The End of Iceland's Innocence: The Image of Iceland in the Foreign Media during the Financial Crisis

Numerous Warnings—A Foreseeable Collapse

– 87 – NUMEROUS WARNINGS A FORESEEABLE COLLAPSE ‘Warnings about this sorry end had been coming from many different sources for months.’ Iceland Review, spring 20091 During the crisis in 2008, a number of journalists emphasized the sudden and unforeseeable nature of what happened in Iceland. A brief look back, however, will show that warnings had been coming from many different sources for months. Early in the year, the financial rating agencies issued the first warnings about Iceland by downgrading the country’s ratings. In January, Moody’s announced that the rating it had assigned Iceland—up until then an excellent triple A—was at a crossroads ‘because of the perceived fragility of the country’s banks’.2 In February, the agency reiterated that Iceland’s banks were in a challenging situation. Then, in March, it downgraded its outlook for the entire country, which, according to David Ibison, indicated that Moody’s was ‘gradually losing confidence in the ability of the nation to avoid a banking crisis’.3 Several newspapers then expressed serious concern. Le Monde warned that excessiveness threatened Iceland’s financial equilibrium since ‘the country’s banks held assets eight times greater than its GDP’.4 An article by Simon Watkins in the Financial Mail (South Africa) stated that ‘these banks [Lands1 Bjarni Brynjólfsson, ‘The pots and pans revolution’, Iceland Review, vol. 47, no. 1, 2009. 2 David Ibison, ‘Moody’s blows hot and cold on Iceland’, Financial Times, January 29, 2008, p. 41. 3 David Ibison, ‘Moody’s poised to downgrade Iceland’, Financial Times, March 6, 2008, p. 27. 4 George Hay, ‘L’Islande, victime du “credit crunch”’, Économie, Le Monde, March 8, 2008, p. 18. The original quote read: ‘le secteur bancaire local détient désormais des actifs représentant huit fois le produit intérieur brut de l’Islande’. – 88 – banki, Kaupþing] are now seen as the most unsafe in the developed world’.5 In April, Standard & Poor’s indicated that Iceland, Estonia and Latvia were ‘the most vulnerable European countries to a global slowdown’,6 while Fitch Ratings agency expressed serious doubts about the stability of the Icelandic banking system; as a result, ‘investors panicked, and the currency and the stock market both plunged 25% in a matter of days’.7 In a matter-of-fact article for the Guardian, David Teather provided the following bleak picture of Iceland’s economy: Risk-averse investors have begun pulling out. Since the beginning of the year, the Icelandic krona, the smallest independent currency in the world, has fallen by 25%. The main stockmarket index has fallen by about 40% from its peak last summer, inflation in the overheated economy is running at 6.8% and interest rates reached 15.5% last week. The country has also been running a large trade deficit, partly because of rampant consumer spending.8 It is difficult not to grasp, from this message, a certain sense of urgency and the risk of more serious deterioration. The New Yorker, for its part, indicated that concern was mounting: ‘many people suggest that [Iceland] could become the “first national casualty” of the ongoing credit crunch’.9 In June, the Financial Times reported, in one of its many articles on Iceland, ‘growing fears that its overheating econ5 Simon Watkins, ‘Iceland’s banks top “riskiness league”’, Financial Mail, March 16, 2008. 6 Robert Anderson, ‘Fears grow of Baltic states’ addiction to external capital’, Finan­ cial Times, April 18, 2008, p. 25. 7 Peter Gumbel, ‘Iceland: the country that became a hedge fund’, Fortune, December 4, 2008, http://www.money.cnn.com/. 8 David Teather, ‘Iceland first to feel the blast of global cooling’, Guardian, April 17, 2008. 9 James Surowiecki, ‘Iceland’s deep freeze’, New Yorker, April 21, 2008. – 89 – omy ... [was] about to slip into recession’.10 By mid-summer, experts had started to worry: ‘Analysts said there were reasons to be nervous about the health of the country’s large banks.’11 The financial rating agencies were not the only ones to issue early warnings. Highly regarded economists had asserted before the crisis that the situation would become unbearable for Iceland if a major crisis occurred. In 2006, Frederic S. Mishkin, Columbia University professor and former economist with the U.S. Federal Reserve, published a report entitled Financial Stability in Iceland for the Iceland Chamber of Commerce. Although the Icelandic government and banks used the report to convince foreign investors that their...