Recession Diary part 1
I've decided to share how the recession that is starting here in Iceland is affecting me. Possibly give a glimpse into how something like this affects someone like myself. If you don't know already here's a short intro to how we got into this mess.
Iceland is part of the European Economic Area, which means that we're half way in the European Union. But not a full member. Several years ago 2 of the largest Icelandic banks were privatized. Some years later they and another Icelandic bank had grown and started operations abroad and some time ago it was revealed that a higher proportion of people were working in the Icelandic financial industry than in Switzerland. Several critics of the rapid growth of the Icelandic financial industry warned that the Icelandic banks were rapidly becoming to large for Iceland. The key reason was that in the EEA agreement there's a statement that if a financial instituion fails, the government of the home country of the bank is responsible for 20.000 Euros insurance. So when the 3 banks failed it wasn't just a matter of a private institution failing. It means that Iceland is responsible for the 20.000 Euros in insurance. This means that we're all now responsible for damages that equal several times the GDP of Iceland. So not only is Iceland dealing with the failure of 3 of its largest financial institutions, but it's also faced with paying out damages to those who had their money in the accounts of the Icelandic banks. The failure of the banks is then having a serious knock-on effect on the rest of the economy. Funding for companies has dried up. Investors in the banks have lost their money. Retirement funds have lost a chunk of their investments, which in turn means lower payout. At the same time the value of the Icelandic currency went into freefall. Sank like a rock. So much for the background.
It's not an overstatement to say that this hit us like a brick. All of a sudden I saw some of my savings disappear. Even now I don't know exactly how much I've lost. But it was a considerable part of my savings. I can expect that the money I had in my retirement funds has shrunk. Time is on my side however, as I still have several years until retirement and with the drop in prices on the stockmarkets, there's actual opportunity to rapidly make some of the money lost back. What's worse however, is the situation of some of my family and friends. People have lost not only their savings but also their jobs. The first few days after the failure of banks things seemed to carry on much like before. But now I'm starting to feel and see the effects.
For one thing there are a lot of people who've just lost their jobs. They are still getting paid, but on average this will last only for about 3 months. I've noticed the effects already. There are fewer cars on the road when I go to and from work. Prices are slowly starting to rise on imports. Which for a country like Iceland means just about everything. Credit card debt is now with 25% interest rates while the inflation rate is rocketing. Due to the fall of the currency my car payments have gone up by 100% since I started paying for the car. Which I don't own, but lease with a currency connection. But I'm lucky in a sense. The company I work for has its revenue in foreign currency and has offered to pay us in either euros or dollars. This will provide me with some shelter from the flucation of the Icelandic currency. Plus it's in a growing industry and is thus hopefully somewhat sheltered from the current economic downturn. You might say that it's now become a beacon of hope for the Icelandic economy.
While it would be an overstatement to say that there's any lack of goods on the shelves. The variety is slowly becoming less. I noticed this in the wine store. Some popular selections are no longer available. I've also noticed this in the grocery store. A few things haven't been available for a couple of weeks. There's talk about the manufacturing industry starting to lack supplies. This is however, a wonderful time for tourists to visit Iceland. I've had people stay with me who have bought more than they planned. Things are simply so inexpensive here now, that the value of their currency is considerably higher than they expected. Still, due to the general economic downturn, it's probably more difficult to get people to come visit. We're all feeling the pinch.
I also feel that there's a lot of anger and resentment bubbling under the surface. Nobody is saying sorry. Nobody in government or in the institutions we trusted to monitor and safeguard us against this sort of thing has lost their jobs. Corruption is bubbling up to the surface. There are calls for change from all sides. This weekend saw the first glimpse of serious protests as somewhere around 5000 people (that's nearly 2% of the population - if you live in the US think 5.000.000 people - we're about 1000 times fewer than the US population) gathered to protest in the center of Reykjavik. Just imagine that. A 5 million march on Washington DC would be world wide news. A small part of that group threw stuff at the parliamentary building. Just eggs and tomatos. The government is responding by establishing a riot taskforce. The news media treated that as the main event. Not the fact that we've just had 5.000 people protesting. There's a lot of historical evidence that things can quickly spiral out of control. Next weekend it wouldn't surprise me if 10.000 people show up to protest. I'm in the group that calls for an immediate start in negotiations with the European Union for full entry into the EU. There are also several new initiatives to see if this can be turned into an opportunity. To create new jobs and firms that can utilize all the human capital that is now looking for work. There's constant talk on blogs, radio and TV about what we'll do next. Lots of ideas floating around. Few concrete actions or answers from those I and many others see as responsible for this mess.
So this is just the first. Not everything is here. But unfortunately it seems like I am living in interesting times.
Iceland is part of the European Economic Area, which means that we're half way in the European Union. But not a full member. Several years ago 2 of the largest Icelandic banks were privatized. Some years later they and another Icelandic bank had grown and started operations abroad and some time ago it was revealed that a higher proportion of people were working in the Icelandic financial industry than in Switzerland. Several critics of the rapid growth of the Icelandic financial industry warned that the Icelandic banks were rapidly becoming to large for Iceland. The key reason was that in the EEA agreement there's a statement that if a financial instituion fails, the government of the home country of the bank is responsible for 20.000 Euros insurance. So when the 3 banks failed it wasn't just a matter of a private institution failing. It means that Iceland is responsible for the 20.000 Euros in insurance. This means that we're all now responsible for damages that equal several times the GDP of Iceland. So not only is Iceland dealing with the failure of 3 of its largest financial institutions, but it's also faced with paying out damages to those who had their money in the accounts of the Icelandic banks. The failure of the banks is then having a serious knock-on effect on the rest of the economy. Funding for companies has dried up. Investors in the banks have lost their money. Retirement funds have lost a chunk of their investments, which in turn means lower payout. At the same time the value of the Icelandic currency went into freefall. Sank like a rock. So much for the background.
It's not an overstatement to say that this hit us like a brick. All of a sudden I saw some of my savings disappear. Even now I don't know exactly how much I've lost. But it was a considerable part of my savings. I can expect that the money I had in my retirement funds has shrunk. Time is on my side however, as I still have several years until retirement and with the drop in prices on the stockmarkets, there's actual opportunity to rapidly make some of the money lost back. What's worse however, is the situation of some of my family and friends. People have lost not only their savings but also their jobs. The first few days after the failure of banks things seemed to carry on much like before. But now I'm starting to feel and see the effects.
For one thing there are a lot of people who've just lost their jobs. They are still getting paid, but on average this will last only for about 3 months. I've noticed the effects already. There are fewer cars on the road when I go to and from work. Prices are slowly starting to rise on imports. Which for a country like Iceland means just about everything. Credit card debt is now with 25% interest rates while the inflation rate is rocketing. Due to the fall of the currency my car payments have gone up by 100% since I started paying for the car. Which I don't own, but lease with a currency connection. But I'm lucky in a sense. The company I work for has its revenue in foreign currency and has offered to pay us in either euros or dollars. This will provide me with some shelter from the flucation of the Icelandic currency. Plus it's in a growing industry and is thus hopefully somewhat sheltered from the current economic downturn. You might say that it's now become a beacon of hope for the Icelandic economy.
While it would be an overstatement to say that there's any lack of goods on the shelves. The variety is slowly becoming less. I noticed this in the wine store. Some popular selections are no longer available. I've also noticed this in the grocery store. A few things haven't been available for a couple of weeks. There's talk about the manufacturing industry starting to lack supplies. This is however, a wonderful time for tourists to visit Iceland. I've had people stay with me who have bought more than they planned. Things are simply so inexpensive here now, that the value of their currency is considerably higher than they expected. Still, due to the general economic downturn, it's probably more difficult to get people to come visit. We're all feeling the pinch.
I also feel that there's a lot of anger and resentment bubbling under the surface. Nobody is saying sorry. Nobody in government or in the institutions we trusted to monitor and safeguard us against this sort of thing has lost their jobs. Corruption is bubbling up to the surface. There are calls for change from all sides. This weekend saw the first glimpse of serious protests as somewhere around 5000 people (that's nearly 2% of the population - if you live in the US think 5.000.000 people - we're about 1000 times fewer than the US population) gathered to protest in the center of Reykjavik. Just imagine that. A 5 million march on Washington DC would be world wide news. A small part of that group threw stuff at the parliamentary building. Just eggs and tomatos. The government is responding by establishing a riot taskforce. The news media treated that as the main event. Not the fact that we've just had 5.000 people protesting. There's a lot of historical evidence that things can quickly spiral out of control. Next weekend it wouldn't surprise me if 10.000 people show up to protest. I'm in the group that calls for an immediate start in negotiations with the European Union for full entry into the EU. There are also several new initiatives to see if this can be turned into an opportunity. To create new jobs and firms that can utilize all the human capital that is now looking for work. There's constant talk on blogs, radio and TV about what we'll do next. Lots of ideas floating around. Few concrete actions or answers from those I and many others see as responsible for this mess.
So this is just the first. Not everything is here. But unfortunately it seems like I am living in interesting times.
Ummæli