1.1 Gala at Harpa
At 8 a.m. on October 27, 2011, the brand new Reykjavík Concert Hall and Conference Centre, Harpa, received a steady stream of formally attired dignitaries, both national and foreign. They were attending a conference presented jointly by the Icelandic government and the International Monetary Fund (IMF): “Iceland’s Recovery – Lessons and Challenges.”1 An impressive panel of speakers had assembled, including Nobel laureates Paul Krugman and Joseph Stiglitz, Willem Buiter, chief economist of Citigroup, and various ministers representing Iceland’s government. As often had been the case in Iceland over the past several years, the event also attracted a throng of protesters, who waved picket signs denouncing the IMF, the local government, or the general conclusion that three years after an epic collapse, Iceland was now an example of successful economic rehabilitation. As this was an international conference, the crowd had written out their slogans in English.
Harpa was the ideal location for such a meeting. What better symbolized Iceland’s pre-crisis folie de grandeur and its Icarus-style downfall? Set against the backdrop of Faxa Bay and the Esja mountain range to the north, Harpa sits on the east side of Reykjavík’s old harbor like a giant iceberg washed onto shore, directly facing the Central Bank to the south. According to tradition, this is precisely where it all started. In 874, the legends say, the Norwegian chieftain Ingólfur Arnarson became an outlaw in Norway and fled the country. He set his sights on a new, uncolonized island in the North Atlantic Ocean. When land was in sight, he threw his high seat pillars into the sea and swore to the gods that he would build his farm wherever they directed the pillars. After three years of searching along the coastline, his slaves found the pillars on the east side of a small bay on the southwest coast – what would become Reykjavík’s harbor. Although his slaves thought it a remote headland, Ingólfur nonetheless made good on his oath and founded the first organized settlement in the new country at that very place.
Whether divine guidance played a role in Harpa’s construction is left to speculation. But accomplished hands certainly guided its planning and design. Henning Larsen Architects designed the building in cooperation with Ólafur Elíasson, a Danish-Icelandic artist. The building’s steel framework is clad in geometrically shaped glass panels of different colors and mirrored finishes. Fitted together, the panels create the effect of a crystallized rock wall, reminiscent of Iceland’s crystalline basalt columns, which glitters magnificently in the dark. The winner of various architectural awards, Harpa has been cited as an example of how “architects are only now gaining the courage to crawl out from the under their (functionalist) rocks and begin to explore, once more, the frivolous joys of ornament,”2 and received the Mies van der Rohe prize for modern architecture in 2013.3
Decades in the making, Harpa was the dream-home to the Iceland Symphony Orchestra, a source of great pride since the foundation of the republic in 1944. Nearly 70 years after independence, Iceland’s population had almost tripled to 330,000,4 but it still had fewer residents than at least 50 American cities.5 Nevertheless, Icelanders wanted world-class accommodation for their orchestra as a matter of principle. This is a nation that expects its sporting teams – football, handball, chess or any other – to compete on equal footing with the best, and win. To this end, the nation offers its champions total devotion. Icelanders are driven by the almost incessant urge to show the world they deserve a seat alongside more populous nations. Quite often, their implacable will can triumph against long odds, even in popular sports such as football. In the European Championship of 2016, Iceland progressed to the quarter-final stage after an unbeaten three-match streak in the group stage, and captured a historic win against England in the first knockout round before losing to hosts France at their national stadium. Quite remarkably, these games were attended by almost 10 % of the island’s entire population.
Back home, the best performers deserved the best buildings. In the early 1990s, the football scene in Iceland had been revolutionized with large-scale investments in thermally heated indoor football stadiums, which allowed the Icelandic youth to play through the long winters. Soon, Iceland was rewarded with a trove of world-class players. In 2005, the nation’s newfound wealth funded the construction of a new Reykjavík landmark: Harpa.
The first genuine, purpose-built musical hall in Reykjavík, Harpa was only one part of the ambitious “World Trade Center Reykjavík” redevelopment plan that would transform the east harbor district. The plan also included a 400-room five star hotel, luxury apartments, retail units, restaurants, a car park, and the new headquarters of Landsbanki, one of the three Icelandic banking giants. All these projects were to be funded and built by private enterprises – without state assistance – when construction began in 2007, at the apex of the financial bubble.
About a year later, in October 2008, the financial crisis engulfed the economy and the whole project went bankrupt. Like most other building projects on the island, Harpa stood half-built, awkward, in stasis, and its incomplete, ghostly cement walls testified both to aspiration and failure, in equally grand proportions. It was a true testament to Iceland’s most recent saga of boom and bust.
In March 2009, the World Trade Center project was “bailed out” and nationalized, and acquired at scrap value by a company jointly owned by the treasury and the municipality of Reykjavík.6 Construction resumed on Harpa, and the nationalization effort was subject to hot debate. Some believed that Harpa should remain unfinished: its bare walls a memorial to – and a warning of – the financial follies and blind ambition that had nearly bankrupted the nation. Others called it a white elephant whose development was totally unacceptable at a time of downsized state budgets and IMF oversight. Any money earmarked for Harpa would be better spent on the struggling national health system.7 Various bloggers and commentators swore they would never set foot inside such a wasteful, outrageous monument to snobbery.
Despite the criticism, work continued. The Icelandic Symphony Orchestra held its first concert in Harpa on May 4, 2011. The total cost of the building turned out to be €164 million (ISK 27 billion) or about 1–2 % of Iceland’s GDP at the time. This more than doubled the initial cost assessment of €73 million (ISK 12 billion). But much of the cost was borne by foreign creditors – Deutsche Bank in particular – since the first year of construction was basically written off prior to the nationalization.8
At about the same time Harpa opened, the Icelandic economy turned a corner and embarked on a new growth path, which did not go unnoticed abroad. It was not only that Iceland had become better: other European countries had grown a lot worse as the international financial crisis morphed into the Eurozone crisis. Initially seen as a warning, Iceland was increasingly hailed as an example. In 2008, Iceland had been the first advanced country to seek the assistance of the IMF since the UK in 1977. To the surprise of many, the nation had sought and received leeway to deviate from the Washington consensus of free market liberalism by imposing capital controls, thus creating a firewall against the punishing forces of international financial markets. Furthermore, the IMF’s insistence on austerity and fiscal adjustment had been much less strident than had been the case in previous programs in Asia or South America. The IMF had also provided a seal of approval for a wide range of force majeure measures implemented by the Icelandic authorities just before the collapse of the nation’s three main banks. These, most notably, included emergency legislation that rewrote the bankruptcy code for financial institutions and gave priority to deposits. The legislation also gave the Icelandic Financial Supervisory Authorities (FSA) the power to seize these guaranteed deposits and Icelandic assets from the collapsing banks at “fair value,” which then were used to found new domestic banks.9
Just two months before the October Iceland-IMF conference, Iceland graduated from the IMF program with flying colors. “Iceland’s Fund-supported program has been a success, and program objectives have been met,” declared a press release that accompanied the sixth and final review from the IMF.10
The Icelandic government was keen on showcasing its success and refurbished international reputation. The first center-left government in Iceland’s post-war history had been elected in the spring of 2009 and was led by Jóhanna Sigurðardóttir, the chairman of the Social Democrats and the first female prime minister of Iceland. The minister of finance was the chairman of the Left-Green Party, Steingrímur J. Sigfússon. A long-time radical, Sigfússon had on numerous occasions denounced the IMF as the watchdog of international capital. He originally protested the IMF plan as an MP, but found himself having to work directly with the IMF once in office.
This pair – Sigurðardóttir and Sigfússon – had an agenda, and declared they were going create a “new Iceland” through enactment of many controversial moves: applying for European Union (EU) membership; initiating a nationwide vote on a special assembly to rewrite the constitution; and imposing new taxes on the wealthy and big businesses, which in Iceland meant fishing companies and aluminum smelters. Political forces from both left and right lodged criticism of this vision. On one hand, the ruling coalition was accused of anti-business bias; on the other they were taunted as IMF sell-outs. There were also calls for household debt relief from across the political spectrum, which grew louder by the day. Indeed, many protesters outside Harpa on October 27 were advocates of debt relief. In a letter sent to the media and all speakers of the conference, the main advocates of the protests pointed out that the general price level had risen about 40 %, and household purchasing power subsequently decreased by 27 % since 2007.11 Since about 80 % of all household loans in the country were inflation-indexed, the principal of the loans had also increased by 40 %. Thus, the protesters maintained, the burden of the crisis was borne by the public while the banks were being restored under the auspices of the IMF.
So, after three years of extreme hardship, Iceland was mending fences with the IMF and Europe. And while its citizens objected – loudly and openly – to the new status quo, few could deny the nation had made remarkable progress after its spectacular financial wreck. But what exactly was the lesson to be gleaned from the nation’s crisis and recovery?
1.2 One Letter and Six Months?
In the autumn of 2008, London traders popularized this joke: “What’s the difference between Iceland and Ireland? Answer: One letter and about six months.”12 Both countries were staggering under the weight of a financial sector bloated to eight to ten times the national GDP. The banks began to look like dead weight after the Lehman Brothers default on September 15, 2008, which eroded market confidence.
Ireland’s response was a blanket guarantee of its domestic banks on Monday, September 29. It was successful in the sense that it was credible and the bank run stopped. Ireland was a part of the euro area and was able to supply its banks with a reserve currency. With the guarantee in place, harsh austerity measures were hammered through the Irish parliament. It was tough economic medicine, but there stood Iceland as an imminent warning of what might happen should Ireland refuse it.
In Iceland, also on September 29, the government had attempted to nationalize Glitnir, one of the three massive, now failing, banks. The consequences were disastrous. Carnage ensued with a severe ratings downgrade: Moody’s took Glitnir down three notches, from A2 to Baa2 on September 30.13 This triggered covenants in loans and credit lines, which were contingent on the maintenance of certain ratings. Glitnir, which originally needed €600 million in liquid funds, suddenly faced a hole €2 billion deep.14 The other two large banks, Kaupthing and Landsbanki, also suffered downgrades and liquidity evaporation. (See a more detailed discussion in Sect. 2.2.) As the smallest currency area in the world (no other nation with less than 2 million citizens has its own currency), Iceland could only respond to the crisis by printing illiquid krónur (ISK). Lacking a lender of last resort, all three banks collapsed by the end of the following week. Within months, almost all financial institutions in Iceland – except for some small rural savings banks and investment management boutiques – would go under.
But much had changed in both Ireland and Iceland in the aftermath of these shocks. The comparison between the countries was no longer a joke. As early as 2010 there arose healthy debate over which response to the crisis had worked out better.
In the third review by the IMF on the progress of the economic program, made public on October 4, 2010, the IMF’s economists would write the following conclusion:
Under the recovery program, Iceland’s recession has been shallower than expected, and no worse than in less hard-hit countries. At the same time, the krona has stabilized at a competitive level, inflation has come down from 18 to under 5 percent, and CDS spreads have dropped from around 1000 to about 300 basis points. Current account deficits have unwound, and international reserves have been built up, while private sector bankruptcies have led to a marked decline in external debt, to around 300 percent of GDP. The outlook is for an investment-led recovery to begin during the second half of 2010, and for growth of about 3 percent in 2011. 15
This would prompt Paul Krugman to write, in a November 24, 2010 blog post:
What’s going on here? In a nutshell, Ireland has been orthodox and responsible – guaranteeing all debts, engaging in savage austerity to try to pay for the cost of those guarantees, and, of course, staying on the euro. Iceland has been heterodox: capital controls, large devaluation, and a lot of debt restructuring – notice that wonderful line from the...