Customer Reviews

Why Iceland?: How One of the World's Smallest Countries Became the Meltdown's Biggest Casualty

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This is an excellent account of the Icelandic financial disaster as written by the Chief Economist of the leading "at the time" Icelandic Bank, Kaupthing. I was on the edge of my seat, astonished that I could get these "front row" details from a senior member of the bank who understand macro economic concepts and how they led to the downfall of the firm he obviously loved. I was intrigued at the conclusions that were drawn but ultimately saddened by the cold shoulder so many supposedly "friendly" countries offered during Iceland's fall from grace. The overall lack of expertise within the central bank of Iceland is clearly the leading cause of this severe depression. The central bank ignored countless signs and relied too much on "Hope" to solve its problems. Although we know how it ends I kept hoping it would end differently for Iceland's sake.

Great book. Let's hope Iceland remains the only country to experience this severe of a collapse.

This wonderfully written story of Iceland--historical and contemporary--is a saga in the true sense of the word. It is an epic tale of single-mindedness and stubbornness that led to a disaster that continues into 2010. Jonsson is an astute observer--both of Icelandic economics and Icelandic culture. He neatly weaves economic and and financial developments over the past decade into 1000 years of history to give context to Iceland's meltdown.

By tracing the roots of Iceland's downfall to its deeply entrenched traditions, Jonsson's is also a tale of other countries hit by the current financial crisis and recession. Greed, hubris, resistance to regulation, asymmetric risk-taking, bubbles are all characteristics of Iceland and the United States. By learning about Iceland, we learn about the world financial system.

The book is written at a level appropriate for any reader--expert or not. I recommend it heartily, to be read side-by-side with Reinhart and Rogoff's equally compelling history of banking crises. While Reinhart and Rogoff offer broader coverage of crises, Jonsson provides a deeper analysis of a single crisis, firmly establishing its roots.

Iceland was the first victim of the global banking crisis of 2008, when its heavily-leveraged international banks all collapsed--taking down many British savers as well as inflicting a major blow to the home economy.

Jonsson tells the story of the crisis, beginning with a brief history of Icelandic banking and then moving to a blow-by-blow account of events. He gives us capsule summaries of various businesses and their highly-leveraged adventures, with lots of factual detail but often insufficient analysis. Charts of companies, subsidiaries, name changes, and principals would have been nice, as would time lines of bank failures, interventions, and legislation. There information is here, but visual references would also be helpful.

Events make it clear that there is plenty of blame to go around - Icelandic entrepreneurs, state banks, regulators, and politicians; foreign politicians and bank regulators, especially in the UK; and international financial institutions.

With all the market failures and institutional failings, it's surprising that Jonsson attributes many problems to Icelandic culture, starting his story of the banking crisis with Iceland's conversion to Christianity in the year 1000. The flip side of this overemphasis on culture is a relative inattention to Icelandic politics. Sure, David Oddsson was a key player in establishing the free-market policies of the 1990s, and as a governor of the Central Bank, making a mess of the crisis response. However, Iceland has coalition governments and most of the other parties and players are invisible in this account.

Finally, I'm struck by how many of the underlying factors are also found in other countries, and have not been addressed by reforms after 2008. He concludes that Iceland may be the canary in the coal mine. Readers concerned about the future of the international banking and finance sector will find much here to lose sleep over.

What happens when arrogant financiers hijack an entire country and use it to game the world financial system? The answer is: it depends.

In the case of Iceland, a democratic government refused to bail out the bondholders of its three swashbuckling international banks, whose aggressive empire building through foreign acquisitions, incestuous domestic equity coups and relentless grabs for overseas deposits left them sitting ducks for hedge fund speculators who could count things like the country's GDP and its tiny population of generally prosperous and conservative citizens. What the hedge funds did was short the country's stock market and currency, while buying leveraged insurance on the banks' bonds through credit default swaps. In the insane world of OTC derivatives, it was easy to bet on default without owning any bonds, and it was only a matter of time for the banks, despite the fact that on the whole their methods were if anything more conservative than those of British and American cousins. Iceland's banks had no subprime exposure and little involvement in securitization. What the banks had instead was the inevitable dependence on repo financing secured by dubious assets, a volume of overseas branch deposits which overwhelmed the country's existing deposit insurance scheme, and billions in overseas bond borrowings attracted by Europe's highest interest rates and the expectation that sovereign nations do not default.

When the kreppa hit the fan, the debt free government of Iceland refused to save either the banks or the foreign bondholders. It left British depositors who had flooded into high interest "Icesave" accounts (offered by local branches of Icelandic banks) twisting in the wind. This last gambit was a definite defiance of international banking fair play. It led the Brits to nationalize Icelandic assets under its convenient antiterrorism laws, throwing the country quickly into chaos.

What happened ultimately is quite interesting. The rock star banksters were wiped out and some were forced to decamp. Iceland's domestic depositors of modest means lost nothing, although the stock market lost 90% of its value and unemployment reached 10% while the currency cratered. Yet, the losses seem to have been concentrated where they should have been, in the class devoted to plunder and speculation. The country survived the crisis free of foreign debt, has since begun going back to work and is fortunately in a position to capitalize upon energy independence and a fully funded pension scheme under a Social Democrat government focused on concerns of the domestic population rather than reputation in global banking circles. It is too soon to tell how this will all turn out. For those impervious to cold weather, Iceland may prove a refuge in the financial crises sure to come. How it feels about immigration I have no idea.

As for the book, it is not easy going but worth the effort for those with the background to read between the lines. The jargon of finance flows effortlessly across the author's pages, and for one having only the understanding of a determined financial amateur, there will be long stretches of nodding off and more than occasional rereading of paragraphs to decipher what is actually meant. I would have given Why Iceland five stars had I been certain I fully understood it. But I cannot help feeling the country did the correct thing in the circumstances. No doubt time will tell.

Interesting study on the specifics of the sudden and catastophic collapse of Iceland's economy. Well written. Provides an insight into how such an occurence can happen not only on a small scale, but on much larger, albeit more secure economies.

WHY ICELAND: HOW ONE OF THE WORLD'S SMALLEST COUNTRIES BECAME THE MELTDOWN'S BIGGEST CASUALTY tells how Iceland changed from one of Europe's poorest countries to one of its wealthiest, with the typical Icelandic family seeing its wealth increase by 45% - a wealth built on the worldwide credit boom that then collapsed in 2008. Within a week all the wealth disappeared and Iceland's banking sector was seized by the government. This analysis of its economic meltdown considers a banking empire's rise and fall and comes from an insider who is head of Research and Chief Economist at the former largest bank in Iceland. While it's a 'must' for any business collection, it's reviewed here because its readability and message makes it key to any general lending library.