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Business Daily: Iceland after the crash

26/10/2009

Iceland after the crash

BBC World Service - Business Daily, Iceland after the crash

One year on from Iceland's banking crash, what can the country do to get out of the mess?

Iceland's banking crash turned one of the richest countries in Europe into one of the poorest. One year on, what impact has the crash had, and what can the country do to get out of the mess?

Business Daily is in Iceland - twelve months on from the banking crash which turned one of the richest countries in Europe into one of the poorest. We look at the impact of the crash on Icelanders and their economy and ask - what can the country do to get out of the mess?

On the dockside in Reykjavik the forklift trucks zip to and fro in an intricate ballet, unloading crates of fish packed in ice from a newly-arrived trawler. Fishing has been a mainstay of Iceland's economy for centuries, along with agriculture.  

But in recent decades Icelanders have found other, less hazardous, ways of making a living. The country developed a successful tourist industry. It invited aluminium companies to build huge smelters to take advantage of Iceland's enormous reserves of geothermal energy and cheap hydroelectric power. And then Icelanders stumbled across what seemed like an even better way of making money: banking. 

Until, that is, last October, when the government had to step in to save the three main banks, Landsbanki, Glitnir and Kaupthing, from going under. As the banking bubble burst, Iceland's currency collapsed in value - and the country started going back to basics

While Iceland's fishing companies may be doing well - many are technically insolvent, after borrowing large amounts of money in foreign currencies. When the Icelandic currency, the krona, halved in value their debts soared. It's a symptom of a wider malaise in the economy.  The devaluation of the krona makes Icelandic fish invitingly cheap to foreign buyers.  But by the same token, imported goods have soared in price.

When the banks collapsed 12 months ago, after years of reckless expansion, the government stepped in to bail them out.  It took on a reported $6bn in debt - three times Iceland's entire annual income. And if the government's deep in the red, so are many of its citizens.

In the square next to Iceland's tiny Parliament building the bells of the historic Domkirkjan chime the hours. Earlier this year furious Icelanders staged a series of protests in this very square - Gunnar Sigurdsson helped organise them.  Eventually they brought down the government. 

Its replacement is a coalition of social democrats and left-greens, led by the prime minister, Johanna Sigurdardottir. Her first priority is to restore Icelanders' confidence in the political system. In the long term she needs to restore confidence in the economy. That, she says, means becoming a full member of the European Union and ditching Iceland's own fragile currency in favour of the euro.

But not everyone's convinced.  Iceland's finance minister - who's also the fisheries minister - is Steingrimur Sigfusson.  He's a left-green. And he's not so certain that joining the euro is a good idea.

In an economic crisis governments have fewer options.  Nonetheless, Þór Matthíasson, an economist at the University of Iceland, says the country must be careful not to put too many eggs in one basket, repeating the mistake it made when it became far too dependent on its banking sector.

It is a point not lost on Iceland's industry minister, a social democrat, Katrin Juliusdottir.

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