The MT Diary

The reckoning for Reykjavik; watch those bubbles burst; mystery brief for Mandelson.

by Howard Davies
Last Updated: 31 Aug 2010

Late in 2000, my wife and I spent a long weekend in Buenos Aires - as you do. We had one free evening, and the friendly neighbourhood ambassador recommended a decent, but not lavish, steakhouse nearby. Half a cow later, we asked for la cuenta, which turned out to be as eye-watering as the steaks. How could it be, we wondered, that the price of a meal in Argentina was even higher than in London? Well, the answer was that it couldn't be, and soon afterwards the Argie peso fell to earth with a thud that could be heard across the pampas: devalued by two-thirds overnight.

The same thought struck me in Reykjavik a couple of years ago. I changed a few Adam Smiths at the airport, and there was nothing left over for a beer in the hotel, after I had - judging by the fare - bought most of the taxi that had taken me there.

For years, Reykjavik has been famous for all-night bars and drunken weekends for overpaid City folk. That didn't greatly appeal, so my healthy hosts took me to the Blue Lagoon, Reykjavik's premier tourist destination, where you swim outside in a thermal pool, hard by a powerstation. It was January, but that was of no concern to the Icelanders. Every now and again we climbed out and headed down an icy path to a sauna or a steam room. Then, when my senses were completely numbed, it was inside for a plate of smoked fish.

I did not pay the bill for these ambiguous pleasures, but I took a peep at the reckoning when it came. Translated back to sterling, it was the price of a decent holiday for two.

I don't know what has happened to the Blue Lagoon, but the Icelandic boom is well and truly over. The krona is worth three-fifths of nothing very much, even against the enfeebled pound, and Iceland has had to adjust very fast to a more reasonable price level for the rest of us, leaving them and the unfortunate Icesavers with the mother of all financial hangovers, and a huge debt to those friendly Russians across the water.

My first job after leaving university was as the Foreign Office desk officer for Iceland, during the 1970s Cod Wars. For a while, I wondered if my esoteric knowledge of Icelandic politics might earn me a recall to the colours. But calmer counsels prevailed and, instead of war, they can pay us and the Russians back for the next 50 years.

The very profound lesson I learned from these two wallet-threatening experiences is that if something looks far too good to be true, it almost certainly is. So what else might we put in that category today, when bubbles are bursting all around us? Where should we go short, now that the FSA won't let us short RBS any longer?

London property prices are a no-brainer. Restaurants that charge £100 a head for indifferent food similarly. I forecast a cull of glorified tapas bars charging £8 for six slices of chorizo and an olive.

I am not a bull of the personal trainer market either. While times are tough, how many people will be prepared to pay someone good money to say 'just do 10 more for me'? And what about gambling: online, off-course, wherever...

There has been a crazy expansion of companies and sites that sponsor the most obscure reaches of the Sky and Setanta sporting schedules. The serious gamblers, who can't help themselves, will no doubt punt on through the recession. But most of us can get quite enough excitement these days from a blue-chip share or an internet bank account.

The surprising feature of this slow-down so far has been that, although the world's stock exchanges suddenly began to price in recession in September and October, company managements have been quite slow to react.

Those of us who lived through the 1970s and '80s (seems like yesterday to me) can recall sudden hiring freezes and memos from the boss to the effect that, from this day forward, all indents for lead-fuelled writing instruments must be personally signed off by himself. We have heard less of that so far - although now that Lucy Kellaway has given up her role as the Financial Times's fearless chronicler of corporate life and become an agony aunt, perhaps we are less well informed.

Unemployment is a lagging indicator, though, so I imagine it will be a winter of separation management and right-sizing, overseen by the new maestro of the Department of Business, Enterprise and Regulatory Reform, Peter Mandelson, fresh from his diet of Brussels.

What will Lord Mandy make of his new brief? When the department was rebranded, it was clear what 'Regulatory Reform' meant. It was thinly disguised code for deregulation. Now we hear less of the D-word.

Making London safe for derivatives traders, previously a watchword for New Labour, has now slipped down the list of policy priorities. Other more gritty problems will emerge as the credit squeeze crunches through Britain's corporate sector.

After years of airport-hopping, in a vain hunt for that snark of global politics, a comprehensive trade deal, Mandelson will need a quick briefing on the state of old Blighty. I am sure his personal trainer, back from a weekend in bargain-basement Reykjavik, can fill him in between the trunk curls.

Howard Davies is the director of the London School of Economics.

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