The island laboratory

Tradução de Flora Thomson-Deveaux

 versão em português

The young man seized the megaphone. “This is a message addressed to all media!” Behind him, James I, conqueror of the Berbers, ruled the Plaza de España in Palma de Mallorca from atop his horse. It was a clear day. “There’s a change coming. In the name of that change, people are coming together across the world.” They were all on that May afternoon last year, and, like their brethren in more than fifty Spanish cities, they were there to protest the economic crisis.

In the background, a protestor started to climb the equestrian statue. “We’re following the example of a country that began this civic movement some time ago. The Icelandic people knew to act in the name of social justice. They refused to pay off a public debt incurred by others, and managed to punish those responsible. They managed it because they were united as a people and they took to the streets. Our goal is to follow their example. That’s why we’re renaming this square the Plaza de Islandia!” The climber, having reached the conquistador’s upraised hand, stuck the Icelandic flag to it. The unfurled standard rippled above the square. In the weeks to come, eight million indignados would take to the streets shouting, “We are all Iceland!”

Three years earlier, in October 2008, the Icelandic banking system had collapsed and taken the country’s economy with it. In early November, in Reykjavík, six thousand people filled the square in front of the Parliament to demand the government’s resignation. It was already dusk at four o’clock, with heavy, overcast skies. A small crowd split off from the mass and headed to the police station, ready to free a young activist who’d been jailed the day before. What came next was something unheard-of in Iceland, historically a country more given to consensus than conflict.

The crowd began to shower blows on the front door of the police station. Rather surprisingly, the occupants’ first reaction was to shut off the lights and pretend that nobody was there. “Where are the stones?” someone demanded, lamenting that their absence was “typical of Icelandic good manners.” As the front door was being broken down, a SWAT team burst out from around the building. The police officers – arms linked and barring the door – were called fascists by the crowd. “If we manage to get in and free him, it will mean that the government’s over!” bellowed someone, spurring on the masses. Then the ranks of police opened. The prisoner emerged from the darkness, his face covered with a hood, and threw himself into the arms of the crowd. A protestor raised his fist. “Now we are French!”

The Icelandic collapse was sudden and violent. In a country of 320,000 inhabitants, lines of communication are efficient, and any disturbance moves swiftly down the economic chain. A professor at the University of Iceland likes to joke that the country is a macroeconomist’s paradise – there, everything happens faster and in higher concentration. If you needed a laboratory to test the effects of a financial collapse, Iceland would be ready for the part. Their banks failed first, their protests started first, their government fell first, the IMF was called there first, their people organized first, and their government was first to adopt a strategy to deal with the crisis. And Iceland is the first place where people have seen how the devastation of the financial crisis may unfold.

 

Ísleifur Thórhallsson, who goes by Ísi, is in his thirties. Like a good portion of his countrymen, he speaks impeccable English, a credit to the excellence of Iceland’s public school system. In the mid-2000s he sold his film company to one of the biggest entertainment conglomerates in the country and then went to work for them as a producer. It was in the offices of that company, on Monday, October 6^th, 2008, that he and his coworkers gathered around the television to witness the declaration of then-Prime Minister Geir H. Haarde: “I urge you all to protect that which is most important in your lives, the only values that can weather the approaching storm. Families should discuss this together and not allow anxiety to get the upper hand…”

Ísi [1] recalls, “When he ended with ‘May God protect Iceland,’ everyone thought, ‘Fuck.’” Some went out to 24-hour ATMs to see if the banks were still working. Others called home and tried to calm their families. Many thought about stocking up on food. “That was the crazy week,” Ísi says. “In seven days all the banks failed. Iceland might not have been able to import food anymore, and since almost nothing grows in this frozen earth, we were going to go hungry. For the first time we heard the expression ‘food security.’” Overnight, people said, the carriage had turned into a pumpkin. “Not even that”, reacted one distraught citizen. “A pumpkin you can eat.”

Between September 30^th and October 9^th, 2008, Iceland suffered what one of the IMF reports – usually written with all the hyperbole of a beige wall – called “a financial crisis of catastrophic proportions.” As reported in piauí (“A grande ilusão,” January 2009), the banking system failed, the currency lost half its value, and most of the country’s businesses became insolvent. Great Britain, in an effort to freeze the Icelandic Treasury’s holdings in its country and reimburse British depositors from one of the failed banks, put the Central Bank of Icelandon a list of terrorist organizations, next to Al Qaeda and the Taliban.

The roots of the collapse go back to 2003, when the country first decided to privatize its banks. Until the early 1990s, Iceland’s economy was tightly controlled by the state and based on extracting natural resources. The country was rich in fish and geothermal energy, and its policies were guided by the notion of the common good. Natural resources belonged to the collective – fishing and heating one’s home were the inalienable rights of every citizen. This arrangement, modeled on the Nordic social contract, meant an egalitarian society where everyone could count on health care, education, food and heat. Iceland, a young nation which had only gained independence from Denmark in 1944, managed to fill its citizens’ basic needs.

For many of those born in the last quarter of the 20^th century, this began to seem like very little. Icelanders died in a country not so different from the one they’d been born in, their lives limited by the certainty of few adventures. The privatization of the banks came as the culmination of a process started ten years earlier with the privatization of the Reykjavík fishing company, and took away politicians’ power to control credit. For the first time, those without institutional connections – and with no interest in cod – could open their own businesses and start taking risks in search of opportunities.

Soon enough, as they borrowed in strong currencies and lent in Icelandic krónur to a population eager to consume and invest, the three newly-privatized banks ballooned. The credit boom was good for the country: between 2003 and 2007 the economy grew 25%. The banks grew even faster. In 2007, their balance sheets added up to more than 10 times the country’s GDP. Private helicopters, VIP boxes, and vulgarities were soon to follow.

Everything started coming apart on September 15^th, 2008, when the investment bank Lehman Brothers filed for bankruptcy. The world was at the peak of “the ‘financialization’ of the economy,” as MIT economist Simon Johnson refers to it, “an inelegant word in English that expresses the fact that we have all gone too far down the road of allowing our financial sector of becoming big and dangerous.” Too big, because it spread transnationally without being regulated by one specific jurisdiction; dangerous, because it insinuated itself into all aspects of economic life, from state projects to home mortgages, allowing, of course, to bet against one and the other through complex financial instruments. When such an interwoven system suffers the slightest shock, all its parts recoil in a swift contraction.

That’s what happened in Iceland. All of a sudden, the country saw the world shrink – violently. In the weeks after the failure of Lehman Brothers, foreign institutions started asking for their money back. Only then did the irrationality of the system reveal itself in all its exuberance: a debt in dollars and euros, locked into investments in krónur. Very soon, the national currency would fall apart. It was one of those moments for the history books.

 

It was snowing on the last Friday of November 2011. At nine-thirty in the morning, the day was still night. Laugavegur, the long steep commercial street running through downtown Reykjavík, was hushed by the snow. In one discreet building, the international risk consultant Thórdur Jónasson was already at his desk. He worked at the World Bank and the IMF and, for a few years, was Chief Executive Officer at the National Debt Management Agency of Iceland. In 2007, before the collapse, he left the government.

For Thórdur, the Monday Prime Minister Haarde addressed the nation was the defining day of the whole crisis. That night, the government passed the Emergency Act dictating how Iceland would respond to the collapse. “Faced with the banks’ imminent failure, they decided that depositorswould have priority above all other creditors – that was the most important measure.” Moreover, the domestic operations of the banks were being nationalized. The government would only guarantee the deposits of Icelandic agencies; foreign agencies would go into liquidation, and their depositors would be reimbursed by the proceeds of the estate under receivership. “Without the Emergency Act,” explains Thórdur, “Icelandic depositors would have lost all their deposits. Their credit cards would have stopped working, since all the banks’ assets would have to go into receivership and be treated as collateral.”

This was in no way a trivial choice, and it could carry serious legal implications. According to bankruptcy law at the time, it was illegal to distinguish between different types of creditors and prioritize depositors over bond holders. Liability carriers couldn’t be hierarchized; Deutsche Bank, a London depositor and a Reykjavík retiree should be treated equally when it came to reimbursement.

The country also faced grave political repercussions. By declaring that accountholders had priority over all other claimants, the government was essentially sending its international debtors – banks, hedge funds, and institutional investors – to the back of the line. Given the vast disproportion between the Icelandic banking system and the country’s economy, there was only one conclusion: the Icelandic banks, which under the new law were owned by Iceland and run by the government, would not pay their international debts.

Jón Steinsson is an economist at Columbia University in New York. Tall, with a toothy smile, he looks younger than his 35 years. Back in 2008, in the most critical moment of the crisis, he was summoned back to Iceland by the prime minister. On Sunday the 5^th, he remembers that the government was still reluctant to impose radical measures. “Some of us began insisting that this was the right decision and that we needed to announce it fast”, says Jón. After endless discussions, he went home to sleep. “At three in the morning, they called me. ‘We’re going to go with what you’re suggesting.’” The government would let the banks fail.

By this point, officials from the IMF were already in the country holding conversations with authorities, but the government was wary of bringing them closer. “On Monday, we explained to them what we were planning to do. On one side of the table, it was me and my colleague; on the other side, two guys from the IMF. I think that was how they first heard about the plan. ‘Today, after the courts close, we’re going to propose a law with such and such characteristics, and it’ll be passed at midnight.’ Their first reaction was to call us crazy. It sounded like they were saying that we were sparking some kind of financial Armageddon, with very dire consequences.”

In the words of the American economist Paul Krugman, when all the conventional wisdom was that it should zag, Iceland zigged.

 

If, back in 2008, the government thought the future was hazy, for the Icelandic people it was frankly incomprehensible. In the best-case scenario, one foreign diplomat said, everyone would have to relearn how to fish; in the worst, the country would become an international pariah and be sent back to the 1930s.

The demonstrations started in late October, always on Saturdays. One Saturday in early November, a 22-year-old scaled the Parliament building, reached the roof, and dragged himself up the flagpole, where he raised the flag of a budget supermarket chain with a pig for its logo. Everyone got the message. The country was for sale – and it was going cheap.

Haukur Hilmarsson, an activist since his teenage years, was a member of a militant environmentalist group with anarchistic tendencies. He’d already been convicted of attempting to sabotage an aluminum smelter and sentenced to four days of detention – he would serve his time as soon as room was made in the local jail. Two weeks after the flagpole stunt, Haukur went on a school visit to Parliament and a police officer recognized him. Since tensions were running high in the country and there would be more protests on the next day, it seemed best to arrest him then and there. It would mean one fewer agitator in the square.

Haukur is now 25. With a pierced nose and ear, and blond hair falling in dreadlocks across his face, he is very handsome but doesn’t seem to notice or care. His impish smile suggests that not only is he proud of what he did, but he also enjoys the effect that his political stances may have upon an interlocutor. “I flirt with primitivism. We’re all fucked, it’s just a matter of time. The nuclear plants are going to go amok and global warming is going to destroy the planet.” In dulcet tones, he roots for the apocalypse. During catastrophes, he reasons, the state falls apart. “The sooner, the better.”

In Iceland, non-dangerous prisoners have the right to a free hour outside jail. On Saturday, November 22^nd, Haukur’s request to go out during the protests was denied. With nothing better to do, he went to sleep. As a consequence of this, he took part in one of the most radical moments of Iceland’s limited insurrectional history, all from between the sheets in his cell. He was woken up by a man who offered to pay his bail. Haukur turned him down. Give money to the state – never.

Then they told him that there was a mob outside, threatening to break into the prison to free him; there was a chance that someone might get hurt. Haukur asked for a phone and called his mother. Eva Hauksdóttir, a militant just like her son, was in the hospital after being pepper-sprayed. Since people were risking themselves for him, she advised him to take the offer. Minutes later, hooded and with only his eyes visible, Haukur was welcomed triumphantly by the protesters with shouts that now this was a nation of rebelling Frenchmen.

In November 2011, sitting next to his mother in a café, Haukur doesn’t hide his scorn for the events of that day. “I’m not a big fan of the fetish of doing something cool. Everybody emphasized my part and they totally missed the point. I’d rather be a citizen of a cheap supermarket than of this fascist state,” he says, to his mother’s approval; as she sees it, at least the supermarket has the decency of not hiding its motives.

The government responsible for the radical deregulation of the economy would still hang on for two more months, but, for many, the rush on the police station was a turning point. That was when the modern sans-culottesof the North Atlantic realized their own strength. The fact that the young anarchist only accepted freedom after consulting with his mother is a sweet footnote on the gentle ways of Iceland, a country where even revolutionaries listen to their parents.

 

A few hours before Haukur was set free, a law student took the stage in the square and gave the most inflamed speech of all those rebellious Saturdays. It was the first time that Katrín Oddsdóttir felt true anger. “That had never happened to me,” she recalled on one afternoon last November. “I went up to the platform and then I saw the faces of the old people, all of them so sad. They were not the snobbish young group who were betting with borrowed money. They had nothing to do with it, and yet they would pay the price.”

Facing the Parliament building, Katrín pointed an accusatory finger at the politicians she couldn’t see. If the government didn’t resign in a week, she said, there would be a revolution. From a neighboring building, a banner rolled down to the ground, showing a wolf labeled IMF devouring the country. A FOR SALE sign was hung on the Parliament’s balcony, stamped with the words Sold: $2.2 billion–the value of the IMF package.

Ah, the IMF…

The events of the Icelandic fall and winter of 2008 are full of ironies. One is the fact that a young radical who disdains all forms of government, right and left alike, wound up playing the role of head militant in the movement to reform the European political process. Another is the fact that it took a leftist government to implement the first IMF program in a First World country since the 1970s. And the cabinet that substituted Geir Haarde’s didn’t just implement the IMF’s program, they did it so excellently as to garner effusive praises. The sixth and final review of the Icelandic program published by the Fund in August 2011 doesn’t mince words: “Exemplary.”

“Before going into government, Steingrímur probably used to say, ‘Fuck the IMF!’” laughs Katrín. That’s Steingrímur J. Sigfússon, the current Minister of Economic Affairs.

In November 2008, Steingrímur was the leader of the Left-Green Party, the major opposition to Haarde. He went to work in socks and sandals, probably with two objectives: first, to give comfort to his feet; and second, to demonstrate that, in the best tradition of the ‘60s, he remained a free spirit.

In November 2011, Minister Steingrímur, now in a suit and sensible shoes, defended his current position. “Like many others on the left, I was highly critical of the IMF’s track record, and I have not changed my mind on that. I would have rather avoided having Iceland going to the IMF for help, but under the circumstances we had no other option. When we came to power, they were already here. Without the Fund, we wouldn’t have recovered credit lines to import the food and oil we needed, and it wouldn’t have been possible to stabilize the economy.”

Such realism perplexes some and disgusts others. “The IMF has never made a secret of its motives,” says Kári Stefánsson, founder of the Icelandic biogenetic company deCODE. “Its role is not to try to resurrect the economies of struggling countries, it’s to try to minimize the international consequences of a fiscal crisis across the world. I’m not criticizing the IMF for doing its job. I’m just criticizing our government for being so obedient to the IMF.”

Thórdur Jónasson, the international consultant, is among the perplexed. “This is the first purely left wing government Iceland has ever had, and they cooperate with the IMF!” he says in tones of astonishment.

“This is a socialistic government that has broken all the principles of their own political ideology”, is Kári’s verdict. During the worst of the crisis in 2008, sitting in this same room on the top floor of deCODE, he had been one of the few optimistic voices amongst his countrymen. It was unfortunate, he’d said, that the Iceland “of sagas and poets” had transformed itself into a country of speculators – “they were vulgar and uninteresting” – but, “now that they’re gone we will help ourselves and we’ll come out of this as a better people.”

In the mid-1990s, Kári Stefánsson, a professor of medicine at Harvard, had gone to then-Prime Minister Davíd Odsson – architect of the unfettered liberalization of the economy, admirer of Milton Friedman and Margaret Thatcher – and made him a proposal. If the Icelandic government could guarantee proprietary rights of the scientific research he was about to propose, Kári would create a cutting-edge company to use Iceland’s extraordinary genetic patrimony in order to identify hereditary causes of diseases. In a country where almost everyone is related to each other, and medical records have been meticulously kept since 1915 by the public health system, it becomes possible to track diseases along generations and eventually identify their genetic causes. With Davíd Odsson’s support, a law was passed which essentially privatized the Icelanders’ genomes.

The company started trading on the New York Stock Exchange and the Icelandic government, beating the drum of patriotism, encouraged citizens to invest. Despite its indisputable scientific success – around 70% of recent discoveries relating a genetic mutation to a given disease were made in Kári’s laboratories – the company couldn’t turn a profit. Thousands of Icelanders saw their stocks turn to dust.

The optimism that Kári exuded in 2008 gave way to the nihilism of 2011. As solemn as a statue, he strode in absolute silence across the waiting room where his interviewer sat. Minutes later, he reappeared to fetch some coffee and size up the first commitment of the day. “There’s nothing more irritating than a Brazilian journalist early in the morning.” It was very good theater.

“These last three years have proven me wrong. All right?” he bristled. “If we’d had a conservative government sworn to some sort of trickle-down economic philosophy, I would understand why the country has been governed the way it has. But this was supposed to be a socialist government… They’ve basically fueled our journey out of the crisis on the back of the people who have nothing. This is a criminal government because it has broken all its promises.”

 

In the same week that Iceland announced it wouldn’t support the banks, Irish officials shut themselves in a room to decide how to deal with their financial crisis. It seemed like a game of mirrors: Iceland had three large banks, Ireland too; Iceland was threatened by a run on the banks, Ireland too; international creditors had turned off the tap for Iceland, and for Ireland too.

The Irish government started casting around for advice. In what surely merits a passage in the universal annals of idiocy, the Ministry of Finance asked Merrill Lynch for a report on the health of the country’s banking system. It didn’t occur to anyone that the fact that the firm had two of the three Irish banks as clients might perhaps influence its diagnosis. With all the trust that a confessor puts in a priest, the Irish government believed Merrill Lynch when it said that the banks were profitable and well-capitalized.

According to Michael Lewis, author of Boomerang: Travels in the New Third World, it was with this conviction that the prime minister and his advisers met on the night of October 2^nd, 2008. A run on the banks was bringing the economy close to collapse, and nobody knew if the financial system could last another 24 hours. In such desperate times the Irish government took desperate measures, and acted to bolster international confidence.

An employee of the Central Bank was sent to go on TV and explain the solution they had found. One can take issue with many things about this man – his timidity, his air of apermanent understudy, his little mustache – but no-one can deny him his sincerity. In areedy voice, he announced, “The taxpayer is there to guarantee the banks.”

Zag.

Ireland had just announced that any loan to an Irish financial institution, public or private, was a loan to the Irish state. It was believed that the guarantee would never actually have to be enforced; its mere affirmation would reestablish confidence in the system as a whole. This hypothesis failed. The country took on a debt of $85 billion, around 40% of the GDP – a sum that will have to be raised through brutal cutbacks, including layoffs and salary cuts.

“Our situation was much more severe than Ireland’s,” says Jón Steinsson of Columbia, “but they were being told at the time that the banks were fine, and so they made the crucial mistake of guaranteeing everything. Historically, in these situations, governments tend to think, ‘If I spend just a bit more I might be able to save the whole thing.’ And, bit by bit, you lose it all.” For months before the collapse, the desperate Icelandic banks had been getting loans from the Central Bank to honor their international obligations. “In the week they failed, the banks kept on asking us for lines of credit. We could have burned 50 to 100% of the GDP in a matter of days to try to save them – and, looking back on things, it’s clear that it would all have gone down the drain. Even so, there are those who say that our only choice was to let the system collapse. Look, I was there and it certainly didn’t feel like that. We gave up helping the banks three days before the point when other countries tend to quit, and that saved us an enormous amount of money.”

Those three days allowed Iceland to spare the most vulnerable sectors of its population. “It’s true that most of the cuts did come from social programs – health, education, social security,” explains Jón. “But as it happened, we had a good margin coming into the crisis. The government always operated in the black” – a fact that challenges the argument that the Nordic social contract is unsustainable – “and we had plenty of funds that we didn’t spend trying to save the banks. That was crucial to protecting our social system. We didn’t have to cut as deep as other countries.”

The inflation set off by the devaluation of the Icelandic króna devastated high salaries, while the lowest were partially spared with readjustments. The tax system became strongly progressive under the new government, and taxes were only raised for companies and the richest 40% of the country. In 2009, at the peak of the crisis, the government actually increased social expenditures for the worst-affected. “Upping social spending in the very height of a crisis isn’t the most obvious strategy,” says Minister Steingrímur. “It’s generally accepted that the IMF’s plan for Iceland was quite unorthodox.”

Unorthodox and ruthless: the government cut the equivalent of 10% of its GDP in order to pay what it needed to resurrect the financial system. This is one of the biggest such adjustments ever heard of.

Stefán Ólafsson, a professor of sociology at the University of Iceland, says that the Icelandic program is so extraordinary that it belongs in a class of its own. His analysis of the social effects of the austerity program indicates a complete reversal of the trend towards inequality that prevailed in the boom years. The Gini coefficient, which measures the distance between the richest and the poorest, shows that Iceland had fewer disparities in 2010 than in 2007. Financial crises affect speculators most directly, Jón Steinsson is quick to remind; at first, naturally, the wealthiest will lose the most. That said, Jón can attest that government policies did, indeed, mitigate inequality.

Iceland became poorer – the country’s economy today is as large as it was in 2004 – but it enters 2012 as a fairer country. Because of that, it has a better chance of recovery. The IMF itself will emphasize this. “It’s relatively easy for countries to have short episodes of rapid economic growth,” said Nemat Shafik, the director of the Fund, at a conference in Reykjavík sponsored by the IMF and the Central Bank of Iceland last October. “But the countries that have been able to sustain growth for long periods tend to be countries that have more equitable income distribution.”

Today, Iceland’s unemployment rate is 7.3% – that’s half of Ireland’s and just a third of Spain’s. The economy is on track to grow 2.5% in 2012. According to The Economist, the Eurozone will likely suffer a decline. (Ireland is projected to remain stable.)

The presumed blow to Iceland’s reputation, which was bemoaned when the country decided to let the banks fail, does not seem to have materialized. That’s to judge from the only measure that the market respects. In June of last year, for the first time since the crisis, the country stuck a toe into the waters of the financial market. It felt good. Iceland sold $1 billion in 5-year bonds at less than 5% interest. Ireland, whose good behavior won it an A from the international financial system, has to pay 15% more.

This doesn’t mean that Iceland has its ducks in a row. In one of the most harmful effects of the crisis, assets underwent a chaotic rearrangement. Caught off-guard and heavily in debt, many Icelandic companies had their control transferred over to creditors. Today 60% of them belong to the banks. It’s a remarkable figure, but that’s not all.

Of the three nationalized banks, the state only held on to one, Landsbanki. In a classic transfer of debt into equity, the other two were passed off to big international creditors. Uninterested in spending time or money on fixing the same institutions that had just caused them catastrophic damages, the creditors – without too much fuss about it – sold the banks to American hedge funds for 2 or 3 cents on the dollar.

Three years after the crisis, over half the Icelandic financial system belongs to funds whose main priority is to get back their investments in the short term. They aren’t partners in Iceland’s recovery, and they won’t invest in the country. Worse still, since these funds control a considerable part of Icelandic companies and nobody knows what will be done with them, things are effectively frozen. The businesses could be auctioned off in chunks, if that ends up being the most lucrative option.

Iceland didn’t default. As opposed to Greece, for example, which has mainly public debts, the Icelandic government always kept its books balanced.The country’s debts were incurred by private entities, and it was their investors whoassumed the risk of making a bad deal. Those who truly lost out were international banks, most of them European and half of those German. With no hope ofseeing any of the money they put into the Icelandic trio,the banks picked up their red pens and took a $63 billion loss.

At the close of the conference in Reykjavík, Martin Wolf, the most prominent columnist at the Financial Times, summed up what he’d just witnessed. “I’ve been around crisis countries for forty years in different capacities. After the crisis hits, there’s a stupendous struggle over who takes the losses. Now, in nearly every society that I’ve seen, the losses are taken almost exclusively by relatively poor people. If that is not the case here, then that’s really sort of a miracle.”

 

On August 31^st, 2011, 33 months after drawing up their agreement, the IMF shook Iceland’s hand – “Nice doing business with you” – and went home. There was only one bump in the road. Minister of Economic Affairs Steingrímur believes that if it hadn’t been for this, the country would have come out of the crisis sooner. He refers to the incident as “this unfortunate Icesave thing.”

Many adjectives would be more appropriate: raucous, notorious, daring,or memorable, to name just a few. What the government sees as unfortunate is seen by many Icelanders as the nation’s grand moment of democratic affirmation. In essence, it is because of this episode that crowds in Spanish plazas shout “We are all Iceland!”

Icesave was a small online bank opened by Landsbanki, one of the Icelandic trio of banks. It specialized in clients outside the country, particularly in Great Britain and Holland. Housewives, workers, philanthropic organizations and universities, attracted by favorable interest rates, put their savings into Icesave. When the system collapsed, around $5 billion in deposits vanished.

The Emergency Act passed on October 6^th had divided each of the three major banks into two parts: a domestic bank responsible for deposits in krónur and a foreign bank responsible for the liabilities in foreign currency. The government would take over the domestic bank, guaranteeing its accounts; the foreign bank would be liquidated. The British government shrieked – its citizens were being discriminated against. While Icelanders still had access to their bank accounts, the poor retired Birmingham postman, who’d deposited his savings in pounds in an online Icelandic bank, was left out in the cold.

With the partial nationalization of Landsbanki, the question then became: Is the Icelandic state responsible for the Birmingham postman? No, said the authorities. At the time of the crash, both Landsbanki and the Depositors’ and Investors’ Guarantee Fund of Iceland were private entities; so there was no reason to socialize their losses. International debtors would be reimbursed with the assets of the bankruptcy estate, but accountholders would still have priority.

The usual geopolitical mechanisms immediately sprang into effect. Iceland desperately needed money to stabilize its economy. The IMF had agreed to a loan of$2.2 billion and had already paid the first tranche. The rest of the payment was still pending. It was simple enough: as members of the IMF, Great Britain and Holland could block the transfer of resources.

Under pressure, Iceland proposed an agreement: they would start to settle the debt starting in 2017. On December 30^th, 2009, Parliament passed a bill regarding the payment. All it needed to become law was the signature of the president of Iceland. Since the post is a symbolic one, this was a ceremonial gesture. It stopped being ceremonial when President Ólafur Ragnar Grímsson said that he needed time to think about it. The Icelandic Constitution gives the president fourteen days to sign a bill after Parliament has passed it; at that point, the bill is automatically put to a popular referendum.

The political activism of 2008, by then faltering, got its second wind. “At first it had nothing to do with the debt,” clarifies Ólafur Elíasson, one of the creators of InDefence, the advocacy group that would lead the next wave of protests. Ólafur, a musician and piano teacher, was going about his life when the country went broke. He wasn’t in debt to anyone, and suddenly Gordon Brown was calling him a terrorist. He got together a group of friends, and between them they launched an Internet campaign where Icelandic old ladies, children, babies, whole families and even dogs took pictures with signs reading: I am not a terrorist, Mr. Brown.

Ólafur went back into action when he got wind of the details of the Icesave agreement, which the governments of Iceland, Great Britain and Holland were negotiating behind closed doors. The document was leaked to him. He showed it to a lawyer friend, who after studying it for a night could only say that they ought to charge the government with treason.

For months, the members of InDefence tried to convince Parliament to reject the agreement. When this didn’t work, they decided to activate the constitutional mechanism that could send the bill to a referendum. Since the country’s independence, Article 26 of the Constitution had never come into effect. Ólafur and company asked to speak with the president on January 2^nd, 2010, three days before the bill was passed.

It was a Saturday morning. At eleven o’clock, several hundred people appeared in front of the presidential residence, half an hour from Reykjavik. The core of the movement came into view through the snow, carrying a pile of pages with 56,000 signatures – a quarter of the country’s electorate – in opposition to the agreement. Standing in a semicircle, a choir broke out in a patriotic song. It was the sign for two small planes to take off from a nearby airport and come register the most spectacular moment of the day.

All around the house, dozens of people raised their arms, each clutching a red distress flare. “We are a maritime country,” explains Ólafur. “So we all know that red flares mean danger at sea.” The sky blazed. A cloud of smoke drifted over the house, hiding it behind a thick red curtain. This was the image splashed across the front page of all the next day’s papers. Even a sea-deprived Paraguayan could understand that this meant danger.

Soon afterwards, the president opened the door. Eight representatives from InDefence were led over to a long table. They sat on one side, the president on the other. For nearly two hours, the InDefence people argued. The president listened, but spoke little. “Honestly, I thought it was a hopeless cause,” Ólafur said. Three days later, on January 5^th, the president announced that he would not sign the bill.

The referendum was held two months later, on March 6^th, 2010. The measure was rejected by 93% of voters, and less than 2% voted to pay. This would already have been sufficient to raise Iceland into the pantheon of insurgent nations; but there was more to come.

Alarmed by the reaction of the two creditor countries – “[By rejecting the deal] the Icelandic people would effectively be saying that Iceland doesn’t want to be part of the international financial system,” one high British official had admonished a few days earlier; “Unacceptable,” the Dutch finance minister adduced – the Icelandic government began discreetly working on a new agreement with more favorable terms.

In early 2011, a new proposal was sent to Parliament. By then, it was already clear that the value of the bankruptcy estate was much more substantial than had been thought; the debt could be paid fairly painlessly. The majority in Parliament – favorable to the new agreement – seemed to reflect the attitude of most of the country. Even so, the president once again refused to sign. Days before the second referendum, in April 2011, polls showed that the measure would pass. A last-minute turnaround defeated it.

It’s not surprising that 60% of the electorate voted no. What is surprising is that 40% said that it was time to pay up.

 

“It’s so easy to take the stance of not paying,” says Gudmundur Jónsson, a professor of history at the University of Iceland. “The president chose to interpret the mood of the nation by saying that there was a split between Parliament and society. There wasn’t. Just before the second referendum, a majority of Icelanders thought that we should agree to pay. He crossed a constitutional line by not letting Parliament decide. You’re a taxi driver and someone asks you, ‘Want to pay foreigners’ debts?’ It’s ridiculous to put a question like that to a referendum. The president is a demagogue.”

“In 2010, it was like we said, ‘To hell with the foreigners, we’re going to save Icelanders,” Ísi the producer sums it up. He voted no on the first referendum, and, going along with the 40%, yes on the second.

The journalist Eiríkur Gudmundsson works for the Icelandic national radio. For a long time, he was one of the few to attack the excesses of privatization, which he did with notable virulence. In 2011, changing targets, he read a furious editorial on the air railing against the referendums. “It was political theatre. It took attention away from the larger issues. For two years people were talking about Icesave, not about the crash or the collapse of the Central Bank. Of course, the no vote became the banner of the same right-wing party which caused the whole mess.”

Eiríkur voted yes. For him, it was simple. “On one side, you had the nationalists, the capitalists, the right wingers, saying, ‘We’re Icelanders, we don’t cut deals, we don’t need anyone.’ On the other side, people were saying something like ‘We’re Europeans, we did harm people, and we should be responsible.’ I didn’t want to be with the first group.”

“We paid a big price for the referendums,” says Steingrímur, the Minister of Economic Affairs. “It blocked our access to foreign capital markets, it delayed growth,” he argues. “Today, the net cost of the second agreement looks minimal. The recovered assets would have covered practically everything. And let me remind you, this isn’t over yet. The decision on the referendums may end up in court. It could cost us.”

In the mythology of the Icelandic crisis, the referendums represent a political moment par excellence, when the country, gloriously sovereign, went to the polls to refuse paying someone else’s debt. But, once again, as even Ólafur and InDefence will emphasize, Iceland has no intention of defaulting on its debts. “We never said that the debt wouldn’t be paid. We just asked that they wait until the bank was liquidated.” Great Britain and Holland, ironically enough, will get their money.

Last December, just as the government feared, the European Free Trade Association charged the Icelandic state with not honoring its Icesave accounts.

 

“Was it from here that you saw the flares?” “Yes,” responded the President of Iceland, Ólafur Ragnar, in a room in the presidential residence. On the shores of a small lake, the house had once been a school of classical languages. The first translation of the Odyssey to Icelandic was written there. The president is tall, with a head of very white, ornamental hair. At 68, he dresses and moves with the ceremony of an old ambassador fully aware of his role in the world.

“I’m aware of people’s criticisms,” he said. “I disagree with them, not only as president of the Republic, but also as a political scientist who taught the Icelandic Constitution a very long time. This crisis demonstrated how the failure of the financial market can threaten the very foundation of a democratic society and social cohesion. The economy has recovered earlier and more effectively than anybody could have expected. And so has society. The question is, why?”

The old political scientist lays out three explanations. First of all, people saw from the beginning that the challenge was not merely economic. The crisis had to be understood in its political, legal and social dimensions. New parliamentary elections were held, a criminal investigation was opened (as of now, only one person has been convicted) and a committee was formed to propose changes to the Constitution.

The second dimension of the strategy was to “to go against some of the prevailing financial and economical orthodoxies of the Western world” and let the banks fail.

The third is what he calls “the democratic dimension.” As he sees it, the Icesave case can be summed up as the transformation of a private debt into the sovereign obligation of the nation. “I put the decision to the Icelandic people.” Was it a difficult decision? “Yes. Powerful forces in my own country supported the agreement. Not only the government and a majority in Parliament, but also the business community and even the trade unions. And all of the European governments as well. Many people predicted that Iceland would become a pariah state” – the “Cuba of the North,” as someone put it. The president, meanwhile, feared that they might become the “Haiti of the North.” “We forged a democratic path. Differently from Greece, for example, where the European governments came together to tell them, ‘No, you’re not going to have your referendum.’”

Rhetoric aside, a subtler motive seems to underlie the referendum episode. In less than a week, the crisis took the optimism of a country euphoric with its own success and replaced it with the nihilism of someone beholding the future as certain disaster. If, as some suspected, the referendums’ bark was worse than their bite, then the bark was exactly the point. “The country was in shock,” said the president. “That’s not why I called the referendum. But it’s true that that was the moment when Icelanders felt that the country’s destiny was in their hands. That’s when the nation found its will again.” Catharsis serves its purpose, even if it doesn’t come cheaply.

 

Jón Skafti Gestsson is 30 years old. Tall, with a bohemian goatee, he studied history and is now working on his master’s degree in economics at the University of Iceland. In the boom years, he taught classes in Icelandic for foreigners, but the crisis scared off his students. He went back to university on the wings of a government scholarship, which helps pick up the bills for the family – a wife and young daughter. Jón has his own apartment; he has his routine. He knows that the state will foot the bill for his daughter’s pre-school, as well as eventual medical emergencies. Everything seems to be fine. But it’s not. “In material terms, I didn’t lose anything with the crisis,” says Jón. “What I have lost – what everyone has lost – is an overall feeling of trust. We don’t trust anything anymore, and this drains our energy and prevents us from being happy. We’re paralyzed.”

“We were taught that we were one of these Nordic societies where there was no blatant corruption”, says Katrín Oddsdóttir, the young lawyer who gave a speech against the government on that Saturday in 2008. “We had no idea how far special interests had penetrated. Politicians flew on bankers’ planes, they had media empires to advance their causes. Suddenly it was as if your spouse was having a double life.”

In 2010, a report on the causes of the crisis was published by a Special Investigative Commission of Parliament. The nine-volume report caused such a stir that it was read out loud, in full and without interruption, for six straight days and nights on the stage of the Reykjavik Municipal Theater and live-streamed online. Few were spared. The president was not among them. For Katrín, “he went from national hero to villain.” It was revealed that, during the boom years, the old leftist professor had been a supporter of the new capitalists. “He flew on private jets to cheer the greatness of our banks. He linked banks to the sagas and bankers to the Vikings. He said we would conquer the world. He was going on with this ‘Iceland über alles’, ‘we are the greatest’, ‘we have to teach the world’ – come the fuck on, can we be a little humble just five minutes after we fucked up the nation?”

The recurring theme in Iceland today isn’t the crash or the ensuing crisis. It’s skepticism, with its corollary of disorientation. “It’s quite paradoxical, sometimes,” says Bergsteinn Sigurdsson, a reporter for Fréttabladid, Iceland’s largest newspaper. “For instance: for the first time we have a leftist government in this country, and the right accuses it of being at the beck and call ofthe financial system.” The day before, Standard & Poor’s had upgraded Iceland’s rating. “One of the results of the crisis is that information has lost all credibility. In the past, we’d look at that upgrade and say, ‘Yes, things are getting better, let’s get on with it.’ Now people are just screaming at each other. Nobody believes numbers or information anymore.”

“You know, I believe there’s a sense in which a loss of innocence is not a bad thing”, counters Jón Steinsson, the Columbia economist. According to him, the crisis is due in part to the fact that Iceland saw no reason to mistrust its institutions. The country had an almost naïve faith in parties, politicians, the press, and captains of industry, which left it ripe for skullduggery. But today the challenge is drawing the line between healthy skepticism and paralyzing suspicion.

Kári Stefánsson, from deCODE, is one of the skeptics. He believes that the difference between left and right has been wiped out. What remains is a crisis of political ideology. “I’ve just described to you the incredibly miserable state of our current government. Even so, if you asked me who I’d replace them with, I wouldn’t know what to say.”

“What takes place in the more established institutions of our states has become almost a side show,” says the president. The mobilization around the referendums, the Arab Spring, and the protests in Europe, as he sees them, are signs that change is only taking place on the margins of the system – when not turning against the system entirely. “It’s a staggering conclusion.”

 

Once again, Iceland was the first place to witness some of the reactions to this brutal lack of faith in the political process. In May 2010, Jón Gnarr was elected mayor of Reykjavík – the second-most important post in the Icelandic political hierarchy, just after that of prime minister. Gnarr didn’t come into this world via the normal channels: he’s the creation of a satirist. He was such a hit on the radio that the creator officially took on the name of his creature and threw himself into politics. Gnarr gave the party he founded a name to reassure the public. “No one has to be afraid of the Best Party,” he explained back then, “because it is the best party. If it wasn’t, it would be called the Worst Party or the Bad Party. We would never work with a party like that.”

Gnarr’s platform was based on a promise to break all his electoral promises – among which, free towels in public pools, free transport for “students and losers,” a drug-free Parliament by 2020, and a polar bear for the city zoo. He was movingly frank about his motives: “I want a well-paid job where I have the influence to help out friends and family. I’d also like to have an assistant and all sorts of freebies.” He was chosen by over a third of the Reykjavík electorate.

“I don’t really know why people voted for me,” said Gnarr, minutes after joining a Taoist religious group, his previous engagement on that miserable, snow-and-hail morning. “I can guarantee that my candidacy didn’t start out as a joke. The Best Party is full of serious people.” To prove it, he observed that the party’s second in command was one of the founders of the Sugarcubes, the neo-punk band that launched Björk’s career.

Jón Gnarr is 44 years old, chubby and extremely polite. He points proudly to a picture which, next to a Darth Vader mask, decorates his office: the well-known image by the British street artist Banksy. “He gave it to me,” he says happily. “I’m very political, I always discussed the issues, but contemporary politics bored me. Philosophically I consider myself an anarchist.”

From a symbolic point of view, as Gnarr sees it, the most relevant fact about his election is what didn’t happen. The Best Party presented itself as a viable alternative at a time when people were angry and confused. Gnarr contends that he used that anger for good. Extremists could have used it for evil. “You see this happening now in Northern Europe, with the rise of the extreme right.”

“Gnarr’s election was a big ‘fuck you’ to our politicians, a statement of the distrust people had for traditional politics,” says journalist Kolbeinn Proppé. “Now, the interesting thing is that as soon as he became mayor he started acting like a conventional politician. You sell yourself as the guy who’s going to change politics, you form a cabinet with musicians, filmmakers and poets, and then, on the first day, they throw the three stacks of the city budget on your desk.”

With disconcerting candor, Jón Gnarr – a self-declared libertarian and surrealist – says that his greatest achievement has been the financial restructuring of the Reykjavik power company. After a month of wading through paperwork – “Why the fuck am I doing this again?” – he engineered a way to fund the company by using the city’s own treasury as collateral. (Or something along those lines.)

“After 2008, ‘governing’ in Iceland became a synonym for ‘damage control.’ Nobody has the luxury of grand projects anymore,” says Proppé. Recognizing these limitations, voters respectGnarr’s administration. They see him as a dedicated and sincere public servant. The mayor praises the Fiscal Responsibility Law, recently approved by Parliament. And he isn’t totally sure, but he suspects that the IMF may be partly responsible for the recovery. It’s Kropotkinin Sunday School.

 

“During these past three years, you [Iceland] lost all the illusions you had about how the world worked. And that’s why you made so much progress”, concluded the economist Simon Johnson as he ended his talk at the Reykjavík conference. “The world is not your friend. The world’s financial system is not your friend” – these are the lessons that the country learned.

“A fairytale,” retorted Gylfi Zoëga, a professor of economics at the University of Iceland, in the same conference. “A myth has been created that we are unique and that we acted bravely, independently, we let the banks fail, the taxpayers stood up to say that this was not our debt, and we protected the sovereign. We didn’t protect anything. We didn’t save the banks because we didn’t have the euro. We were lucky.”

Lucky to be a small country, with practically zero ability to destabilize the world economy. If Italy, Spain or even Greece adopted the Icelandic model, it’s very probable that their economies wouldn’t be able to take the pressure.

Lucky to not have the euro, allowing the national currency to be devaluated. “The króna is good to have in a crisis year,” says Jón Steinsson of Columbia. “But in all the other years, when you’re not facing a crisis, you have to bear the burden of it.”

Iceland was lucky, above all, in the singularity of its madness. “If you’re going to have a banking crisis, make sure the banks go really mad, because otherwise you might think that you can bail them out,” as Martin Wolf of the Financial Times put it.

Heroism doesn’t look quite as good when it’s only for lack of a better option. In the aftermath of her famous speech outside Parliament, Katrín Oddsdóttir has dedicated herself to rebuilding Iceland. She’s one of the 25 people elected to draw up a new Constitution. But she would be hard-pressed to galvanize the youth of Spain. “The anger’s over, which is good. It’s impossible to be angry all the time. But as of now nobody really important has been brought to justice, so the system’s still failing. I don’t see any silent revolution happening around here. People from abroad ask me about it, and I say, ‘Revolution? What revolution?’”

“They’re turning from insurrection to reform,” complainsHaukur, the anarchist, referring to his compatriots.

And perhaps not even that. Little by little, according to Katrín, people are going back to their old ways. “That’s so2007,” some Icelanders will say about the resurgence of excess, be it small (an expensive bottle of wine) or large (a Mercedes). In the first post-crisis years, Professor Gudmundur says, political activism revitalized a country numbed by consumerism. Now, hopelessness seems to have driven some Icelanders back to the passivity of shopping. “Suddenly, Frankenstein is starting to walk again,” says Katrín.

 

It was a windy Saturday night. Rainy, to boot, and hail was on its way. The square was quiet. On the lawn in front of Parliament, two protest tents were set up. Nothing to do with the 2008 demonstrations – this was an offshoot of the Occupy Wall Street movement. In the larger tent, people gathered into two groups talked quietly by lantern-light. The first group was mainly older people, middle-aged, slightly drunk. The second was a silent bunch of kids, smoking hand-rolled cigarettes and passing around a bottle of wine. Illuminated by almost nothing, they brought to mind Caravaggio.

Einar and Svavar are 19. They’re not protesting. They just came into the tent to talk because it seemed like a quiet place. “Where are the protesters?” “They’re missing,” says Einar.

As Svavar talks he gestures slowly, his long arms like seaweed underwater. He’s a sweet boy. He comes from a family with seven generations of fishermen, but he can’t fish. The privatization of the fishing quotas, one of Davíd Oddsson’s first measures, concentrated the fishing industry and elbowed out the smaller boats. “So I became a tour guide. I show people the sea, the sights. Once in a while I go out on the boats as a cook. It’s really sad.” He didn’t take part in the 2008 protests. “Those people were just protesting because they’d lost money.”

The Iceland that Svavar would like to live in is made up of land, sea, and not much else. “I want to remove myself from society. I don’t want to depend on anyone or anything.” This is the regressive dream of a self-sufficient Iceland, a land of free men who don’t answer to any central government, the mythic Iceland of the sagas. Svavar detests the European Union, which Iceland is thinking about joining. “If I don’t want to depend on a decision made in Reykjavík, imagine Brussels.” The same argument is made by Davíd Oddsson, the right-wing leader Svavar allegedly opposes. “Even the Devil has good ideas,” he replies.

The environment Svavar loves so much is also in decline. “If you want to talk about global warming, I can stay here all night.” Svavar thinks about leaving the country, and sadly admits that Iceland has no opportunities for him anymore. He wants to save up to pay for a program in botany in some other part of the world, preferably a tropical forest.

As opposed to Svavar, Einar participated actively in the 2008 protests. He besieged the police station to free Haukur, whom Einar credits, in part, with awakening his political consciousness. “During the collapse, my friends and I started thinking like real philosophers.” He says this in a moving, sincere way. “Those were beautiful days…” he recalls, as if he weren’t 19. “Now, it’s just pure apathy.”

Einar may come off as precious, with his airs of a privileged English youth from between the wars: the red cheeks, the delicate features, the tweed cap. He’s extraordinarily articulate and expresses himself in impeccable English, full of antiquated British turns of phrase. In a film, he would be headed to Oxford with verses of Shelley on his lips. The reality is quite different. Einar dropped out of school. Then he decided to go back, and now he’s thinking about dropping out again. He wants to become a filmmaker and admires Hal Hartley – he of the chatting, philosophical characters.

Ísi, the producer, had said, “We didn’t go down like everybody expected, but, on the other hand, nothing big is about to happen here for a long, long time. This is it.”

This is very little for Einar, and for his friend Svavar as well. They’re both disillusioned, but for opposite reasons: Svavar fears the chaos of the future; Einar fears its boredom.

With the passage of time, even the referendum is losing its heroic stripes. Everything seems to boil down to an exasperated pragmatism. “Foreigners deposited their money in Icelandic banks and now they want it back.” Einar can understand that. “But I don’t want to spend my life like a dog because some Icelandic banker was living it up. So, fuck it – I’m not paying.” Svavar thinks that Einar has become a pessimist. “What he wanted was to reform the system, not destroy it, but now he’s concluded that that’s impossible.” He echoes the fatalism of Eiríkur Gudmundsson, the radio journalist – “Capitalism: there’s nothing else in view.”

These are the risks that Iceland runs. On one side, nationalism, with its defense of country and its nostalgic, anti-modern and isolationist streaks; on the other, political apathy and scorn. If the first sentiment prevails, the country goes over to the extremists most able to mold the national discourse; if the second gets the upper hand, the land falls to the opportunists who crop up to fill the void left by indifference.

In the middle are all those who, although profoundly tired, still believe in the democratic process. “And, look,” says Katrín, from the constitutional reform committee, “this is what we need now: a bit of trust and a bit of love. It sounds corny, but it has never been bright here, so we could use a little love. Otherwise we will always be this arid island in the middle of the North Atlantic.”

 

Thór Jóhannesson discovered his inner revolutionary at the siege of the police station. After the birth of his son, this was the most intense moment in his 36 years of life. It was he who asked for stones; he who ignited the crowd by saying that to free the prisoner would be to topple the government; and he who, when Haukur was freed, clenched his fists and shouted that now Iceland could sing La Marseillaise.

Back then, he was finishing up college and would soon apply to be ateacher. His dream was to teach high school literature; he was hired on a trial basis, but his job fell under the first wave of cuts imposed by the austerity program. Since then, Thór has lived off unemployment benefits. He’s had small roles in a few films and thinks about changing careers, but right now he’s broke. He lives in his brother’s house, in a city just outside Reykjavik.

The revolutionary ardor is gone now. Thór voted for the Best Party, but he wouldn’t endorse any candidate for the national elections. The leftist government is a disappointment; at most, it’s better than the previous administration. “If you have to choose between a demon and the Devil, you choose the demon. But the Devil is still in charge.” This is a variation on a running theme in Iceland: the players have changed, but the game is still the same. Thór feels frozen, unable to move forward. He dreams of the Iceland of thirty years ago. “What we have is hopelessness. I’ve lost faith in politics. I’ve lost faith in democracy – it has proved to be as bad as dictatorship. So if there’s a way out, I don’t know what it is. If I knew a third way I would be the king of the world.”