Where do I start? Things are bad for the Icelandic economy. Real Bad. A few people I talked to are stoic, but no one is happy, and most everyone is worried, angry, or both.

According to some estimates, the amount of debt that Icelandic banks have accrued is 8 to 12 times larger than the country's economy. How much of that debt can be restructured or jiggled? I haven't seen the books and I'm not a financier. I suspect that some (maybe most) of the debt is serviceable and could be dealt with under ordinary circumstances. But everyone knows that the world economy is not operating in "business as usual" mode; there is a liquidity crisis, and the international forces that are pulling on larger economies could snap Iceland's economy.

Some Random thoughts:

Alda at Iceland Weather Report makes it clear that the message being broadcast in Iceland is that the country is not in the process of going broke - the major banks are failing, but the country itself has no foreign debt. But the headlines and analysis from many international sources are suggesting national bankruptcy - for example, this article in Forbes, and this AP article that has appeared in a few hundred places, including Yahoo News.

The government is no longer trying to peg the Krona to other currencies - Iceland's currency is floating (in a storm). Most foreign exchange sites seem to be putting it at around 120 to the dollar, but I have heard reports that some Icelanders using ATM machines or credit cards in other countries have been charged as much as 225 ISK for one dollar. The widespread confusion on what is really happening makes it difficult for the world to agree on the value of the Krona.

I've heard from a few Icelanders who had money in the banks there. Their bank stocks are basically worthless. Some other types of accounts are frozen, including the equivalents to money market accounts or CDs. Because the economy is so small there, banks were the main mode of investing - it was possible to buy shares of some companies outright, but the average investor was likely to use a bank.

Icelandic banks were also into international expansion in a big way. About a year ago, my wife was mailing a package to Iceland from Florida, and someone in the post office noticed the address on on the box and started talking about high yield Icelandic bonds - the minimum investment was $10,000, and the interest rate was twice as high as a 'comparable' product originating in the U.S. I have to wonder if that was part of a high cost/high risk venture.

There is also a vigorous debate between the government of the United Kingdom and Iceland right now - another innovation that Icelandic banks plunged into was internet banking, and around 300,000 Brits had money tied up in accounts of Icesave, run by a subsidiary of Landsbankin. At last read, the two sides could not agree on anything, such as who said what about customers getting their money out of those accounts - information was in complete disarray. One of the Nordic Countries (Sweden, I believe) did extend an emergency loan to a branch of the internet bank, primarily to assist their citizens in making withdraws.

There were some reports of panic buying - gasoline and diesel sold out after a rumor on a social networking site stirred fears that prices would spike (it went down, and the supply is normal again). There were also limited reports of panic food buying based on a rumor that grocery stores lacked the foreign currency to restock the shelves. This also appears unfounded, and food remains available.

Watching the TV news from RUV online, I did catch a segment where people were discussing the probability that Icelanders would be eating more lamb and fish over the next few years. One agricultural expert said that the country has the ability to increase agriculture dramatically, although imported inputs like fertilizer need to be considered in the equation. One source reported that the quotas on catching fish were increased to generate more income, although another press report said that quotas were being held constant to protect the fisheries and maintain a sustainable harvest.

The source of optimism for most Icelanders is that the country remains rich in resources compared to its small population. It has fish, aluminum smelting, tourism, and a new industry in internet data centers that makes use of the inexpensive electricity from dams and geothermal plants. So life goes on - Iceland's economy has been rather dramatic in the past 100 years, and this may not be the worst crisis.

One comment I read online suggested that Iceland would be ok as far as fossil fuels go, as it has a hydrogen economy. Unfortunately, the hydrogen economy is more of an experiment at this point ... when I last visited, there were only a handful of buses in Reykjavik that relied on a single hydrogen filling station; 99.99% of the cars, trucks and ships still rely on fossil fuels. Iceland started to move towards a hydrogen economy, but is far from realizing that goal. On the other hand, almost all the homes and business use local geothermal or electric heat (I did once go for coffee at a remote farm house that relied on a wood stove).

Causes and Conspiracies

A friend in Florida (who has no connections to Iceland but who is well read) advanced a theory he came across online - Iceland was the victim of an international conspiracy spearheaded by Putin. This crisis makes it possible for Russia to step in and 'rescue' Iceland. The reports that Russia may in fact extend $5 billion dollars fit nicely with that scenario. But reports that Russia was negotiating for a military base were rejected by the Icelandic Government, which is led by the pro-west, pro-business Independence Party. There is little credence behind the idea that Iceland will soon become the Cuba of the North Atlantic.

The idea that Iceland was the victim of a conspiracy was first raised by Paul Krugman in the New York Times in March, 2008. NY Times Source. Krugman was more interested in the idea of currency speculators picking on Iceland because it was small, and he intimated that some in the Icelandic Government were suspicious of Bear Sterns. A comment was left by "Uncle Billy" that suggested that relevant information could be found by Googling "Iceland Russian Mafia".

Another source pointed to an article from 2006, where the head of the Eclectica Hedge Fund refers to profiteering off the pain of the Icelandic Krona; the manager is quoted as saying “I want to be known as the man who bankrupted Iceland.” (Article in Business Times Online)

Russia's motives were also questioned in a few posts at the political forum ((link here).

Will have to follow up on these types of theories later. Ordinarily, I am not a fan of conspiracies, but when explaining financial mismanagement and big heists, they are sometimes valid.

I read an interview with the musician Bjork, where she reflected on the cause of the current crisis - she linked it to the industrialization of the country, the construction of big dams, and losing sight of what life is. It's safe to say that 200,000+ Icelanders are going through their own reflection process right now. Is Iceland the victim of too many clever bankers, of the same rampant speculation and hubris that has hit the sub-prime lenders in the United States? To what degree was it criminal, and to what degree was it merely a bad decision? At this point, I don't pretend to understand it all.