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News: Iceland's road to bankruptcy was paved with U.S. ways


Iceland's road to bankruptcy was paved with U.S. ways
07:57 AM CST on Thursday, December 11, 2008
By JIM LANDERS / The Dallas Morning News
jlanders@dallasnews.com





REYKJAVIK, Iceland – Windswept scaffolding hides the proud Hallgrims Church steeple that towers above this city, much as Icelanders hide their faces when you ask about the economy.

"The only thing most people have ever heard about Iceland is that it went bankrupt," said political scientist Gunnar Helgi Kristinsson.

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The road to ruin for this snowy North Atlantic island, featuring a pit stop at Fort Worth's AMR Corp., was paved with American-style capitalism.

Over the last six years, a group of about two dozen young, U.S.-educated financiers took Iceland on a Viking voyage of acquisitions, grabbing airlines, banks, mortgage lenders and securities traders from Texas to Hong Kong.

One of the new Vikings was Hannes Smárason, an MIT-educated McKinsey & Co. veteran in his early 40s. In 2004, Mr. Smárason led a group of investors who bought Icelandair. The airline had a large cash pool to cushion it from shocks in fuel prices and ticket sales. Mr. Smárason, as head of a holding company called the FL Group, used that cash to go on a buying spree.

FL Group bought a controlling stake in Glitnir Banki hf, one of Iceland's three largest banks, in 2005. It bought other banks, real estate brokerages and asset management firms in Norway, Sweden and Finland. It bought shares in two of Europe's largest low-cost airlines.

In 2006, the FL Group sold Icelandair and bought nearly 6 percent of the shares in AMR, the parent company of American Airlines. By September 2007, it had a 9.1 percent stake and was urging AMR to divest American Eagle, its AAdvantage frequent-flier program and other properties to boost its share value.

Glitnir and Iceland's two other big banks – Landsbanki Islands hf and Kaupthing Bank hf – built loan portfolios totaling more than $125 billion, seven times larger than Iceland's economy.

Unlike other banks, they had little in the way of deposits to use as operating capital. Instead, they borrowed on global financial markets. Those obligations vastly exceeded the size of Iceland's Central Bank, which would ordinarily be the lender of last resort in a banking crisis.

Like their Wall Street counterparts, Iceland's banks spread their risks by bundling the loans they issued into securities derivatives that were sold around the world. They also bought the securities marketed by other finance houses (though not any toxic U.S. subprime mortgages).


Elton-size parties

The bankers partied by flying in Elton John for a Reykjavik birthday bash. They dined at Nordic/Asian fusion restaurants where entrees started at $50. They danced at Reykjavik clubs where bottle service tabs ran to hundreds of dollars.

Iceland's economists traveled the world with PowerPoint presentations hailing the Icelandic economic miracle. Its 312,000 people were among the world's richest.

But their banks owed what amounted to $250,000 for every man, woman and child in the country.

Between 2003 and 2006, Glitnir's income increased fourteenfold to 259 billion Icelandic kronur, or $37 million. In that same period, the nominal value of securities derivatives held by the bank went up eightfold to 3.57 trillion kronur, or $51 billion.

The party stopped in October. Glitnir and Landsbanki failed first. The government did not have enough money to bail them out. With 300,000 British savers holding suddenly uninsured accounts at Landsbanki, Britain invoked anti-terrorism laws to freeze all of Iceland's assets.

The British move toppled Kaupthing, Iceland's last remaining big bank. The krona lost 70 percent of its value before trading was halted.

In a sign of how little control Iceland had over its own finances in the last three years, thousands took out mortgages and auto loans denominated in foreign currencies.

Loans in Icelandic kronur were indexed to inflation. A mortgage might have a nominal interest rate of 4 percent, but that, in practice, could be a 20 percent rate when inflation climbed to 16 percent.

Foreign currency loans offered fixed, low interest rates. Arney Einarsdóttir, who teaches human resources at the University of Reykjavik, and her florist husband took out a second mortgage in 2006 in Japanese yen and Swiss francs. With the collapse of Iceland's currency, their loan payments have doubled. On paper, they've lost all the equity in their home built up over the last 18 years.

"The krona is ruined. It's worth nothing," Ms. Einarsdóttir said. "Who could have expected this?"

Struggling days
Icelandic companies that depend on global finance and imports are firing thousands of workers and closing down. Homeowners and car buyers holding loans denominated in foreign currencies are gasping over ballooning payments. With protesters pelting Iceland's little parliament with eggs and toilet paper, the government is pleading for money with governments from Washington to Beijing.

The Viking financiers have sought refuge abroad. Their public relations experts say rehabilitating their images will have to wait until the financial blood-letting stops.

Mr. Smárason left the FL Group at the end of 2007, after selling its AMR shares at a loss of more than $300 million. He is living in London and could not be reached for comment.

The FL Group, now called the Stodir Group, is operating under the protection of Iceland's courts, with a moratorium on creditor payments until January.

Iceland Prime Minister Geir Haarde said he knew little about the FL Group's role in Iceland's economic disaster. (The prime minister's wife was a member of the FL Group's board until early in 2005, when she quit to protest Mr. Smárason's management decisions.)

"I know they invested in American Airlines and lost a lot of money," Mr. Haarde said. "They were probably too aggressive in their investments."

Mr. Haarde, who was Iceland's finance minister before becoming prime minister in 2006, holds degrees from three American universities (Brandeis University, Johns Hopkins' School of Advanced International Studies and the University of Minnesota). He was an economist and a journalist before turning to politics.

He argues that the global financial crisis tumbled Iceland's banks.

"They had survived the subprime crisis. They had arranged finance," Mr. Haarde said. "But after the collapse of Lehman Brothers, most interbank lending stopped. ... Our banking system and, as a result of that, our entire economy became a victim of the global financial situation."

AMR has been implementing some of the divestments recommended by Mr. Smárason. Icelanders, meanwhile, say it's time to turn away from finance toward fishing, food processing and tourism to grow the economy.

There's also widespread support for joining the European Union and abandoning the Icelandic krona for the euro.

"Keeping the krona for 300,000 people – isn't that ridiculous?" asked Ms. Einarsdóttir. "Imagine a small city that size in the United States trying to keep its own currency and economic system in this global economy."


Source: Dallas News

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