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On a recent weeknight Iceland’s top tourist attraction, the Blue Lagoon geothermal spa, is packed with visitors wearing mud masks and quaffing local beer, contributing to a tourism surge that is helping to fix an economy wrecked by the 2008 financial crisis.
Many Icelanders are not having as much fun.
While unemployment has fallen to pre-crisis levels, gross national income per capita is around a quarter less than in 2007, about one-tenth of the population has fallen into serious loan default and thousands of homes have been repossessed.
They have little faith in the authorities fully restoring living standards and the resentment is fuelling the rise of the anti-establishment Pirate Party, which is leading in polls ahead of elections in October.
The mistrust runs deep. Iceland suffered one of the first big financial implosions of the European economic meltdown after the collapse of its banking system, becoming the first western European country to get an International Monetary Fund (IMF) bailout since 1976.
It needed the $2.1 billion IMF loan, and another $2.5 billion from its Scandinavian neighbors, to protect domestic deposits and keep its krona currency, which has collapsed 70 percent against the euro since 2007, from crashing further.
The government sharply reduced spending and raised interest rates to as much as 18 percent to control inflation that climbed to a record-high 18.6 percent in January 2009.
The currency collapse, though, helped restore competitiveness and, along with a big marketing push to promote Iceland as a destination, boosted tourism.
Some 1.7 million visitors reveled in Iceland’s natural beauty last year, more than double the number who arrived a decade ago and more than five times the total number of Icelanders.
“We have fully recovered in economic terms. The Icelandic economy is doing very well at the moment,” central bank chief Mar Gudmundsson told Reuters, citing the “phenomenal” growth in tourism as one of the main reasons, alongside the fisheries industry, for the turnaround.
At the Blue Lagoon, most visitors spent close to 30 minutes queuing to get in despite pre-booking tickets, while frazzled staff tried to process them as fast as possible.
“It is a tourism tsunami,” said Matthias Kjartansson, managing director of travel operator Iceland ProTravel, whose turnover has grown five-fold since 2012. “All over Iceland, there are no hotel rooms. It is crazy.”
Economic growth is expected to hit 4.3 percent this year, unemployment is at a pre-crisis low of 3.2 percent and capital controls on Icelanders, imposed during the crisis, are expected to begin to be lifted in the autumn.
It is a far cry from 2008 when the economy crashed, felled by regulatory mismanagement, aggressive lending and a huge currency bet. Its top three banks collapsed, having amassed debt equivalent to 10 times the island’s gross domestic product (GDP).
Helped by the loans, successive governments set about cutting debt. “We have changed it from an unbearable situation a few years ago, from about 130 to 140 percent (of GDP) to 14 percent and it can continue going down,” Prime Minister Sigurdur Ingi Johannsson said in an interview in his office.
This is enabling Iceland to unwind its capital controls, carefully; with interest rates at 5.75 percent compared with zero or negative rates in the rest of Europe, the worry is a destabilizing inflow of cash from foreign investors.
The central bank is also concerned there could be a disorderly exit of some 300 billion crowns ($2.4 billion) by foreign investors selling the crown-denominated Glacier bonds, bought before the crisis and trapped in Iceland ever since.
The central bank will conduct an auction on June 16.
To prevent any headwinds – with the worst-case scenario being a currency collapse – the central bank is shoring up its foreign exchange reserves and will be ready to intervene.
Fast Cars, Pricey Meals
In Reykjavik’s restaurant and cafe scene, catering to the elite and tourists, things are hotting up.
“Getting staff is difficult … Some people, honestly, get overpaid because (restaurants) outbid each other,” said Ragnar Eiriksson, chef at top restaurant Dill.
In the streets outside Dill, where you need to book two months ahead to get a table, fancy cars cruise by, including a silver Bentley.
For most Icelandic households though fast cars and restaurants such as Dill, which offers Arctic char smoked with sheep manure as part of a seven-course menu for 13,900 crowns ($111), are beyond reach.
Gross national income per capita was $46,350 in 2013, the latest year data was available, down from a 2007 high of $62,290, according to the World Bank. That’s almost on a par with Germany, but GNI per capita in that country had risen steadily, unlike Iceland’s spectacular crash.
“It is not getting better for me,” said Agusta Drofn Gudmundsdottir, a part-time receptionist who receives disability benefits after a motorbike accident when she was 16, over coffee in her kitchen in suburban Reykjavik.
Between her job and benefits, the 53-year-old earns roughly 310,000 crowns ($2,484) a month after tax. Some 140,000 crowns go on rent and bills and a carefully planned food shopping trip to bargain stores takes up 15,000 crowns per week.
Although her benefits have increased since the crisis, she said, they have not kept up with years of double-digit inflation, which peaked at close to 19 percent in January 2009. Last year inflation was 1.6 percent.
“I can’t go out for a drink with a friend. Holidays are out of the question. The first question my 16-year-old daughter ever asks when she wants something is: ‘can we afford it?'”
The public’s lingering distrust of politicians and business leaders deepened after the Panama Papers revealed in April that the wife of then-Prime Minister Sigmundur David Gunnlaugsson owned an offshore company that held debt from failed Icelandic banks. Mass demonstrations led to Gunnlaugsson’s resignation and early elections in October.
‘Time for Something New’
Gudmundsdottir has not yet decided who she will vote for but Saethor Asgeirsson, chief executive of green technology startup Icewind, has.
“I voted for the Pirate Party last time and I will do so again. It is time for something new on the table,” he said during a break at his workshop in a disused coal-fired power plant, where he is developing a new type of wind turbine.
The anti-establishment Pirate Party, which would get 30 percent of the vote if an election were held today, has channeled the anger of many.
The party, founded four years ago, advocates direct democracy, data transparency and copyright reform. If it wins, it will hold referenda to approve government policies and push for bills to be presented to parliament if 2 percent of voters back it.
“We are a democracy in transition in Iceland, like everywhere else … We need to modernize our democracies,” Pirate Party leader Birgitta Jonsdottir said.
“People look at governments like a big daddy to take care of everything, but at some point you have to grow up and take responsibility,” Jonsdottir said.
Back at Dill restaurant, Eiriksson wonders whether Iceland is heading for another bust. “Maybe it will happen again with the tourism booming, but hopefully not,” he said. “Hopefully we have learnt something.”
(Editing by Susan Thomas)