Iceland

ICELAND

THE SHADOW
The credit crunch has reawakened market fears about Iceland’s economy, in particular its banking system, for the second time in three years: in spring 2005 similar concerns put pressure on the krona and obliged the government and leading banks to reassure financial markets that all was well. The concerns were sparked by ratings agency Moody’s, which in late January said its six-year Triple A rating for Iceland was “at a crossroads” and indicated it might downgrade the entire banking system. And S&P has warned that Kaupthing, the largest bank (whose latest profit figures were 33% below market expectations), Glitnit and Landsbanki all face tough times.

THE SOLUTION
The government has emphasised that public finances remain sound and the economy is diversified and thus secure. Icelandic companies, which have invested across Europe and further afield, say they have essentially long outgrown the domestic economy and banking system and have healthy balance sheets. “All is well here – these concerns have nothing to with us,” said a spokesperson for Baugur, owner of a long list of British and European high street stores including Hamleys and Iceland. Banks meanwhile say they are having no problem securing financing on the world’s frazzled financial markets, although most are paying well above Libor.

THE REBRAND
Iceland’s 300,000 people enjoy some of the highest living standards in Europe – indeed, the OECD reckons that in per capita terms this is the world’s sixth wealthiest economy, a far cry from when as a Danish colony it scratched a living from fish and living conditions were impoverished. Since independence in 1944 and especially during the 1990s, Iceland has tried to make itself almost synonymous with globalisation and innovation, while its businesspeople have won reputations across Europe as tough and canny operators with diverse interests.

THE CHALLENGES
Continuing to convince the global investment community that all is well may prove really tough if the global credit squeeze persists and finance markets get panicky. Even regular Iceland-watchers admit puzzlement at how this tiny island in the north-west Atlantic got so wealthy, while the sheer scale of the banking sector’s growth is unprecedented: total assets jumped from 96% of GDP in 2000 to over 800% today. Although Transparency International places the country in 6th place in its latest Corruption Perception Index – bettered only by the other Scandinavian countries, New Zealand and Singapore – Iceland must also reassure the world about the structure of its business. Its proud, strongly interrelated population has a system of complex business crossownership to match, which has raised domino-effect concerns in the event of a major crisis at one or more bank.

THE FUTURE
Things look pretty good if the banks can ride out the current storm. By not joining the EU but joining NAFTA, the country may have secured for itself the best of all worlds: access to the vast internal market without having to abide by the costly and often complex rules Brussels can impose on member nations. Meanwhile, the growing tourism sector is helping spread wealth across the island. However many banks and companies are urging the government to consider replacing the krona with the euro to alleviate currency risk, with many moving to use it unilaterally. The central bank has blocked such moves but repeated currency instability – with the associated impact on inflation and confidence – could yet prompt a top-level rethink.

SHOULD I INVEST THERE?
Probably not, at least for now. Rising incomes and wealth in recent years have fed into the local property market and stock exchange, which means prices are high and, in the latter at least, highly exposed to negative sentiment, of which there is plenty at present. Domestic household debt is also at record levels, while the small population also suggests few opportunities other than for the import business/trade. This last though should not be ignored: aside from fish, which account for 70% of export earnings, everything is imported. Locals are accustomed to high prices, which suggests opportunity for anyone with interesting products to sell.