Iceland’s big thaw

Sarah Lyall

For a country that four years ago plunged into a financial abyss so deep it all but shut down overnight, Iceland seems to be doing surprisingly well.

It has repaid, early, many of the international loans that kept it afloat. Unemployment is around 6 percent, and falling. And its economy is expected to grow by 2.8 percent this year. "Everything has turned around," said Adalheidur Hedinsdottir, who owns and runs the coffee chain Kaffitar, the Starbucks of Iceland. "When we told the bank we wanted to make a new company, they said, 'Do you want to borrow money?"' she went on. "We haven't been hearing that for a while."

Analysts attribute the turnaround to a combination of fortuitous decisions and good luck.

But the country did many things different from its European counterparts. It let its three largest banks fail, instead of bailing them out. It ensured that domestic depositors got their money back and gave debt relief to struggling homeowners and to businesses facing bankruptcy.

"Taking down a company with positive cash flow but negative equity would have a domino effect, causing otherwise sound companies to collapse," said Thorolfur Matthiasson, an economics professor at the University of Iceland. "Forgiving debt can be profitable for the financial institutions and help the economy and reduce unemployment as well."

Iceland also had some other advantages: relatively few government debts, a strong social safety net and a fluctuating currency whose rapid devaluation in 2008 caused pain for consumers but helped buoy the all-important export market. Government officials are now cautiously bullish.

"We're in a very comfortable place because the government has been very stable in fiscal terms," said Gudmundur Arnason, the Finance Ministry's permanent secretary. "We are self-reliant and can borrow on our own''.

... contd.

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