Iceland faces grave risks

Iceland marked the 90th anniversary of its autonomy from Denmark yesterday with its economy in ruins, its confidence fading fast and its future uncertain.

The country faces pressing problems concerning its immediate economic situation and more strategic, long-term questions over whether to stay independent or try to join the European Union.

Ravaged by the global financial crisis, Iceland's three top banks collapsed in October, an emphatic end to an era of cheap foreign funding which had driven a decade-long economic boom.

"Our situation has never been worse in 90 years... and most people still don't realize how serious it is," said Vilhjalmur Bjarnason, a professor of finance at the University of Iceland.

"We can't really see the end of what is happening right now," said researcher Andrea Gudbjorg from opinion polling company Capacent. "There are no signs of a turnaround."

Iceland's 320,000 residents, among the most affluent in the world, are staring at a protracted recession with the economy seen shrinking 10 percent next year. Construction sites around Reykjavik have been deserted and unemployment is set to soar.

Prime Minister Geir Haarde is under growing pressure to resign, blamed by many for failing to spot the warning signs of the economic collapse and major lapses in regulations.

"The government has slept through this entire crisis," said Jonina Sigurjous, a nurse. "How could it get so bad? We never had to worry about things like the crown (currency) or jobs."

Preventing outflow
Consumer confidence has plummeted and the once high-flying Icelandic crown has effectively ceased trading. To prevent an outflow of capital, which would further weaken the crown, Icelanders can only buy limited amounts of foreign currency at their banks after presenting a valid ticket to go abroad. Store shelves are kept full only because importers of food and medicine buy hard currencies from the central bank. Interest rates have been raised to 18 percent to contain run-away inflation and bolster the crown, but risk setting off a wave of defaults by indebted Icelanders and their companies.

Another anti-government rally was due later yesterday, the 90th anniversary of Iceland's declaration of autonomy from Denmark. Full independence was won in 1944.

The economic meltdown has stirred a longing for more security among traditionally go-it-alone Icelanders.

Polls show a majority backing EU accession and adoption of the euro, forcing Euroskeptic Haarde to promise another look into the merits of joining. Iceland abides by the EU's economic rules but many feel membership would hurt its fishing interests. Strategically located between the Soviet Union's northern ports and the United States, NATO-member Iceland was protected by Washington during the Cold War. But its status has largely faded with the U.S. military base closing in 2006.

"There are areas where we could have been more pro-active," Haarde said this week, when asked if Iceland could have done more to strengthen its ties with Europe in past decades.

As Haarde juggles strategic questions that will define Iceland's identity in future decades, a new opinion survey showed yesterday that 60 percent of Icelanders want early elections next spring, an idea he has rejected so far.

More than two-thirds of people want the pro-EU Social Democratic Alliance, the junior ruling partner to Haarde's Independent Party, to lead the next government. Observers say EU enthusiasm has been fanned by the crisis and could still fall once the economy stabilizes.

"What happened in past years with this break-neck expansion and debt is sheer madness," said Einar Karason, one of Iceland's best-known writers. "The general feeling is that in Iceland there is nothing you cannot do - which probably helped bring about this crisis but which will also help us recover from it."