From The Times October 1, 2009 By Roger Boyes A year ago this month, Iceland went bankrupt. We explain how it went from being the worlds happiest nation to one with a bleak future. Along a narrow strip between downtown Reykjavik and the northern coastline lies a jumble of half-built high-rise buildings that was to be the new Manhattan of the north. By Spring this year, the place had become an urban graveyard. Someone has scrawled "CAPITALISM R.I.P." on the side of one of the buildings. Squatters have moved in, converting an abandoned house into a cosy café. The Reykjavikers cheerfully welcomed the presence of some kind of life to this ghost town. The developers, however, did not approve. So, just after Easter, the riot police were sent in with a chainsaw to hack through barricaded doors and pepper spray to disable the young squatters. The clean-up was nasty, brutal and short: it was the official end of Niceland. The Icelandic sense of live-and-let-live was the first casualty of the meltdown. For centuries, island society had functioned on family lines. Yes, there were feuds and friction between family members, but there was tolerance too. The financial collapse, though, brought a rawness to everyday life. While the Nordic rules still applied, no one was hustled out of the office on the day that the banks went under; no one stuffed the clutter of their desks into a cardboard box. But by November, dismissal letters were in the mail. Unemployment rose from under 2 per cent in September 2008 to 10 per cent by the spring of 2009. Although for a decade or so Iceland had imagined itself to be at the centre of the prosperous world, the crash propelled it back into the remote North Atlantic. Its pride was hurt. Icelanders were conscious that they had been steered incompetently and corruptly into the abyss. Yet the political class showed no remorse. David Oddsson the head of the central bank, who as prime minister had presided over the privatisation of Icelands state-owned banks was quick to blame the magnate Jon Asgeir and the oligarchs; Jon Asgeir blamed both the US for letting Lehman collapse and Oddsson for not responding intelligently; the Icelandic Government blamed the British Government. There is no culture of ministerial responsibility here, says a senior official. The prime minister will say, I didnt order this, I didnt cause that, so why should I step down? And since the prime minister says that, so do the ministers and department chiefs. As a result, no one has an interest in discovering why mistakes were made. The main threads of Icelandic rule were too intertwined, matted together: remove any one of these components say, by an ill-judged confession of incompetence and the whole edifice was likely to collapse. The smallness of the society increased the risks of mismanagement: the humiliation of national bankruptcy, the speed with which the middle class was impoverished, the heaviness of personal debt, the almost instant flip from being the worlds happiest nation to being a place that could offer no future to its young. So Iceland became not only the first country to go broke, but also the first in this global financial crisis to chase its government out of power. Soon, as living standards began to fall and people took to the streets, an uprising gathered force. It became known as the kitchen revolution because demonstrators used wooden spoons to bang pots and pans to drown out the proceedings of Parliament. These protests had plenty of pathos, above all, the singing of the rather dirge-like national anthem. Mainly, though, this was an ironic revolt. Fake banknotes bearing the image of David Oddssons head were distributed, free of course, since he was widely seen as having betrayed the krona. In December, Gurri, one of Icelands many self-proclaimed witches. led protesters toward the central bank and entered the building, carrying a life-size effigy of David Oddsson. Repelled by police, the short blonde witch, dressed of course in black, started to spank her effigy Youve been a bad boy! pronounced a spell, then stuffed it in a garbage bag. Until this moment, Icelands protest movement was an expression of hurt and an inchoate demand for change. Its ironic undertone was in part because many in the middle class, now being squeezed between higher mortgage debt and lower real wages, were half-aware that they had allowed the political class to get away with their incompetence and bad deals. Now they were demanding that the same class be changed, yet no party was completely untarnished by the years of easy credit. On October 24 the Government formally asked the IMF for help, both to send a signal to other nations and to stabilise the currency. There was no rush to help: Britain and the Netherlands were adamant that there should be no IMF package until they secured guarantees from Reykjavik to compensate Icesave depositors. Geir Haarde, the Prime Minister, eventually agreed because he had no choice: without the IMF loan of $2.1 billion, Iceland was finished. On November 16, Iceland announced that it would comply with the EU Deposit Guarantee Schemes directive guaranteeing compensation for up to 20,877 [£19,000] for each savings account. The horse-trading showed the Icelanders that their Government had no choices and could not in any rational sense be described as a government any more. More than 50,000 people had their savings wiped out. The Salvation Army hostel began to fill up with families unable to make ends meet. Car loans became like some obscure punishment from hell. Taken out in foreign currencies, the loan had to be paid back in a krona whose value was shriveling by the day. The only way out of the squeeze was to take out a newspaper advert offering thousands of dollars to anyone willing to take on the car and its bulging debt. The Range Rover and other SUVs have gone through an incredible transformation, a sociologist tells me. First they were luxuries, then they were necessities and you can see the point, you really need off-road vehicles in Iceland, its a rugged place and now they have become burdens. In the two months after the meltdown, Icelanders had been in shock, and the shock had atomised the island. The traditional solidarity of Christmas and the long holiday mutated into political solidarity and contempt for the seemingly guilty silence of the political class. When the demonstrations began in the new year, the tone was different. The aim was clear: to bring down the Government. Now, for the first time, the politicians began to understand what was at stake. They were not being barracked by communist agitators but were being brought to account by a nation. Those in power thought they were being confronted by lynch justice and allowed the riot police almost a free hand to defend the institutions of state. Those demonstrating outside began to sniff every hint of weakness. There were many such pointers. Politicians were buckling under ill health. The Foreign Minister Ingibjorg Solrun Gisladottir, head of the Social Democrats, had been absent for most of the crisis because she was being treated for a brain tumour; President Ólafur Grimsson underwent heart surgery; and Haarde announced that he had cancer of the oesophagus. The demonstrators saw weakness politically too, of course. Iceland looked rudderless, with the Parliament coming back from its Christmas holidays on January 22, after what might seem to have been an unusually long break in the middle of a world crisis. That day Haarde addressed [Parliament] in his first detailed account of what the Government had been doing since the October meltdown. It did not seem like much. Measures had been introduced, he said, to ease the pain of those tumbling into debt. Housing funds were to go easy on loan defaulters, child allowance was to be paid every month instead of every quarter, the unemployed were to be encouraged to study, employers nudged into offering part-time work instead of firing staff. Haarde stretched it out into a catalogue of 15 points, but it amounted to a wish list. None of this pleased or satisfied the protesters. The rallies grew and grew. The protesters banged tom-toms and lit effigies of politicians until late in the night. There were no more vague demands for apologies. What do you want to happen next, after theyve gone? I asked the people in the crowd that January, and did not get a coherent reply. Some wanted a return to fairness; the more radical were so enraged that they went so far as to demand a kind of Nuremberg trial, with Haarde, Oddsson and the oligarchs jailed on charges of defrauding the nation. This economic crisis has hit us with the force of a war, said the novelist Einar Mar Gudmundsson. It will cost us more than a war, not just in lost wealth, but in people we will lose a generation, maybe two, to migration. By January, having just had his cancer diagnosis, Haarde realised that he could no longer convince the nation that he was indispensable to its resurrection. It was time to go. On January 23, a Friday and the end of a long, noisy week of public protests, Haarde announced early elections and said that, for medical reasons, he would not be running. That was not exactly the triumphant defenestration that the protesters had been hoping for. The announcement of his illness he left the country within days for treatment in Amsterdam confused the protest movement and the country. The first political casualty of the global crisis! was the headline in Britain, but in Iceland it did not seem like that. There was just a kind of emptiness, recalled Magnus, an economics student. But the crumbling of the establishment had begun. The interim government, intended to steer Iceland toward the election, was to be a coalition of Social Democrats and the Left Greens, led by the dour Johanna Sigurdardottir. Johanna, nicknamed Saint Johanna by Icelanders, was different. She was from the left of the Social Democrats, and had been pushed aside in the contest for the party leadership in 1996 (leading her to declare: My time will come). During election campaigns she would go to the huge dockside warehouse that housed Reykjaviks flea market. Next to the dried-fish stands, a scruffy café, much favoured by the down-and-out, is warm, cheap, and only three minutes walk from the Salvation Army hostel. Johanna would sit there and listen to their complaints and those of anyone else ready to draw up a chair. Johanna was not only the islands first female prime minister, but also the first openly gay national leader in the world. Her relationship, in an officially registered union with the journalist and childrens book writer Jonina Leosdottir was well-known to Icelanders but attracted little curiosity. With only one gay bar on the island, Icelanders do not stay in the closet long. But to non-Icelanders Johannas sexuality seemed important, a sign of a more fundamental shift in attitudes. Half of her Cabinet were women not unusual in Nordic societies and more significant, the heads of new versions of two of the banks were women: Elin Sigfusdottir at New Landsbanki and Birna Einarsdottir at New Glitnir. Their brief was to create domestic-deposit bases, make a go of shaping a conventional, customer-oriented bank and allow the formerly glamorous and now ruined international departments to sit in a kind of toxic-waste disposal unit. The only Icelandic investment company to emerge from the crisis relatively unscathed was Audur Capital, set up by two women, Halla Tomasdottir and Kristin Petursdottir, to cater to female investors. Our ground rule was simple, said Halla Tomasdottir. We didnt invest in anything we couldnt understand. In a sense the supposedly new orientation toward women echoes the Viking tradition, when the men would disappear out to sea for weeks on end, leaving women to run the households. The Icelandic approach to dealing with the crisis, essentially to let the women clean up after the party, is part of a broader feeling, though, that the Age of Testosterone may be coming to an end in the financial sector. Blaming the crisis on endocrinology is of course absurdly reductionist. At the heart of Ms Sigurdardottirs shift for Iceland was not her feminism but a basic egalitarianism. Iceland had for centuries been a society without large income differences, that treasured literacy, socialised health care and equal access to nature and its resources. Indeed, when David Oddsson took over the prime ministership in the early 1990s, Iceland bore a strong resemblance to a socialist society. Johanna Sigurdardottir put egalitarianism back on the agenda; her promotion of women was not supposed to right some ancient wrong, a discriminatory imbalance, but rather ease the way back toward a society that treasured solidarity. Women understood Johannas aims better than men and confirmed her in power in the general election on April 22. By that time, after only a few months in government, Johanna had convinced society that it had to reach deep into itself and fish out special Icelandic virtues: modesty, hard work, a rugged respect for each other. That was not enough, however, to dispel the anger, the sense of betrayal. On election day, protesters broke into the villa of Bjorgolfur Thor Bjoergolfsson in Frikirkjuvegur, Free Church Street. Thor had bought the house from the city council years earlier. The villa had belonged to his great-grandfather, who had founded one of the countrys most influential trading dynasties. Since Thor was ensconced in Holland Park, London, the protesters were able to climb on to the front balcony of the house, hang some life-size Viking dolls from the balustrade, and hang a banner declaring: We were never elected to any office, yet we ruled everything. The sentiment was shared by the voters, who elected the Social Democrat and the Left Green parties with a huge majority. Seven months after the meltdown, Iceland was still a seething, frustrated, unhappy nation. A friend of mine encountered a normally mild old woman as she left city hall after casting her vote. What were these people thinking when they bled their own country dry? the woman said. They will never be able to show their faces in this country again, nor will their children, or their childrens children. Gurri, the blonde witch, could not have produced a better curse. Meltdown Iceland by Roger Boyes is published by Bloomsbury on October 10 at £12.99. To order it for £11.69, including p&p, call 0845 2712134 or visit timesonline.co.uk/booksfirst The way the crash happened September 2008: Seven months after reports that Kaupthing, Icelands biggest bank, is seven times more likely to go into administration than a typical European one, the Icelandic Government introduces emergency legislation allowing it to nationalise Icelands third largest bank, Glitnir. October 2008: Iceland takes control of Kaupthing, after Alistair Darling invokes anti-terrorism laws to freeze its UK assets. British institutions and individuals scramble to recover their savings (local authorities alone had deposited £900 million into Icelandic banks). The BBC business editor Robert Peston writes on his blog that Kaupthing has the worst case of financial BO Ive encountered. November 2008: The IMF approves a $2.1 billion (£1.4 billion) loan to Iceland. Its inflation soars to 17.1 per cent. January 2009: Protesters surround Prime Minister Geir Haardes car and pelt it with eggs. He resigns. February 2009: Icelands Government tries to sell its embassy residences for a total of £25 million in an attempt to raise capital for the cash-strapped country. April 2009: A centre-left coalition lead by the interim PM Johanna Sigurdardottir wins a majority of 34 out of 63 seats at the parliamentary elections. June 2009: A consortium of four Icelandic banks buys West Ham United from Bjorgolfur Gudmundssonm, who lost a fortune when Landbanksi went into administration. July 2009: Iceland applies for EU membership. Documents released by the Icelandic Government reveal that the British and Dutch authorities held a meeting in 2006 to consider what would happen if the Icelandic bank Landsbanki could not cover the deposits of British and Dutch savers. August 2009: Iceland annual birth rate experiences a 3.5 per cent hike.