It's a quarter to two on Friday morning in late November, and on Laugavegur, the main drag in downtown Reykjavik, the Icelandic economic miracle is in full swing. Outside, a deep depression over the Northern Atlantic has whipped up winds so violent they can't get the Icelandair planes in at the airport. In Cafe Oliver, though, a large group from Landsbanki, one of Iceland's largest banks, is in high spirits. The revellers - hardly any of them over the age of 33 - are celebrating getting a $2.25 billion bond issue away that day.
The scene resembles post-Big Bang City bars in London during the '80s - a guy from Bank of America who helped place the bonds is swigging from a bottle of vodka, while others down pints of Viking beer. After chucking-out time at Oliver's, some revellers still haven't had enough and go off to the super-trendy Kaffibarrin round the corner. Blur's Damon Albarn once passed out on its bar two nights running and, when he came round, decided he liked the place so much he'd acquire a stake.
This sort of exuberance is a Reykjavik commonplace, as are the Laugavegur pavement pizzas the following morning. Iceland has undergone an extraordinary transformation in the past 15 years. From a dour, state-run volcanic wilderness part-girdled by the Arctic Circle, famous for its geysers, sun-free winters and belligerent cod-defending gunboats, the island has suddenly turned cool and interesting. And the world's attention has been drawn not just by its sporting and cultural exports such as Eidur Gudjohnsen and Bjork; the latter remains an acquired taste.
The Icelanders have emerged from a murky, Middle-Earth nowhere to become one of the most acquisitively entrepreneurial peoples on the planet. And, as we know in the UK, they have been doing some heavy-duty shopping abroad for new assets. Here, they now own businesses from Hamleys toyshop to the bank Singer & Friedlander, from retail emporium House of Fraser to Geest, the food producer. They made a tidy £100 million in a quickish turn on easyJet shares. Landsbanki has burst on to the normally sedate UK personal savings account scene with Icesave, whose amazingly high interest rate combined with instant access has been acclaimed by Moneybox listeners throughout the land. Now even the perennially underachieving West Ham football club has fallen into its trolley as it struts around the aisles of UK plc.
Rags-to-riches tales always need looking into. Anglo-Saxons remain mistrustful of getting rich quick, and from the outside, the Icelandic Miracle might seem quite mysterious. Just who are these patronymically named swashbucklers with their unfeasibly deep pockets? Could it really be illicit Russian money that washes through the streets along with the Viking lager? So, the morning after Cafe Oliver, MT is up in the pitch black to find an answer to that burning question, 'Where Does All The Money Come From?'
On the way to Interview One I read The Viking's Guide to Good Business, a copy of which has been left in my hotel room. This pithy volume uses as its source material an old Nordic text from 1240 called The King's Mirror. 'Who are merchants?' is the book's first poser. Answer: 'The finest men often enter this class. But much depends on whether you resemble those who are true merchants, or others who call themselves merchants but are actually swindlers or cheats and trade falsely.'
With this stern aphorism in mind, my first stop is a modest single-storey domestic building that houses Professor Tryggvi Thor Herbertsson, an economist from the University of Iceland. Tryggvi is a classic Icelander, speaking near-perfect idiomatic English: bright, thoughtful, polite, with a PhD from Denmark. What did he think were the origins of the Icelandic economic miracle?
'Well, I don't know if it's a miracle but it's certainly a good thing for the Icelanders, and it's a rare thing in world history that an industrialised country undergoes such a huge transformation so rapidly. At the turn of the 20th century we were the poorest country in Europe. We were worse off than Albania. This remained so until the second world war - that's when money started to pour into the country. (Iceland, though occupied, remained neutral.) All the time we were fishing in our rich fishing grounds and accumulating huge wealth in the Bank of England.'
Cod cash in the bank was one thing but enterprise was near-impossible in the post-war years. 'This used to be a very centralised country - not a communist state, but with huge government intervention in everything,' says Tryggvi. 'The municipalities owned the trawlers, the state owned the banks, and there were restrictions on foreign exchange earnings.'
The turning-point came after a grim six-year recession, which began in the late '80s following a near-depletion of the cod stocks. Taking its lead from Margaret Thatcher, the Icelandic government initiated sweeping reforms and the state beat a rapid retreat from managing the economy and began a wide-ranging programme of market liberalisation. State assets were privatised across the board and competition introduced. Proper beer, previously banned, was made legal, and it became possible to watch television on Thursday (which used to be the TV staff's day off.) A vigorous pent-up energy was unleashed and a new generation of go-getters let loose.
The country's profound geographical isolation eased when, in 1993, it became a member of the European Economic Area. This gave it access to the EU's markets without the constraints of full membership or surrender of its valuable fishing rights. The economy quickly picked up speed as consumers started earning and spending. But it soon became clear that the home market of a mere 300,000 souls was never going to be enough to keep the appetite for growth sated.
'Very soon Iceland became too small,' says Tryggvi, 'and a small group of them began to look abroad. The UK was the obvious place to go because of the business culture there, and we get along very well with the British. I think we are straightforward, maybe sometimes quite aggressive, and that is appreciated.' But not in France? 'No. And not in the Nordic countries, either.'
With a propensity to work 50-hour weeks - on an annual basis, Icelanders work six weeks longer than the Danes - Iceland became a European country with an American-style work ethic and free-market attitude to business.
An early buccaneer in the Icelandic miracle was Bjorgolfur Gudmundsson, the man behind the recent £85 million takeover of West Ham. A nasty scrape in 1991 with the Icelandic authorities over alleged accounting offences at his shipping line Hafskip had led to a 12-month suspended prison sentence. Wounded by the effects of the experience that befell the family, Bjorgolfur's son Thor went to seek his fortune abroad. Armed with a degree from New York University, the twenty-something emigrant wound up not in the UK but in the dark and ambiguous world of post-communist Russia, and made his name by building a brewery and alcopop plant in St Petersburg. (This is perhaps where all the 'dodgy Russian cash' rumours come from.)
The post-Soviet booze market was no picnic - a corrupt bureaucracy, the Russian mafia and a residual fondness for homebrew were awkward hurdles for Thor. Indeed, he described his Russian experience as '10 years in purgatory'. Yet he managed to sell his Bravo brewery to Heineken in 2001 for close to $330 million cash, of which he retained $110 million personally. Now he's also big in generic pharmaceuticals with his company Actavis, and he's even in Bulgarian telecoms.
Thor is Iceland's first billionaire and a portion of his cash found its way into Landsbanki. He bought 45% of the bank in 2002 and made his father chairman. One thing you discover quickly in the small world of Icelandic business is a remarkable web of interconnection between all the players and their companies. Everyone knows everyone else. Many invest in each other's projects. (The country's DNA pool, incidentally, is so homogenous that it is frequently trawled by geneticists.)
'Respect is the number one thing that occupies my mind,' Thor said last year. 'Power, money, that's just the road to respect. After all, money disappears, friends die, and you die yourself, but your reputation remains.' He has obviously been reading that MT favourite, The Viking's Guide to Good Business.
On the subject of reputation, Iceland's took a bashing last year. This required discussion at Interview Two with the head of the Stock Exchange, Thordur Fridjonsson. For some while, sceptics had wondered whether the Icelandic economic miracle might end in tears. They pointed to a borrowing frenzy that had boosted house prices by 40% and the stock market by 65% in 2005, while inflation was moving towards 10%. Investors were also made nervous by the fact that the banks all carry small stakes in each other and some invest in their largest shareholders. This set-up is a classic precursor to a house-of-cards collapse. One native who had advised on more than £1 billion-worth of deals for his fellow Icelanders told the FT anonymously: 'Iceland is an over-leveraged hedge fund with all bets going in one direction - outside the country.'
In March 2006, the wings looked as it they'd fallen off and the whole economy was headed for the hardest of landings. Ratings agency Fitch reduced Iceland's scorecard from 'stable' to 'negative'. Merrill Lynch and Danske Bank pitched in with reports comparing Icelandic banks with dodgy, over-extended institutions in Turkey and Thailand ('Iceland: Geyser Crisis'). Suddenly the bears were on the Icelanders' backs. There was a run on the Icelandic krona - which dropped nearly 5% against the dollar in a single day - as volumes of hot money from Japan and Europe were pulled out. The stock market - in which there are only 22 listed companies - crashed.
How did Thordur feel with all this going on around him? It must have been grim. Not a bit of it. 'I was pretty confident the whole thing would level out,' he says. 'The fundamentals were and remain sound. Nothing really happened that indicated we were facing a serious crisis.'
But the Icelandic business community was angry at what it perceived as ill-informed conjecture. Landsbanki issued a pamphlet in perfect demotic English echoing Shakespeare's Hamlet. It asked rhetorically: 'Is Something Rotten in the State of Iceland?' The answer, naturally, was no. OK, everyone was borrowing rather a lot but the portfolios were diversifying nicely and the fundamentals were sound. Morgan Stanley offered support with an encouraging note entitled 'Chill Out', and so things quietened down. The crash became a 'correction' and the international money markets found something else to amuse themselves.
It was a short walk downtown for Interview Three with Halldor Kristjansson, CEO of Landsbanki (the only bank manager you'll meet who's an expert on international human rights). So was it all too much, too fast? 'We've had fast economic development here for sure - controlled but fast. There's no mystique about it; it's all down to hard work. But it's inevitable there'd be some growing pains due to inbalances in the economy.'
So what about the market dive and the krona's plunge last year? Surely you can't go through that too often. 'Our worst problem has been one of communication. We received a lot of sudden attention from the international analytic community and I think we need to explain what we're doing far better. The economy here is now actually very diversified. For example, the financial sector is now the largest sector in the country.'
He also points out the fact that outsiders, the British especially, remain well disposed towards his country. He cites the highly positive response to his Icesave account in the UK.
So, when the winds finally subsided and MT was able to get back to London, it remained only to visit the most celebrated and high-profile of buccaneering Icelandic firms - Baugur. Its HQ looks down over Oxford Street and its newest trophy, House of Fraser. When you emerge from the lift into reception, the first thing to greet you is an enormous statue of a pillage-happy Viking with an electric guitar strapped to his back (Baugur means 'ring of strength' in Icelandic.)
I ask Gunnar Sigurdsson, Baugur's UK managing director, where he thinks the entrepreneurial streak of his compatriots comes from. 'Although there are so few of us, we just don't accept that we're a small nation. We have a very high expectation of ourselves and when we go abroad we expect to succeed. It's like sport - when we play abroad we're devastated that our teams lose against big nations. I think this is a huge strength.' Clearly, they relish the David and Goliath analogy.
Baugur dates back to 1989, when Jon Asgeir Johannesson and his unemployed father scraped together $10,000 to launch a cut-price supermarket called Bonus in Reykjavik. It has now diversified into fashion (Oasis, Karen Millen, Whistles), TV, radio, mobile phones and newspapers. Rich List compiler Philip Beresford (see pp42-43) says he has never managed to get a proper grip on Jon Asgeir but estimates him to be worth about £500 million. So no longer a David.
Like Bjorgolfur Gudmundsson, Asgeir has also had his scrape with the law - more alleged 'accounting irregularities' with some alleged embezzlement on the side. The case has dragged on for ages, but nothing has been made to stick; Jon Asgeir protests it is politically motivated.
There is no lack of admiration for Asgeir's abilities as a dealmaker - he calls it 'buy and build' - but critics have suggested that his UK portfolio is a bit of a rag-bag of businesses. His fashion interests have yet to startle anyone with synergies, but his purchase of BFG, which owns the supermaket chain Iceland, looks very good: a £61 million loss in 2005 was quickly turned into a profit of £88 million in 2006.
So what do he and his fellow traders do next? Does The Viking Guide have the answer? 'Though you wish to keep your money in trading for a long time, you should stop sailing or travelling when your money has grown to the full and you have studied the ways of men as you please.'
No sign of putting the longboat into permanent dry dock yet.
ICELAND: A SMALL BUT REMARKABLE NATION
· The economy has grown by 25% over five years and by 50% over 10 years.
· Reliance on unsustainable fossil fuels for energy is low, owing to plentiful geo-thermal and hydro-electric energy.
· About 75% of the revenue of the 22 firms listed on the Icelandic stock exchange (Icex) is generated abroad.
· The population is 300,000. Three-quarters of Icelanders live around the capital Reykjavik, while 7% live rurally.
· The official retirement age is 67 but many work longer. Life expectancy is second-highest in the world: 82.8 years for women, 78.9 years for men.
· Icelanders have the highest mobile phone ownership in the world, and 75% of the population is on the internet.
· Iceland ranks among the world's 10 richest countries, with a GDP per head in 2005 of £29,714.
· It has the lowest level of perceived corruption among 158 states in the Transparency International annual survey.
· Iceland enjoys a fully funded pension system dating back to the 1960s. Funds now total 120% of GDP, but little is paid out in accrued benefits.