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Originally published September 7, 2013 at 8:04 PM | Page modified September 8, 2013 at 11:47 AM

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Elves come to the rescue of Iceland’s economy after banks crash

Iceland is counting on tourists to help rebuild the economy after it refused to bail out its troubled banks in 2008.

Bloomberg News

Iceland rebounds

The island’s economy depends heavily on the fishing industry, which provides 40 percent of export earnings, more than 12 percent of GDP, and employs nearly 5 percent of the work force.

GDP: $13 billion; 147th largest; $39,900 per capita.

Other industries: Aluminum smelting, ferrosilicon production, geothermal power, hydropower and tourism.

Exports: $5.049 billion

Imports: $4.443 billion

Population: 315,281; 93 percent live in cities.

Labor force: 180,100

CIA World Fact Book, 2012 estimates

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Iceland’s elves and glaciers are helping resurrect the island after its failed foray into high finance.

Left with a battered economy after the 2008 collapse of its three largest banks, the Nordic nation is returning to its roots for growth — sending its fishing fleet out in records and touting its glaciers and volcanoes to attract tourists. Locals are also reaching back into Iceland’s folklore as a home to elves and other spirits to gain foreign currency.

Helped by an about 90 percent weakening in the krona since 2007, the efforts are paying off. Visitors to the island rose 38 percent from 2010 to 2012, reaching 673,000 last year, more than double the population, Tourist Board data show. The boom is generating new tourist businesses, the number of which surged 41 percent since 2008, according to Statistics Iceland.

“There’s a growing demand for getting away from it all, getting a chance to be alone in nature’s huge wide-open spaces,” said Birgir Omar Haraldsson, chief executive of helicopter service Nordurflug ehf, which flies people to picnics on glaciers and other hard-to-reach places.

Tourism accounted for 6.2 percent of gross domestic product last year, up 0.9 percentage point from the previous year and 1.7 percentage points from 2010, according to Arnar I. Jonsson, an economist at Landsbankinn. The industry is providing vital revenue for the $14 billion economy as Iceland seeks to attract foreign investment and phase out the capital controls put in place in 2008 after the krona plunged 80 percent offshore against the euro.

“The growth is very significant,” Jonsson said.

Ragnhildur Jonsdottir, who lives in Hafnarfjordur, a small town south of Reykjavik, is benefiting from the island’s reputation as a home to “hidden folks,” as they are called. She last year had more than 1,000 visitors to the Hellisgerdi Park, home to the “Elf Garden.” There are also elf schools and shops across the island that tout merchandise related to the beings, who according to legend live in rocks.

“The elves could help Iceland restore its economy, if we were willing to heed their advice,” said Jonsdottir with a smile.

Traditional hot spots for tourists include geysers, the largest of which, the Great Geysir, has been largely dormant since 1915, and thermal pools such as the Blue Lagoon, created from the volcanic island’s geothermal wealth.

“We’re impressed with what we’ve seen so far — love it — we’ve seen some of the geysers and we went bathing in the Blue Lagoon,” said Bill Mancey, cabdriver from Devon, in the U.K., who visited the island this summer as part of a cruise.

There’s a tourist “gold rush,” said Sigurdur Smari Gylfason, who used to work in corporate finance and now runs a car-rental business.

More tourists “would enable us to create larger and better-run companies in the sector, which would benefit both the tourists and the economy,” said Gylfason, who runs SAD Cars, Iceland’s take on “rent-a-wreck.”

The government is seeking to gain a greater share of the revenue from the boom, in part also to ensure Iceland’s nature isn’t damaged, said Tourism Minister Ragnheidur Elin Arnadottir.

“We’d like to spread the number of visitors to more locations, allowing us to build up more locations,” she said. “We need financing and we need to generate more revenue from the people that travel to Iceland. However, we need to strike a balance so we don’t price ourselves out of the market.”

The island has been lauded for what Fitch Ratings called its “unorthodox” way of handling its crisis, which started with a refusal to bail out the banks and has since included the world’s most extensive write-offs of mortgage debt. The hard line has been held up as a model by the International Monetary Fund, which led a $4.6 billion rescue in 2008 and now says the economic recovery is “well established.”

The IMF estimates the economy will grow 1.9 percent this year and 2.1 percent in 2014, boosted by exports and consumer spending. Unemployment will slide to 4.6 percent next year, the group said.

Still, the capital controls, which the government is struggling to phase out, are largely blocking foreign investments. The former government, which was ousted in April elections, also blocked attempts by Chinese billionaire Huang Nubo to build a resort amid concern over foreign ownership.

Huang is now considering reviving his bid as the new government looks over the rules, his Akureyri, said Iceland-based spokesman Halldor Johannsson.

Investments are needed to sustain the momentum and make tourism a more year-round affair, said Bjorgolfur Johannsson, president and chief executive of Icelandair Group which operates the airline and a chain of hotels.

Iceland will be able to double or triple the number of guest coming to explore the country, according to Johannsson.

Last year, the number of hotel beds rose 6.9 percent to 22,525, encompassing 368 hotels, according the Tourist Board. Landsbankinn estimates that the country will need to invest 24 billion kronur ($202 million) by 2020 to create 1,600 rooms only in Reykjavik to keep up with a jump in visitors.

“Iceland isn’t sold out,” he said after announcing the start of a new 142-room Reykjavik hotel. “In many parts of the country there are opportunities.”

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