Iceland's currency struggles to regain people's trust

Icelandic krona The krona has halved in value since the banking crisis of 2008

Related Stories

Katla straightens a dark blue shirt on a hanger and smiles encouragingly at a customer who's tentatively trying on a summer jacket.

"It's crazy," she sighs. "We opened this shop just a week ago and we had to do it without a single loan from a bank - no one will lend you money here after the bank crash."

Katla's clothes shop, Oxney, is a boutique in central Reykjavik and she's clearly proud of the beautiful, original collection she's created by blending Icelandic and French designs. But she's worried about the future of her business.

"We're buying in clothes from France and it costs us double now to get stuff into the country because the krona is so weak."

"We have to pass on that cost to the customer," she says quietly. "The government really has to do something about the situation with the krona - it's so hard for businesses."


Following the banking collapse of 2008, the value of Iceland's national currency plummeted by a half.

Branch of Kaupthing Bank in 2008 Iceland suffered a serious financial crisis in 2008, when Kaupthing bank collapsed

To stop it depreciating even further, the government imposed strict capital controls, restricting the flow of money in and out of the country. Even foreign currency for things like holidays abroad is now tightly rationed.

The move has certainly saved the national currency, but at what cost? The government, which promised the measures would only be temporary, still can't say when controls will be lifted.

"We're expecting 3.7% growth this year," insists Finance Minister Bjarni Benediktsson.

"All the economic indicators show we are bouncing back, slowly but surely. I honestly believe one of the lessons we have to learn from the past is that we should be happy with slow progress - we don't want to grab everything at once and have to give it all back as we had to do over the crisis year.

"We must be patient with the lifting of capital controls."

Alternative currency

But not everyone is prepared to wait. In an internet cafe in the centre of town, computer engineering student Hilmar Jonsson is proud to pay for his surfing session with Auroracoin, the Icelandic version of the crypto currency Bitcoin.

Hilmar Jonsson Student Hilmar Jonsson says the Icelandic people have lost faith in the krona

It was launched at the beginning of this year by an unidentified person going by the name Baldur Friggjar Odinsson, with the aim of providing Icelanders with an alternative currency to the krona that is free from government and bank controls.

"At the moment, the second-hand market and things like cyber cafes are the only places that accept Auroracoin," says Hilmar. "But you know, I've managed to buy a boat with it for summer camp."

Baldur has promised that every Icelander will be given 30 Auroracoin - beginning an "air drop" or electronic distribution of the currency in March, with a second drop expected soon.

Hilmar reads out extracts from Baldur's manifesto: "Capital controls…mean the Iceland economy is slowly bleeding. The people of Iceland are being sacrificed at the altar of a flawed financial system… Auroracoin will be free from the meddling of the politicians and their cronies. The power must be taken back from the politicians and given back to the people."

Hilmar is confident that the principle behind the Auroracoin will keep the crypto currency buoyant.

"The banks lost the trust of the Icelandic people - and this means that we lost faith in the krona," he explains.

"So why not have an alternative that is not controlled by the government - it might be better than the krona. Aurorocoin hasn't got the flow the currency needs yet but I think it has the potential."

'We're broke'

When the banks crashed, disposable income here fell by a quarter and 20,000 jobs were lost - a sizeable number in a country of only 320,000 people.

Iceland landscape Iceland's economy relies on fishing and tourism to its dramatic landscapes

In Iceland, if you want to take the temperature of any situation, you head for the local swimming baths and hot tubs. Here, Jon, Svanna and Thor sink into the water, cowering from the wintry breeze swirling round their heads.

Svanna laughs at the notion that she is benefitting from an economic recovery.

"Recovery? We're broke! I don't buy anything except the essentials anymore and all holidays are inside Iceland - the krona doesn't travel!"

Jon agrees. "The krona sucks, ok? Give us the euro - or maybe the Canadian dollar, but the krona - it just does not work."

Greater controls

So should Iceland ditch its pride and call time on the national currency? That, says Mr Benediktsson, is simply out of the question.

"The krona is a viable solution for the future," he says, thumping his desk.

Finance Minister Bjarni Benediktsson Finance Minister Bjarni Benediktsson wants to see Iceland solve its own problems

"Grabbing another currency to solve disciplinary problems is not a solution. I don't like the idea of importing discipline through a hard currency. I'd like to see Icelanders show discipline in running their own economy and that will benefit us greatly and stabilise the krona."

But the government does acknowledge that currency controls are hitting investment and spending power.

In a bid to encourage Icelanders to spend rather than save, it has just launched a mortgage debt relief scheme, financed largely through tax hikes on financial institutions and worth more than a billion dollars. The aim is to free up households from crippling repayment loans.

The obvious solution is to join the euro - after all, Iceland has pretty much been on a fast track scheme to join the European Union since 2009. But, following the government's and the Icelandic peoples' decision not to repay overseas investors who lost out in the banking crisis, a poisonous European diplomatic row ensued and the mood towards Brussels hardened.

Last year, the Icelandic coalition government announced it was halting EU accession talks. By default, it also renounced Iceland's claim on Euro membership.

Back in her shop in central Reykjavik, Katla stands at her cash register and raises her eyes to the heavens.

"This cannot go on," she warns. "The government has to do something about the krona - and quickly."

For more on this story, listen to the World At One on BBC Radio Four at 13:00 BST.

More on This Story

Related Stories

More Business stories


Business Live

    09:26: Greece

    Greece has paid the first €310m (£223m) instalment of an International Monetary Fund (IMF) loan that falls due this month. The government must pay a total of €1.5bn to the IMF this month over two weeks starting today. Prime minister Alexis Tsipras is reported to have asked for a meeting with European Commission chief Jean-Claude Juncker about the payments.

    09:09: Eurozone bonds

    Government bond yields in Portugal, Italy and Spain fell to new record lows on Friday, a day after the ECB gave details of its bond-buying plans. Portuguese 10-year yields fell 12 basis points to 1.7%, while Italian and Spanish equivalents fell 5 points to 1.28% and 1.19% respectively. The ECB starts buying government bonds on Monday in a bid to boost growth in the eurozone.

    Thomas Cook Via Twitter

    Dominic Walsh of The Times tweets: Question is whether, as with Club Med, Fosun has longer-term aim to use minority stake in Thomas Cook as basis for eventual full bid @walshdominic

    08:47: Market update

    The FTSE 100 Index is 8 points lower at 6,953. Shares in Weir Group are the biggest riser this morning on speculation that the engineering firm may be a bid target following a recent slump in its share price.

    08:31: Thomas Cook
    Thomas Cook

    Fosun, a Chinese investment firm, has bought a 5% stake in Thomas Cook for £91.9m and plans to increase its holding further. The move follows its purchase of French resort operator Club Med last month. Shares in Thomas Cook have soared 16% higher to 140p.

    08:17: RBS shares

    Just worth point out that RBS shares are trading at 376.9p and the government needs to sell its stake at an average of 455p per share just to break even on the money it pumped into the bank in 2008 and 2009. Also worth mentioning: Mr Osborne may not be Chancellor after May.

    08:03: RBS shares

    George Osborne has told the Financial Times he made a mistake in not radically restructuring taxpayer-owned Royal Bank of Scotland soon after he came to office in 2010. But the chancellor says he would like to proceed "as quickly as we can to get rid of it" after the general election.

    07:50: AGA profits

    AGA says operating profit stood at £9.6m, but it booked £4.1m in pensions charges, £3.3m in fair value costs relating to its stake in Fired Earth - its tiles business - leaving it with £2.2m. But that's before £1.5m in net interest charges on its pensions deficit, which doubled in the year from £35m to £72m. That brought pre-tax profits down to just £700,000, and left AGA in no position to pay a dividend. But the company does expect market conditions to improve this year.

    07:39: Vodafone
    The Hoff

    Vodafone has announced a plan to introduce a mandatory minimum maternity policy in all 30 countries in which it operates. By the end of 2015, all female employees will be offered at least 16 weeks fully paid maternity leave, as well as full pay for a 30-hour week for the first six months after they return to work. David Hasselhoff, however, will not be eligible.

    07:27: AGA profits
    AGA Rangemaster

    AGA Rangemaster has reported a slight fall in an annual pre-tax profit to £700,000, compared with £1.1m a year earlier. It has also announced it will not be paying a dividend to shareholders.

    DFS shares Via Twitter

    Retail analyst Nick Bubb tweets: The Chairman of DFS trumpets that it stands for "Dedication, Family and Success". Or Dull Furniture Sale? ;-) @NickBubb1

    07:15: DFS shares

    Buy one, get one half price! Furniture retailer DFS has priced shares at 255p - at the lower end of expectations. The stock starts trading at 0800 today and means the company will be valued at close to £550m.

    07:02: Eurozone outlook BBC Radio 4

    One thing that may help the eurozone economy is a small but significant accomplishment by the ECB that appears to have gone largely unnoticed. That was last Autumn's asset quality review of the banks, by the ECB which "gave pretty much everybody a clean bill of help", says Mr Cameron Watt. "And that's allowing banks to sell assets off their balance sheets."

    Greek economy Via Twitter Adam Parsons Business Correspondent

    Former Greek shipping minister @MVarvitsiotis tells #WUTM "we'll do whatever it stay in Eurozone...leaving would be a disaster" @AdamParsons1

    06:47: Eurozone outlook BBC Radio 4

    Mr Cameron Watt tells Today: "There is a following wind which is the lower oil price and the material decline in the currency [euro] against the dollar". He says those factors should help boost the eurozone economy, although he he sceptical that it will do as well as ECB president Mario Draghi (pictured) suggested at his press conference on Thursday.

    06:35: ECB bond buying BBC Radio 4
    The EURO logo is pictured in front of the former headquarter of the European Central Bank

    We're talking quantitative easing (QE) on the Today programme and why it pushes up stock markets. And Ewan Cameron Watt, global chief investment strategist at BlackRock, explains in the most clear terms. It is all about portfolio substitution, of course. "If I buy a whole lot of bonds and give you cash, you have now have to invest that cash," he says. "You don't want to buy bonds because of [current] negative yields, so it forces you to buy riskier assets, which inflates the prices of things like equities." Simples.

    06:25: Alpacas! Radio 5 live

    Let's face it - alpacas are a bit weird. But farming the cuddly critters appears to appeal to some who want to escape the rat race, alpaca farmer Mary-Jo Smith tells Wake Up to Money. She says alpaca wool is strong, luxurious and "just amazing to wear". The British Alpaca Society holds its annual show in Telford this weekend.

    06:15: Insurers v banks Radio 5 live

    Aviva shares ended 7% higher yesterday and Ewen Cameron Watt, chief investment strategist at BlackRock, tells Wake Up to Money it is no surprise that insurers are doing better than banks. He says operating conditions for banks are getting tougher, but some insurers are opting to join forces.

    06:05: Rangers FC
    A general view of the Ibrox Stadium, in Glasgow,

    It's a big day for Rangers FC as the club holds an emergency meeting where Dave King hopes to oust the board. However, there are question marks over King - who wants to become chairman - because of his convictions in South Africa for tax offences.

    06:03: Matthew West Business Reporter

    Happy Friday everyone. Don't forget you can get in touch by email at or via twitter @bbcbusiness.

    06:00: It's Friday Chris Johnston Business Reporter

    Good morning and welcome to the last day of the working week. US unemployment figures are set to dominate the day and are out at 13:30. We'll bring you the reaction to those numbers and all the day's other business news as well.



  • Cartoon of women chatting on the metroChat wagon

    The interesting things you hear in a women-only carriage

  • Replica of a cargo boxSpecial delivery

    The man who posted himself to the other side of the world

  • Woman wearing a niqab in Raqqa (31 March 2014)'Run for your life'

    How IS fighter's tip-off led to narrow escape for Syrian woman

  • Target practice for Lithuanian troopsBaltic shiver

    Europe editor Katya Adler on the alarm at Russian muscle-flexing

From BBC Capital


  • A cyborg cockroachClick Watch

    The cyborg cockroach – why has a computer been attached to this insect’s nervous system?

Try our new site and tell us what you think. Learn more
Take me there

Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.