- The Washington Times - Monday, April 21, 2008


Egill Johannsson sits in his Reykjavik office, glances at the snow-capped Esja Mountain across the bay and checks the value of the Icelandic krona every 15 minutes. He isn’t a currency trader; he’s a car dealer.

The krona has lost a fifth of its value against the euro this year, forcing Mr. Johannsson to raise his prices by as much as 12 percent.

“I’d rather spend more time selling cars,” Mr. Johannsson, 44, said, looking out over a showroom filled with Ford Mustangs and Volvo sport utility vehicles. “But that’s Iceland now. It’s all about the currency.”

Investors are selling the krona because of concerns that Iceland has too much international debt at a time when banks around the world are restricting access to credit. The currency’s plunge, which forced the central bank to raise its key interest rate to a record 15.5 percent earlier this month, has transformed the nation’s 300,000 people into currency obsessives.

At Reykjavik 101, the bar of a hotel catering to wealthy Icelanders and tourists who flock to the island for the midnight sun and whale watching in summer, customers were discussing the latest economic crisis on a recent Tuesday night.

“In the U.S. or the eurozone, people couldn’t tell you what the exchange rate is,” Frosti Olafsson, an economist at the Iceland Chamber of Commerce, said over a quesadilla and Viking beer.

“Here, it’s a hot topic, something people talk about over coffee,” he said.

Plunked in the middle of the Atlantic Ocean, 2,600 miles from New York and 1,175 miles from London, Iceland imports most of what its people need — except fish. The island sits atop one of the world’s most active volcanic zones and just below the Arctic Circle, leaving it with a craggy, infertile interior where Apollo astronauts once trained for moon landings.

The cost of everything from cars to food and clothing is surging after what Central Bank Governor David Oddsson called a “speculative” attack on the currency by “unscrupulous dealers.” The interest rate increase came after the central bank raised its benchmark rate by 1.25 percentage points at an emergency meeting on March 25.

“In some senses, Iceland is like an economic experiment,” Mr. Olafsson said. “In 20 years or 50 years, economics professors will look at Iceland and say it’s possible for a country of that size to have its own currency or not.”

The effects of the krona’s decline are reverberating throughout the $20 billion economy, in which locals often borrow in foreign currency to sidestep high interest rates at home.

Forty minutes west of Reykjavik is Blue Lagoon, a geothermal spa built at the meeting point of the American and Eurasian tectonic plates.

As steam wafts into the air, tourists and locals bathe in the warm, mineral-rich waters, surrounded by jagged peaks. Staff set tables at the new restaurant, financed in part by foreign currency loans. As the krona tumbled, the spa postponed plans to refurbish a cafe and reception area.

“High interest rates, the incredible fluctuations of the krona and inflation make the business environment very difficult,” said Blue Lagoon founder Grimur Saemundsen, who postponed a family holiday in Europe as the krona dropped.

“We have been under attack from international markets,” he said.

Fuel prices have jumped 50 percent in the past year as the krona’s decline amplified the rising cost of oil, said Eggert Benedikt Gudmundsson, chief executive officer of HB Grandi, Iceland’s biggest fishing company.

Mr. Gudmundsson is now considering paying some salaries in euros to head off demands for higher pay to offset surging prices.

“The krona’s decline is like eating cake,” Mr. Gudmundsson said in his office close to Reykjavik harbor. “A little bit is nice, but too much makes you obese.”

“The price of a duck breast rose 10 percent in a week,” said Magnus Solvhson, maitre d’ at Domo, a nearby Asian-fusion restaurant. “It’s crazy.”

Back at Mr. Johannsson’s Brimborg car showroom, he estimated that sales will drop 20 percent this year. Buyers, many of whom borrow in euros or yen, face higher repayments, leaving salesmen to pore over currency tables seeking the best deals for their customers.

“We’re all currency experts now,” Mr. Johannsson said. “It’s going to be a tough year.”

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