Book Review: Why Iceland? by Asgeir Jonsson

Imagine every man, woman and child of Victoria, BC being faced with a sudden new debt of $18,000 to repay bank depositors in a foreign country. In addition, this is all through no fault of their own - the people now on the hook had nothing to do with creating the situation. That's what is facing the citizens of Iceland (whose population is about the same as Victoria's) these days as a result of the financial crash of 2008.

Why Iceland?, written by Icelander Asgeir Jonsson, examines how all this happened, how the rise and collapse of Iceland's banks in 2008 bankrupted the country. The title suggests the plaintive cry of an innocent and naive victim asking how such a calamity could come about. One might expect bitterness and incendiary language in the book. Not so however, as the author is also an economist. The approach seems more like morbid professional curiosity in trying to unravel what went wrong. He does so with little overt emotion and much fascinating detail.

Along the way, as they affect Iceland, one learns through Jonsson's succinct and clear explanations about currency swaps, Credit Default Swaps, Collateralized Debt Obligations, the carry trade, hedge funds, glacier bonds, repo funding, central banks, government interventions (or lack thereof) and consequences, credit ratings and agencies. The book is an intricate case study.

The detail is really the object lesson. Iceland did not go down because of one single error, one big villain or one event. It was a combination of many factors both local and global, mistakes at crucial moments that failed to prevent dire consequences of what had been building for some years. (There was even a small Canadian hand in the form of TD Bank whose London office merrily sold to the carry trade wagonloads of highly profitable glacier bonds denominated in Icelandic currency but sold outside Iceland.) A good summary might be the quote he includes from a 2008 Merrill Lynch credit report on Iceland: " ... rapid expansion, inexperienced, yet aggressive management, high dependency on external funding, high gearing to equity markets, connected party opacity. In other words: too fast, too young, too much, too short, too connected, too volatile."

With a little more of the human drama, this book could be made into a Hollywood movie (except of course for the heroic ending). The scene of the hedge fund managers coming to Iceland and mocking the executive of the Icelandic Central Bank as they detected weakness in Iceland's position is ready-made. Jonsson does include bits and pieces of personalities and their effects, though I would have welcomed more since I suspect such elements did influence the course of events more than is apparent in the book.

For Canadians the value of this book is the lessons and warnings. In the final chapter, Jonsson notes that the cost of bank bailout packages may yet become sovereign debt crises. He says some countries are especially at risk: a) small countries with, b) large, internationally exposed banking sectors, c) currency that is not a global reserve currency, and d) limited fiscal capacity. Jonsson asks whether even Britain itself could be in danger according to these criteria. Canada's banks escaped most of the 2008 financial havoc by their heavy reliance on stable domestic deposits so that is reassuring, as is the government's generally strong fiscal capacity, though it has been diminished by stimulus spending. However, Canadian complacency would be serious mistake.

The author does an excellent job keeping the story flowing and the tone light for what could easily have become too technical and dry. The author's position as chief economist at Kaupthing, one of the failed banks, seems not to have interfered with the presentation of a fair and unbiased account (bank executives get their share of blame).

For the individual investor and citizen, perhaps the biggest lesson from this book, is that the economic and investment landscape is highly complex, making it hard to know where things are going. Drastic bad things can and do happen, even to the surprise of highly motivated, smart, not-evil, though self-interested people. If you don't prepare for the worst, it may happen, even if it isn't your doing, and you may suffer the consequences.

Now many people are leaving Iceland, though Jonsson says Icelanders refuse to see themselves as victims. The acceptance of the 12,000 euro per person debt to reimburse Icesave depositors in the UK and Holland is being resisted within Iceland. The story isn't finished and the echoes of the crash will continue for a while yet.

A combination of an education and a good story, I highly recommend this book. My rating: 5 out of 5 stars.

Thank you to McGraw Hill for supplying a copy of the book for review..