FROM RUSSIA WITH LOVE
Tuesday, October 7, was a day when bank employees came early to work, even though they had no idea if their employers had a future in the world. Landsbanki had gone into receivership with the FSA the night before and Glitnir, its contract for government purchase notwithstanding, was next; Kaupthing followed on Wednesday, believing to the last that it would be the sole survivor.
The currency market were for most purposes closed—there were no buy offers for the bludgeoned ISK—but the dealers’ phone lines were hot with calls from terrified foreign traders seeking to clear out their ISK positions.
But at 8:26 that morning, the CBI made an astounding announcement: “The Foreign Exchange Reserves of the Central Bank of Iceland are bolstered.”
The announcement seemed to be a deus ex machina that could yank the nation away from the precipice. It declared that the Russian ambassador to Iceland, Victor I. Tatarintsev, had told CBI’s chairman of the Board of Governors—David Oddsson—that very morning that Russia would grant the bank a EUR 4 billion loan. Its maturity would be three to four years, on terms in a range of 30 to 50 basis points above Libor. Prime Minister Vladimir Putin had confirmed his nation’s commitment to the loan. Geir Haarde had initiated talks with Russia some months before. Representatives of the CBI and the government were to finalize the agreement in Moscow. The loan would be life-blood to CBI’s foreign exchange reserves and would stabilize the krona’s exchange rate.
The research departments of the banks immediately were barraged with queries from foreign analysts and reporters who wanted the inside take on what was really happening. Forty minutes later, CBI issued a second announcement titled “Foreign Exchange Measures.” It stated that “following consultations with the Prime Minister, the Central Bank of Iceland has decided to engage in foreign exchange transactions in the interbank market today at an exchange rate that takes reference from the trade weighted index of 175, equivalent to 131 krónur vis-à-vis the Euro.”
In other words, CBI was announcing a peg of a far more favorable exchange rate than had existed in the last market trades of the prior week. Given the lack of an active currency market in the new week—when all three banks were headed to receivership—the peg was far above any sensible market-clearing price.
There was something amiss, and confusion set in. CBI’s economic department seemed paralyzed by disbelief, without information; this announcement was all news to them. Moscow officials at the ministry of finance did not seem to recognize the terms of the loan, either.
CBI had to admit that this loan had yet to be finalized. At 11:13—not quite three hours after the sensational news broke—the following quotation appeared on TV screens around the country while a cable show was airing on the Bloomberg business news network: “Central bank Governor David Oddsson said an announcement earlier today in Reykjavik that the Russian loan had been agreed upon was incorrect and talks were ‘ongoing.’ Russian Finance Minister Alexei Kudrin confirmed that ‘we have a request from the Icelandic government’ and said Russia’s reaction is ‘positive.’”
Given this volatile news cycle, the new peg did not fare well. The dealers at the banks instantly called CBI to buy foreign currency at the advertised price. After a brief hesitation, the bank sold off EUR 6 million. None of the banks was willing or able to give away their euros by selling them at this price, being on the way to receivership or already there. Nevertheless, CBI published a new announcement on its Web site the next morning:
“Measures designed to create stability concerning a realistic exchange rate for the króna are still in progress. . . . This does not mean that the exchange rate has been fixed; it only means that the Central Bank considers the low ISK exchange rate that has developed in the recent term unrealistic. The Bank requests that market makers in the interbank market support its attempts to strengthen the króna.”
That stance was held for most of the day, until CBI pulled in its horns and published a new announcement:
“For the past two days, the Central Bank of Iceland has carried out foreign currency trading at a different exchange rate than that on the foreign exchange market. It is clear that there is insufficient support for this exchange rate; therefore, the Bank will not make any further such efforts for the time being.”
This was probably the shortest peg in history, and it was an embarrassment for Icelandic economists. The aptitude—or lack thereof—of their central bank was now subject to public ridicule. A peg of this kind is useless unless it is supported by credible economic measures and ample foreign reserves. Even assuming the EUR 4 billion Russian loan was granted, it might have worsened the situation had its funds been offered to the private sector at an absurdly low price through a peg. The banks, such as they now were, retained just enough public trust to keep citizens from cleaning out their deposit accounts, but that trust was extremely fragile. It certainly was possible that opening the currency market again with a favorable conversion rate might precipitate another bank run, as people sought to convert their assets into euro notes or transfer them outside the system to foreign bank accounts.
Meanwhile, the mere possibility of Iceland accepting a Russian loan brought a new geopolitical dimension to the banking crisis, one that threatened to develop into a new international dispute. On October 10, after the failed peg attempt, CBI started to ration out foreign exchange, with preference given to trade in necessities.
THE HANGOVER FROM THE CARRY TRADE
Iceland had endured two crises in 2008. One, in banking, was “solved’ by the collapse and restructuring of the three major banks. The currency crisis had actually started in March but it became acute when the krona became all but inconvertible by the end of September; the banking collapse did nothing to solve it. It peaked, at new, unprecedented heights, after Britain invoked terrorist laws on October 8, which practically cut off the currency market’s payment-clearing mechanism from the rest of the world.
Repairing the payment system was slow, steady work. But the currency crisis could not be solved without an outside loan, due to a great hangover from the carry trade. CBI had fixed its policy rate at about 10 percent above that of the neighboring countries for the past three years, keeping currency high and inflation low. This attracted great quantities of hot money from abroad and contributed mightily to the disequilibrium and overheating of the Icelandic economy. Prior to the banks’ demise, the speculative position of foreigners in Icelandic interest-yielding assets or derivative contracts was around ISK 1,000 billion to ISK 1,200 billion: the equivalent of 80 to 100 percent of the M3 money supply, or 70 to 80 percent of the GDP. The banking collapse automatically cleared up a great deal of this problem, since all derivative or swap contracts with the three banks were now locked up in their defaulted estates.
However, in response to a depreciating krona, Icelandic authorities had floated many large, nominal bond issues, as well as certificates of deposit at the CBI, to lure foreign funds into the country. Foreign speculators were able to obtain the high interest directly from the state without the intermediation of the banks; after the banking collapse, they had about ISK 500 billion trapped in various securities. These funds had to be released for the currency market to ever recover, and to that end foreign currency reserves were needed.
When they wheeled out their emergency law, the Icelandic authorities’ primary intent was to protect the balance sheet of their debt-free republic. Taxpayers had to remain unburdened by the debts amassed by “reckless” bankers. Therefore, authorities argued, the nation was a much safer credit risk now that the bloated banking system was finished, its contingent liability evaporated.
Of course, the state was bound to honor its obligations, and it had not survived the banking crisis without being splattered with some debt. CBI had lent to the banks with their bonds as collateral—these were now effectively worthless—and there had been a government bailout of the money market funds. Now the new banks needed equity. Yet when its fiscal house was at last in order, it seemed likely the government would be no more indebted than that of any other Western nation that had bailed out its banks—perhaps less so. But then, there were the Icesave claims.
Despite the beginnings of a recovery plan, the world press customarily referred to Iceland as a bankrupt nation, much to the political leadership’s annoyance. What was more, other nations were no more willing to lend than they had been before the collapse. It would have been quite fair to ask the government just what plans it had for solving the currency crisis in the event of a loan; after all, the two-day peg had not exactly bolstered its credibility. Rather than risk their own funds, other countries all pointed Iceland in the same direction, toward the International Monetary Fund.
ACCEPTING AID RELUCTANTLY
IMF assistance is an obvious solution to a currency crisis. Indeed, it might have alleviated Iceland’s banking crisis as well, should the government have had the wisdom to ask before the collapse. It would not have been the first time Iceland, a founding IMF member, had requested assistance. But fear of lost sovereignty, or even foolish pride, seems to have prevented Iceland from seeking out the fund as at least a stand-by facility.
On October 3, Tryggvi Thor Herbertsson, then the economic advisor to the prime minister, was asked if he thought the nation would seek IMF aid. “We’re an industrialized country, the fifth-richest country in the world per capita,” he said. “We are working on various measures to provide liquidity to the economy and you’ll see that soon, but the IMF is not an option.”
Oddsson also voiced a blunt opposition to an IMF program in his famous TV interview on October 7. He claimed the IMF would demand that the government give up sovereignty, and claimed that the fund was a recourse for only “bankrupt nations”—which in his view Iceland was not. On the fifteenth, when CBI decided to lower the policy rate from 15.5 percent to 12 percent—in direct contradiction of the IMF plan then being prepared—some suspected the governor was attempting sabotage. In an October 23 interview with the Financial Times, Oddsson offered only “lukewarm support” for the IMF’s rescue package, and hoped it would not end in “humiliation.”
Meanwhile, it is possible to discern sound logic behind Iceland’s pursuit of a loan from Russia. All other nations had rejected its pleas for help. Russia, having benefited greatly from high oil prices in the past year, had amassed nearly $600 billion in foreign reserves by mid-2008; a $5 billion loan to Iceland was small potatoes. What was more, here was a tiny island nation, a NATO founder of strategic importance, seemingly forsaken. The Kremlin likely felt the temptation to make a splash in the international press by offering a desperate country a loan.
By October, however, Russia’s fortunes had reversed when oil prices dropped precipitously. Its own banking crisis had set in, and foreign reserves were shrinking. Faced with these sobering conditions, Moscow’s interest in the venture seemed to fizzle as well; the loan has yet to materialize.
For Iceland, this gambit produced mixed results. Turning to Russia was really a means of demanding attention from the United States, the former cold war ally. This trick had been played successfully in the past, most notably during the Cod War of the 1970s, when NATO forced the British to back away from Iceland. A flirtation with Moscow also piqued the attention of Norway, which, after U.S. forces withdrew from their Icelandic base, was effectively in charge of the North Atlantic. Sure enough, a week after the Russian loan was announced delegations from Norway and the United States appeared. It was the beginning of a new alliance with Norway, the only ally Iceland could claim during the coming winter storms.
But the nation paid a price when its international image was further compromised by its dalliance. The old canards that had painted Iceland as some kind of laundry for Russian mafia money resurfaced. Much worse, however, was the delay that resulted from the chase of a red herring. The government, particularly the Independence Party, seemed to have wasted precious time waiting for Russian money instead of seeking out IMF assistance.
The Social Democratic leader, Ingibjörg Sólrún Gísladóttir, returned to Iceland after a successful brain surgery in the United States but was too frail to participate in the action. There was now a growing division within the government that would result in a split between the two dominant parties less than five months later. Much of the debate concerned national options and direction, but Odds-son’s performance as a crisis manager was becoming a central issue as well. Now surfacing was the age-old dispute between isolationist and internationalist elements in Icelandic society. The former wanted to use the emergency law to the fullest and not accept any responsibility for the private debts of the banks, even though it meant that country would be chastised by the international financial community or the European Union.
The CBI governor had requested entrance to a cabinet meeting on the Monday after Glitnir’s nationalization plan was announced. It was a day of bank downgrades, and CBI likely realized their plan had failed spectacularly. Oddsson’s tone was sermonizing. He argued that the banks were doomed and that “the wall of shields” was needed to protect domestic operations—this was the tack of later emergency laws.
But Oddsson also proposed a new emergency government, in which all parties in parliament would take part. In itself, this was not a terrible idea, but Social Democrats saw it as nothing but a power play. The Independence vicechair publicly suggested that Oddsson would do well to focus on CBI’s tasks and steer clear of politics.
Another confrontation occurred after the emergency law was drafted. Haarde proposed that a committee should be formed with representatives from the ministries of finance and commerce, the prime ministry, CBI, and FSA. The committee chairman? Mr. Oddsson. Again, the essence of the idea was practical, but Social Democrats were not going to allow their old adversary a shot at control of the country. Soon they were demanding that Oddsson would be relieved from his CBI post. So were angry crowds that protested every Saturday, throughout the winter.
Haarde often sounded indecisive during the crisis but he always made one thing clear: Oddsson would not be removed as CBI governor. After the banking collapse, Oddsson claimed publicly, on numerous occasions, that he had warned his peers in government repeatedly about the pending collapse—going back as far as February 2008—to no avail. Of course he blamed the “Viking raiders” who had leveraged the country abroad for the ultimate collapse. But each of his public utterances implicitly implicated his friend Haarde; after all, if the CBI governor was shouting warnings, the prime minister ought to have listened and taken action. Oddsson’s critics pointed out that if he had really known what was going to happen to the banks in early 2008, it was beyond comprehension why the CBI had continued to accept “love letters”—unsecured bonds—from the banks in collateralized lending until the very day of the default. It could also be pointed out that all three of the banks actually had relatively sound Icelandic assets from their loan portfolio that could have been tendered instead of the love letters, and that CBI saw no need to request them. As it was, when the banks went into receivership and defaulted on the bonds used in the collateralized lending, the CBI lost an amount roughly equal to 25 percent of Iceland’s GDP and de facto joined the banks in “technical” bankruptcy with negative equity.
The first IMF fact-finding team had arrived on Sunday, October 5, one day before the emergency laws were passed. Over the coming weeks, in coordination with CBI and government officials, IMF hammered out a joint economic plan that included a $2 billion loan from the fund and $4 billion from central banks in Scandinavia, Japan, and other nations. These Samaritans were lending under the IMF’s “seal of approval”; they were not lending directly to Iceland. Finally, on the twenty-seventh, after weeks of political arm-twisting, the country sought IMF assistance with the launch of an economic stabilization plan. But by then, yet another obstacle had arisen.
THE ICESAVE DISPUTE
As all-consuming as the banking crisis was, some elements of the government tried to push forward with their business. Despite Haarde’s retreat and the illness of Gísladóttir, the foreign service still was promoting Iceland’s candidacy to the UN Security Council. This was an effort almost four years in the making, and diplomats were determined that it would not be sunk by the toxic publicity created by ruined banks and the “terrorist state” brand. They went on wooing other small nations and arguing their case to the last. But on October 17, Austria and Turkey handily defeated Iceland in the vote after all and subjected it to yet another global bruising.
While the Icelandic diplomatic brass was treating representatives from tiny island states in the Pacific to blueberry pancakes and other Icelandic delicacies to solicit their vote for the UN security council, the British foreign service was quietly and efficiently gathering support among the other nations of the EU for a resolution to the Icesave imbroglio. Despite the utter collapse of their international standing, Icelandic officials remained evasive and ultimately uncommitted to a state guarantee for Icesave’s British customers. The British also wanted more than the minimum guarantee. They wanted the same treatment that Icelandic depositors had received, a full refund for the institutional depositors to the accounts. The delay was so prolonged that the British government at last decided to pay out in full to its compromised citizens. Still determined to make Iceland pull its weight, they sent a delegation to the island to negotiate a settlement, but this effort too proved unsuccessful.
Part of the problem was that Icesave had created a hot-button political issue at home. The public, finding out that their bankers had so deeply indebted the nation abroad, was whipped into fury. After all, the number of British account holders was roughly equal to the total number of Icelanders—300,000—so in a way, all Icelanders would be saddled with their very own Icesave account to pay back; a significant sum indeed. The British claim amounted to between 60 and 80 percent of the GDP—this just seemed to be an impossible burden when the economy in general was still a wreck.
Faced down by angry constituents, the government insisted that Landsbanki assets ultimately would cover the Icesave claims and that their best position in the matter was a hands-off one. They continued to claim there was no legal basis for them to issue a full guarantee, since the Deposit Insurance Fund was the liable party. In fact, the Icelanders were smarting under the Terrorism Act, and they were determined to make any issue into a forum on which they could protest what to them was an injustice. They argued their cause at NATO meetings, and even refused to allow British fight squadrons to enter the country as part of NATO-led surveillance missions.
The British saw their own methods as an indemnity, not injustice, and they believed the stubborn, small nation needed more tough medicine, not less.
When Iceland finally filed its application to the IMF, it was blocked by the English, in collaboration with Holland, another Ice-save nation. The British were also able to enlist another powerful ally, Germany, in which Kaupthing had been offering Edge accounts under an Icelandic deposit guarantee. The total owed to Edge customers in Germany was EUR 400 million, and it was never in danger of being lost; all of Iceland’s German debts were to be paid in full. But for some reason, the Germans were not swayed by the numbers and gave their support to Britain as well.
This was just one front of a growing financial blockade. With foreign reserves dwindling, foreign exchange rationing, and a growing shortage of imports, the island was beginning to suffocate. The British meanwhile had managed to bring into their siege camp all other EU nations, including the Scandinavians.
The coalition had been formed as a matter of principle, and as a means to keep the Common European Market and cross-border competition in financial services intact. Banks were extending their reach throughout Europe, but with their home country’s deposit guarantee as the ultimate insurance. If one nation was unable to provide this insurance abroad, there could be more disasters in store, even though a home-nation guarantee was not required in the strict, legal sense. After a year of crisis, the world was no longer willing to risk another system collapse or continental bank run because of one outlier’s intransigence.
Iceland, stubborn as always, held out for a month against the inevitable. From their perspective, they were on the receiving end of mistreatment. Most ordinary Icelandic citizens felt as if they had been expelled from Europe.
In the end, however, there was little to do but accept the conditions dictated by their tiny size and isolation. It does not really matter what you think, after all, if the whole world is thinking otherwise.
Under threats of expulsion from the European Economic Area, the foundation of their prosperity, the Icelandic government accepted liability for the Icesave accounts on November 17. The British had conceded one demand, and the Icelanders would pay back only the minimum deposit guarantee. The IMF’s plan became effective on November 20.
ALWAYS LOOK ON THE BRIGHT SIDE OF LIFE
Iceland now enjoys the dubious distinction of being the only Western nation to have “solved” its banking problem. About 85 percent of the financial system collapsed when the three banks were taken into receivership. Six months later, two-thirds of the remainder fell, and the FSA took control of a couple of savings and loan funds and the investment bank Straumur-Burdaras. The savings and loan funds were essentially out of equity (and actually more than that), but Straumur could not meet foreign refinancing by set due dates. This means that about 95 percent of the Icelandic banking system is now under state control while other Western nations are still trying to save theirs.
The three banks now operate under the old bank–new bank division outlined in the emergency law. The old banks were not brought into default but have effectively become asset management companies. The aim is to recover as much value as possible from the foreign assets of the old banks to compensate bondholders. This will take years.
The new banks are now rebuilding themselves as domestic commercial banks. The domestic assets that were transferred to them at the time of the collapse have yet to be appraised, which means that each bank has operated without a defined balance sheet over the winter of 2008–2009.
The events of 2008 have not been very kind to the loan portfolio of the banks, as would be expected from a situation that includes 100 percent currency deprecation, collapse of property prices, 95 percent wipeout of the stock market, 10 percent unemployment, terrorist sanctions, a credit freeze, double-digit inflation and so on. The majority of all businesses in Iceland are technically in default, and a enormous write-off is expected from the corporate loan books of the old banks.
There is some good news. The old bank–new bank construction is in many ways similar in practice to the bad/good division implemented in many Western countries. The government will buy the Icelandic assets from the old banks at fair value—after a realistic write-off—and the new banks might have the chance to start with a clean slate, with the loan losses left in the old banks. The asset transfer is a very delicate, complicated job; if the price is too low, the bondholders will complain of being unfairly treated, if too high, the banks will be bankrupted directly. For many of these assets no price can possibly be estimated, given the uncertainty that surrounds the Icelandic economy at this time. This is banking in a gray area that has not really been chartered before, and no one knows the final outcome. At present, it seems Iceland will have a new banking system defined by its own domestic savings pool, about equal to one to two times the GDP.
The large investment companies died one by one over the winter. Their assets were restructured and either taken into custody of the banks or just sold off. When Baugur went into default in early March 2009, Jóhannesson claimed that Oddsson had taken his “final revenge.” He has been stripped of nearly all of his companies. Jóhannesson wrote an article for a leading daily titled “Did I Bankrupt Iceland?” in which he rejected the role of a major culprit in the national disaster. He has left the country, stating that Iceland needs a break from him and vice versa; like Arnold Schwarzenegger, he promises, “I’ll be back.”
Some investment companies remain afloat—barely—as they try desperately to close a restructuring deal with their creditors, turning debt into equity; extend the maturity of payments; and so on. For most of them, dealing with foreign creditors is easier than dealing with the new state-owned banks. Postcollapse Iceland has little patience for the “Viking raiders” who leveraged the country abroad and fast-tracked it for ruin. The former owners of Kaupthing are still claiming that their short position against the krona, taken through forward contracts with the old banks, should be balanced against its outstanding debt to them.
More worrisome is the fate of the “real” multinationals, formerly successful production companies that had been built up before the financial bubble. They are now virtually without banking service and are stigmatized by epithets like, among others, “the Nigeria of the North.” The new banks have limited foreign currency, nor are they big enough to service companies on an international scale. There is real fear that these multinationals will have no access to foreign financing and will be taken over by foreign creditors in the coming months. If this comes to pass, Iceland truly will have lost everything it was working for during the internationalization of the corporate sector.
Around 60 to 70 percent of the employees of the old banks were transferred along with the domestic assets and are now working in the new banks. Most of Einarsson’s top brass either were fired from the bank or left voluntarily. The bank-funded employee stock ownership program has backfired horribly since the collapse and left many personally bankrupt. It is still being debated, as debts are settled, if employees should be held personally responsible.
The IMF solution to Iceland’s balance of payment problem was to impose capital controls and effectively fence the carry traders still stuck in the country. At the same time, policy rates were pushed up to 18 percent and kept level until March, when a program of cautious rate cuts began. The wisdom of implementing strict capital controls while keeping interest rates higher than any others in Europe, in the country hardest hit by the credit crisis, is questionable to say the least. The interest rate payments on the carry trade positions are invested in government securities, and are roughly equal to the revenue from the cod fishing around Iceland. The high interest rates also threaten to deepen the already steep output contraction, which forecasters predict will reach 10 to 15 percent in 2009.
With the ISK so low, Icelandic wages are now approximately 50 to 60 percent of the general wage level in Scandinavia. Private consumption has plummeted. Unemployment is now around 10 percent and much of the population is at least considering moving abroad. But with unemployment also rising rapidly in neighboring countries, opportunities away from home are hardly bountiful.
A lower ISK had provided such stimulus to exports that the country developed a trade surplus of around 5 to 10 percent of the GDP. With the price of the primary exports—fish and aluminum—plummeting due to recession abroad, this advantage is disintegrating as well. Hope for foreign dollars is now tied to the tourists, mainly Scandinavians, who have been flocking to the island to take advantage of bargains, and perhaps, to witness the aftermath of disaster.
Once the Icesave dispute was resolved and the common enemy beyond the shores retreated, in November 2008, bankers and politicians have had no buffer from the wrath and incredulity of the population. “How the hell did you bungle this so badly?” is a question that defines their professional existence. The bankers, former darlings of the nation, are now described in the media as greedy, reckless, and even criminal. A truth commission has been appointed to re-create the events of the collapse, and a special prosecutor will investigate any crimes possibly committed in the financial market.
There is no doubt that many of the actions of the banks in the last 12 months of their existence resided in a gray area. It has yet to be determined if they were actually breaking Icelandic law or European directives in a systematic way, reckless though they might have been. Nevertheless, that does not mean the former titans can rest easy, however; investigations of this nature are rarely judged to be worthwhile if they let an entire rogues’ gallery off scot-free.
The government, as Haarde’s statements convey, denied any responsibility and attempted to heap all the blame on the bankers. But they could not keep public anger at bay, either. Protests outside the ministries had begun in October and gathered steam each week, even while they remained peaceful. After a brief lull through the Christmas holidays, anger burst forth anew in what would be called the “kitchen-ware revolution.” Protestors banging pots and pans surrounded and all but blockaded the parliament house and shouted again and again “Incompetent government!” They demanded a new election and called for certain officials—notably Oddsson and the chief of the FSA—to resign.
There were signs that the protest might become violent once they began to attract young toughs, anarchists, and common criminals into the mix. In one instance, the peaceful (but still vociferous) protestors were needed to form a human shield around the small band of Reykjavik riot police to protect them against possible mob violence. This incident was exceptional (especially for Iceland, which had rarely known protest of any kind in modern history); protests in the main were orderly, without vandalism or serious injuries.
On January 24, 2009, Haarde announced his resignation after revealing that he was suffering from throat cancer. Shortly afterward, the Social Democrats defected from the government at large and formed a new minority body with the Left-Green Party. The new combine’s leader, Jóhanna Sigurdardóttir (born 1942), is a seasoned Social Democrat who won distinction as the world’s first openly gay minister on February 1. Sigurdardóttir was originally a labor union leader, but has 30 years of experience as an MP. An outspoken advocate of social reform and longtime critic of the extravaganzas in the corporate sector, she enjoys wide approval and a reputation for honesty.
In the elections held on April 25, the center-left parties obtained a majority in parliament for the first time in Iceland’s history. Independents went down in a crushing defeat. The new government had declared that the Scandinavian-model economy, rather than freewheeling Anglo-Saxon capitalism, is the new way forward.
David Oddsson was not about to cave to the demands for his head, even while CBI was besieged by protestors. Once his party was driven from power in February, however, the new prime minister sent him a letter that called for his resignation. He did not budge, however, until a special law was passed in parliament, on February 26, that reduced the number of CBI governors from three to one, effectively terminating his position. A Norwegian specialist was brought in as a stopgap while the search continues for a permanent appointment to the governor’s chair.
Beneath the hurly-burly of politics, Icelandic society has undergone its own quiet transformation. Historically, the nation adhered to egalitarianism, and there was virtually no ostentatious wealth. The banking boom changed this, and quickly, but in its aftermath values are returning to their former patterns. While the wealthiest Icelanders have lost almost everything, many are quite relieved to find equality restored.
There is abundant hope that a new Iceland will be built as well. National awareness has increased, as evidenced by certain increases: the consumption of Icelandic food is up, the birthrate is up, the sale of books has skyrocketed, theater tickets are selling in record numbers, and so on. By losing so much and sharing in suffering with their neighbors, people are now experiencing a new freedom granted by the end of materialism. Education and health care remain free. The nation is self-sufficient, in terms of both food and energy, which adds greatly to the sense of security.
Icelandic pride has found a new medium; its people refuse to see themselves as victims. For 20 years a nation of wannabes, they have already begun to make new plans. In a matter of months, Iceland has cleared away the wreckage of the multinationals and reinstated a state-owned banking system and capital controls.
There are now two distinct camps in Icelandic politics. One sees entrance into the Europe Union as the only hope for recapturing some of the ephemeral international glory. The other is quite happy to return to the old Iceland, contained in a natural, resource-based economy. To keep order at home or push aggressively outward: it is a very familiar choice to Icelanders, and perhaps a natural outgrowth of life on a remote island, where the sea promises both solitude and adventure.