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Former Iceland's Prime Minister Geir Haarde listens during his trial in Reykjavik April 23, 2012. He was found guilty of one charge related to the collapse of the country's banks in 2008. (INGOLFUR JULIUSSON/INGOLFUR JULIUSSON/REUTERS)
Former Iceland's Prime Minister Geir Haarde listens during his trial in Reykjavik April 23, 2012. He was found guilty of one charge related to the collapse of the country's banks in 2008. (INGOLFUR JULIUSSON/INGOLFUR JULIUSSON/REUTERS)

The high cost of Iceland's remarkable recovery Add to ...

In this small Icelandic village, sailors are making double their pre-crisis pay, haddock sales to places like Boston and Brussels are booming and unemployment is almost zero – signs of this island’s surprisingly rapid rise from the ashes of banking ruin.

While much of Europe wallows in recession, the economy of this volcanic island in the mid-Atlantic is growing at a clip that has surprised many people, thanks to a currency fall – in which the crown lost almost half its value to the euro – an export and tourism boom as well as growing consumer confidence.

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“This is probably one of our best years,” said Arnthor Einarsson, a fisherman readying his boat for his next catch as seagulls circle huge piles of fishing nets on a rocky peninsula about one hour south of the capital Reykjavik.

Only a few years ago, a banking boom in which the sector’s assets grew to 10 times the country’s GDP lured many of Iceland’s 320,000 population from traditional industries into the world of finance. Fisherman got into banking and sailors speculated on booming real estate.

Those heady days have gone. Gas-guzzling Land Rovers have been replaced with fuel-efficient Volkswagens, a sign perhaps of a more sober consumer mood in which economic growth is based on a steady expansion of exports rather than flash-in-the-pan speculation.

The wounds that sparked massive street protests against the financial elite are slowly healing. Even the then prime minister has been tried by a special court, closing one chapter.

Granted, there is still a long way to go, but many see Iceland as offering a lesson particularly to European countries such as Greece and Spain, stuck with shrinking economies and lacking the option of devaluing to boost their international competitiveness.

Iceland’s GDP growth estimated at some 2.6 per cent this year will outshine even powerhouses like Sweden.

“These are among the highest numbers in Europe,” said Finance Minister Steingrimur Sigfusson. “Sometimes it is easier to turn a small boat around than a big ship.”

Currency depreciation though is only part of the picture.

Capital controls, progressive taxes and a careful phasing-in of austerity measures were also key to getting the country back on track, bringing a more than 10-per-cent fiscal deficit back to a near balance.

Iceland also did what other parts of Europe haven’t dared to do – let its banks go under. It took some of the cost itself but forced foreign creditors to take the biggest hit.

Lauded by some economists for taking unorthodox measures to fix its broken economy, others see it as a one-off example that would be hard to replicate.

“The lessons don’t transfer directly because of the relative size of the old banks in relation to the economy. What we were left with was quite manageable,” said Jon Bentsson, senior economist at Islandsbanki.

Three years after its near meltdown, Iceland looks healthy on many measures. It successfully finished an IMF bailout program and has already made one early repayment. It expects the sale of assets from failed bank Landsbanki to cover its $5-billion in debts to Britain and the Netherlands.

In February, Iceland recovered its investment-grade rating from Fitch, which praised the country for restoring macroeconomic stability, adding to investment-grade ratings from Standard and Poor’s and Moody’s Investors Service.

Icelanders are getting work, going shopping and their house prices are rising again.

And while the penthouse of a gleaming new skyscraper in downtown Reykjavik sits empty, Icelanders are piling into a hip new restaurant on the ground floor called the Hamburger Factory.

Car sales doubled in the first quarter. Jon Olafsson, who runs an auto dealership on the outskirts of Reykjavik, expects to sell almost 1,000 cars this year, having sold less than 100 cars in 2009.

“This is a high-volume day for us,” he says, pointing at a shiny row of cars just rolled out on his lot. His customers are back en masse, hunting for leaner, greener cars, and he is recruiting staff to meet demand.

While signs point to recovery, many remain cautious about the future and bitter over the past.

Household debt exceeds 200 per cent of GDP. The government must deal with the issue of capital controls, imposed after the crisis but which are seen by some economists as denting foreign investment confidence.

There is little trust in government three years after the fall of ex-Prime Minister Geir Haarde. Parliament has the support of only 10 per cent of the public, polls show.

Pall Matthiasson, chief executive of mental health services at the National University Hospital of Iceland, flips through slides on his iPad showing the five stages of grief.

He says Icelanders remain in a state of depression.

“There is cohesive guilt, because only so much anger can be directed at the bankers,” he said. “It’s like looking in the mirror and asking ‘did I do that’? It comes back to haunt us.”

Many just want a clean slate.

That can be seen no more clearly than in recent polls which show a surprisingly strong lead for presidential candidate Thora Arnorsdottir, a fresh-faced mother who is due to give birth to her sixth child at the end of May.

In an election due at the end of June, the 37-year-old goes up against President Olafur Grimsson, who is running for a fifth four-year term having a few years back cheered on those who drove the country’s banking expansion.

Mr. Haarde’s trial, she says, was difficult for the nation.

“Instead of being a step towards reconciliation, it has been more an opening up of wounds,” she told Reuters, curled up on a sofa in her suburban home and peeking out of her window every few minutes to check on her children.

People told her they couldn’t bear to watch the news any more.

“I feel that we can get through this without taking out the daggers,” said Ms. Arnorsdottir, a journalist who also has her own quiz show. “My hope is to use the influence of the presidency to close the trenches.”

Mr. Haarde, the world’s only political leader to be tried for crimes related to the global crisis, was found innocent of major charges of gross negligence but guilty of failing to hold dedicated cabinet meetings ahead of the collapse.

In the months ahead, Iceland will bring former banking executives to stand trial, so the pain is not over.

Icelanders will meanwhile get on with their recovery.

“Did Icelanders have an identity crisis? Yes,” said Egill Helgason, one of Iceland’s best-known television commentators. “They thought they were financial wizards, but it was all an illusion … Now it’s back to books, music, and well, fish.”

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