordic country, whose per capita income last year exceeded 60,000 U.S. dollars, undergoing economic chaos in under less than a year.

A Dong-A Ilbo reporter took a glimpse of the recent changes in Iceland.

On the way from the airport to downtown Reykjavik, the taxi filled up its gas its tank without a problem. The Icelandic capital has 200,000 residents, almost two thirds of its population of 302,000.

Though rumors spread that people were hoarding goods, a 24-hour supermarket in downtown was well stocked. No stores shut down, either.

The night view of the city from the Pearl Observatory was still breathtaking.

Though the city looked unscathed by economic turmoil on the surface, ordinary people seemed to be feeling the pinch.

An owner of a small guesthouse said he bought a new house for 24 million krona two years ago. He paid 10 million krona in cash and took out a mortgage loan to pay the remainder.

Many in Reykjavik bought houses with loans like him. Since several years ago, new houses started springing up on the outskirts of the capital in large numbers, leading to the formation of a satellite city.

Soaring prices prompted a scramble to purchase new homes and the guesthouse owner was one of them. Banks aggressively peddled their mortgage products and extended loans up to 100 percent of a house’s price.

Since last year, however, house prices have plummeted and outstanding mortgage loans have exceeded home prices.

Worse, housing costs skyrocketed 20 percent over a year due to rising inflation tied to interest rates.

A taxi driver took out a loan to purchase a new car two years ago with no down payment. The loan was denominated in the euro to avoid high interest rates. At the time, the Icelandic government set high interest rates for krona to induce foreign deposits.

Many people who made foreign currency-denominated loans in currencies such as the Japanese yen, euro or Swiss franc have since suffered huge losses.

As recently as two years ago, the exchange rate was 80 krona to one euro, but this has risen to 130 krona. The taxi driver said his debt doubled overnight due to the weaker krona.

Icelandic banks, which were privatized in 2003, have suffered a similar fate. They recklessly expanded investment in the United Kingdom and the Netherlands over the past several years.

Iceland’s biggest bank Kaupthing, led by a 37-year old president, provided higher interest than other European banks to attract foreign capital. This led to the combined assets of Iceland’s commercial banks reaching 100 billion euros last year when the Central Bank of Iceland held two billion euros in foreign reserves.

pisong@donga.com