In my usual weekend reading routine I came across this article in the NY Times profiling the plight of several Icelanders including a coffee house owner in Iceland trying to keep her business, Kaffitar, afloat.One problem Kaffitar is having is getting suppliers to conduct business with it. At some point in the process someone has to buy Icelandic kronas to complete the transaction and no one is willing to do that.
Another problem is that Kaffitar borrowed money in euros for expansion. The monthly payment used to be ISK 120 million but now it is ISK 200 million after the collapse of the currency. What would a 66% increase in your mortgage do to you? This is happening to many businesses in Iceland.
When Joellyn and I were in Reykjavik in July 2006 there was a Kaffitar a couple of doors down from where we stayed. They make a hell of a soy mocha and had great bagels and pastry.
Reading that reminded me of this article from Bloomberg in October that featured an interview with Arni Einarsson who is the manager of the Room With A View Hotel in Reykjavik which is where we stayed when we went. It really is a small country.
The house pictured above is for sale about and is an hour east of Reykjavik in Reykholt. The seller is asking €135,000 negotiable which works out to $171,000. I'm thinking it might be available for a whole lot less. Even if this one isn't available for less many others are.
The second picture is a view from the deck of the neighbors and off to the left is where I think the town is. According to the listing the town, which has 100-200 people, has a supermarket, pub and restaurant.I'm not sure how far it is if you need a dentist or need to get your transmission worked on--maybe over to Selfoss which is 30k away or if need be Reykjavik is an hour away.
One interesting thing, but not unusual for Iceland, is that the home heating is free. One word; geothermal.
I'm not suggesting anyone buy a house in Iceland. The point is that like many assets all things Iceland are now much, much cheaper than they were, there seems to be no near term solution at hand but it is also true there is less risk after the collapse. The Icelandic countryside will not disappear if Iceland defaults on its debt, or needs more bailout money or the krona drops a lot more. I also believe that at some point free heat from geothermal pays off for the country in attracting manufacturing to set up shop.
This general outline applies to many other types of investments these days. Down a lot, no clarity on how low it goes, some sort of redeeming value that cannot go to zero and something to look forward to in the future.
This is not a call to buy them with both hands but to step back and remember there is less risk in the stock market after a 40% drop. Any given stock might be a different story. If you were lucky enough to raise cash early on, be smart enough now to recognize that fear might exceed reality. If you think that is a crazy thought then I would submit that you have the wrong asset allocation which has caused you to have a big emotional reaction.
2 comments:
Question. Is the root cause of the Iceland collapse simply the bank failures due to credit issues?
Man, Iceland isn't the U.S; I'm assuming they don't have thousands of banks. It would be insane to blame an entire monetary collapse on just a few banks.
the three banks were levered something like six times the gdp.
there was also overheated prosperity and like the owner of Kaffitar money borrowred in other currencies. This is hurting Hungary. People there took out mortgages in Swiss francs, look at that rate now.
Not sure if I wrote about this when I was there or not but have read about this since; the number of BMWs and Range Rovers there was very surprising. THe country was wildly prosperous and then it overheated.
I felt Iceland would become more globally relevant but not for these reasons.
It is a great example of why no matter how highly you think of a country you need to go small. I went small, realized something (not the exact thing) was wrong and got out. Had I not gotten out I would not have been truly damaged. Hopefully the importance of this comes through in the posts.
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