Monday,Oct 12 2009, 01:55:59 PMIceland Looks Back To The Sea

Kristjan Davidsson went to sea as a deckhand at 16. At fisheries college he aspired to be a boat captain. For two decades, he sold fish and fish-processing equipment. For 30 years his father earned his living the way practically everyone in this remote village ever has: pulling fish from the ocean.

But in 2001 Mr. Davidsson got bored. He joined one of Iceland's newly privatized banks. He got rich. Now, he says, it looks like it's back to fish. That may be true for this nation's fortunes as a whole.

On Tuesday, Iceland's government seized Glitnir Bank hf, Mr. Davidsson's employer, caught up in the unfolding global financial crisis. On Wednesday, he came to the office for an emergency staff meeting. Glitnir's government-appointed receiver addressed the troops. 'The basic message I heard was, 'Go find another job,'' says Mr. Davidsson.

Fishing sustained the rugged and remote island of Iceland for centuries. But just a half-dozen years ago, Icelanders discovered that vast fortunes could be made in high finance. They took to the new business with all the zeal and fearlessness of their seagoing past, lending abroad with speculative fervor. The banks quickly swelled to a size that dwarfed the economy of some 300,000 Icelanders back home.

Within a few years, Iceland's three big banks -- Kaupthing Bank hf, Landsbanki Islands hf and Glitnir became highly leveraged, like other now-troubled banks. The banks' assets reached 100 billion euros, about 10 times the country's gross domestic product last year, and their foreign depositors have come to far outnumber the island's population.

Icelanders are risk-takers, Mr. Davidsson says. 'All this energy was released when the banks were privatized. We like to do things fast.'

Today, Iceland's swollen banks are ruined. In the space of a few days, practically the entire banking system has been seized by the government. The largest bank of all, Kaupthing Bank, was seized Thursday, and trading was suspended on the stock exchange until Monday. The krona has ceased functioning as a currency outside Iceland.

Inflation and debt payments are soaring, and trade has been crippled in a country heavily dependent on imports. The U.K. and Netherlands are suing over frozen deposits held by their citizens,replica handbags, while the government is trying to arrange more foreign loans to help stave off national bankruptcy.

The collapse is the most dramatic washout from the global credit crunch, a pyrotechnic demonstration of how the crisis can demolish a once-booming economy. Other countries have mounted giant bailouts: Ireland's plan to guarantee its banks' deposits potentially puts it on the line for a sum twice its annual economic output. The U.K.'s package is roughly equivalent to its GDP, the world's fifth-largest.

But investors fear that Iceland's tiny treasury can't back its banks' obligations and that the country might default on its sovereign debt. That could have a cascading effect on other small, debt-ridden countries -- and on the country's investors -- giving the island outsized importance amid the financial pain circling the globe.

Mr. Davidsson, 47 years old, who wears a wide grin and a pinstriped suit despite the collapse of his bank, still awaits word on his future. But he's convinced of one thing: 'It's going to be the seafood industry for me.'

Up until a few days ago, Icelanders thought they could live on banks.

It was 2001 when Mr. Davidsson looked for a new vocation. Banks were being privatized, and the bank that would become Glitnir was eager for fishing experts to help it expand beyond Iceland and do deals around the world.

Mr. Davidsson signed on, advising on mergers and lining up financing for fishing companies world-wide. He strayed far from Iceland, once finding financing for a Peruvian company and engineering its listing in Oslo.

Meanwhile swank restaurants crammed downtown Reykjavik, the capital and new financial center. The main shopping street filled up with pricey boutiques selling avant-garde fashions and design cookware. The krona was strong. That damped exports -- fish is the island's biggest -- and the trade deficit ballooned, a worrying sign.

Icelanders, however, didn't much mind. To their surprise, they became some of the wealthiest individuals on the planet. Many became millionaires, a few billionaires. The standard of living was high and foreign luxuries could be imported cheaply. They bought expensive cars with loans in yen and Swiss francs with attractively low interest rates, racking up high debts exposed to the vagaries of currency exchange.

Banking has been good to Mr. Davidsson, too. He has built a comfortable life in Reykjavik with his family. They vacation abroad. 'I am well off,' he says, 'I have my pension.'

Earlier this month, Mr. Davidsson went home for the annual sheep herding, when villagers bring back sheep loosed into hilly pastures the spring before. He lent a hand to a farmer schoolmate, rounding up animals in his leather-interior Toyota SUV.

For the banks, growing was easy. They could borrow at low cost from all over the globe, then turn around and with little oversight lend that money to businesses and entrepreneurs wherever they wanted -- in the U.K., Denmark and the U.S. Over time, the banks' assets -- largely these loans they made -- grew and grew.

The money rode a carousel: Iceland banks borrowed,replica watches, made loans, borrowed some more. They had to pay their own lenders, of course, but that wasn't a problem -- there was always someplace to borrow more money with which to make the payments.

Then, last winter, the credit crunch struck. By this summer, no one wanted to lend to anyone, really, least of all Icelandic banks. That was because they had gotten so large.

While investors figure the U.S. and large European countries could come up with cash to bail out their banks if need be, what could tiny Iceland, with 2 billion euros in foreign-exchange reserves, do if its banks with 100 billion euros in assets got in trouble?

Just printing more money -- something the U.S. can do -- wouldn't help the Iceland banks much, since their debts were largely in foreign currencies. The creation of more Icelandic krona would just push down the exchange rate. Fearing this, investors began shunning the krona. It tumbled more than 40% against the euro this year.

Just about everything but fish is imported here, so the plummeting krona has caused prices of cars and food and furniture to rise rapidly. Inflation hit 14% recently. Families are squeezed. In the past five years, household debt doubled as people bought new homes and the tricked-out sport-utility vehicles that chug through Reykjavik's streets.

Most loans are inflation-linked, meaning payments rise with inflation, or in foreign currency,replica watches, which means payments rise with the sinking krona. Today,replica handbags, both are calamities.

Gisli Gislason, the director of the Reykjavik port, has an office that looks over the harbor where cargo ships haul in building materials and cars, and trawlers send out fish. He saw the storm brewing a couple of months ago, when imports started to fall off. Exporters began to recover.

'Overnight, the change of emphasis is going from banking over to solid products, and that is fish and aluminum,' he said.

Those fisherman who didn't plunge into banking are breathing easier. Halldor Leifson had worked in the industry for a decade and a half,replica watches, in jobs from seaman to plant supervisor. A year and a half ago he thought he'd bail for cushier employment.

'Every one of my fellows worked in the banks,' said Mr. Leifson,replica watches, dressed in a white smock coat and a blue hair net, standing on the floor of a fish plant in Reykjavik's harbor. 'The guys had been saying, 'You're still working in fish?''

Mr. Leifson mulled a job as a consultant to banks, but in the end he got cold feet about leaving an industry that had long been his family's livelihood. 'Thanks to God,' he says. Behind him rise rectangular tubs stacked 10 high. Fish spend three weeks inside, curing in pebbly salt. A real economy needs products to sell, Mr. Leifson says. Banking is 'paper money. You can't do anything with paper money.'

After years of scorning fishing as dirty and boring, the paper-money princes may have second thoughts. 'Those especially who have been raised in small villages close to the sea, they still have it in their blood,' says Mr. Leifson. 'I think it is just a question of moving back.'

In an address last week, Iceland's prime minister told his countrymen that they would have to fall back on the resources of land and sea. Fishermen say they believe the government will raise cod quotas to goose the business. This week, Iceland nationalized the three banks. The prime minister said the 'fairy tale' of banking was over.

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