Page last updated at 08:41 GMT, Monday, 6 October 2008 09:41 UK

Big chill hits Iceland's economy

By Steven Duke
Business reporter, BBC News, Reykjavik

For a country with fewer residents than the English city of Leeds, Iceland has been punching well above its population size in the global economy.

Reykjavik street scene
Iceland is in the grip of a slowdown

"We've had amazing growth," says Auour, a student hanging out in one of the trendy - but expensive - bars that Reykjavik is famous for.

The country's companies have expanded into Europe and beyond. In Britain, well known names such as House of Fraser, Hamleys and, appropriately, the supermarket chain Iceland have been snapped up during the Icelandic invasion.

But the land of ice and fire is suffering a severe cold and painful indigestion.

"Perhaps a slowdown was to be expected - it couldn't last forever," muses Auour.

An economy that was recently enjoying annual growth of 7% a year is forecast to enter a sharp and painful recession next year. Interest rates are at 15.5%, inflation is over 12%.

"It's been a horror week," remarks taxi driver Oskar, referring to all the bad economic news coming out of Reykjavik.

"But we've had worse, I remember when interest rates were 40%," he says with a shrug and a smile. He admits, though, that price rises hurt. "You go to sleep, and you don't know what the price of things will be in the morning."

Debt crisis

Iceland's troubles can be blamed on an increasingly-familiar source - the international money markets.

A decade ago, Icelandic banks used domestic savings as the main source of their funding, by 2006 the banks were dependent on the foreign money markets for cash - those markets have now seized up, leaving them with big debts to service.

Auour, a student in Reykjavik
The falling currency has hurt many of my friends studying outside of Iceland
Auour, student

Just six years ago, if the 310,000 residents of Iceland wanted to be kind, and pay off the foreign debts owed by their country's banks and companies, it would have cost them 15,000 each.

Today, every man, woman and child in Iceland would need to find more than 160,000 to settle the debts.

Can Oskar loan the banks some money? He shakes his head with a chuckle, "No sorry, I've not got those kind of sums in the bank."

What he does have in the bank has seen its value fall sharply against other currencies. The Icelandic krona is down 30% against the pound in the past month alone.

That means Auour won't be taking part in any student exchange programmes soon. "The falling currency has hurt many of my friends studying outside of Iceland. Their grant has basically been slashed."

It's a painful time, but Auour suggests it might be overdue. "I'm no economist, but you can't just keep on borrowing. It's common sense."

Iceland nationalises Glitnir bank
29 Sep 08 |  Business

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