Is Iceland Ready To Come In From The Cold?

Includes: FRN, PMNA
by: Roger Nusbaum

Fitch Ratings upgraded Iceland's sovereign debt to investment grade, which serves as a milestone in the country's journey back from the abyss. The short version of the story is... fishing wealth funneled into creating a booming financial industry with a sizable global footprint that then went on to be mismanaged and over-levered with far too much risk, to financial Armageddon and now a recovery. Somewhere in there probably needs to be a mention of the as yet unfulfilled potential of geothermal power.

I clued into to Iceland as a possible investment destination a couple of years before it exploded, had some luck trading Kaupthing Bank before it went bust and, although the last trade in it was a loss, we were out long before zero.

Iceland took a different path, it did not bail out the banks. It let them fail and, depending on how you look at it, stiffed foreign depositors in the Icesave program from Landsbanki, which you may recall was very controversial. Whether saying no to Icesave participants was right or not, the thought process behind it was a tearing off of the band aid that would enable a faster recovery. I don't recall where I first read the idea of letting banks fail, allowing the shareholders and bondholders eat it while protecting the depositors, but it resonated with me as being a better path than what was done here.

There would have been consequences of course but I believe we would be able at this point to see when we get out of the wake of the crisis. But with the path taken here I do not believe we know how we get out of this. Yes, the stock market is having a good run and some data points have improved, but we are a long way from normal, a very long way.

Back to Iceland. At some point it will become an investable destination again, maybe it is now. I think the fishing industry could be a way to go as part of the Malthusian theme, but the accessible publicly traded fisheries are difficult to own. They swing violently from feast to famine. It also seems like a logical long term theme to invest in geothermal but, as readers have pointed out, the distance makes it very difficult to harness on a global scale and not every company is willing to build there the way Alcan (now owned by Rio Tinto) did.

Investment destinations come in and out of favor on varying cycles, and Iceland is no different. I continue to believe in it as a long term idea but we have been out of it for years now and may not ever go back in. However, it is worth keeping tabs on. This is similar to New Zealand, it has a lot of offer but we have been out for six years. I continue to pay attention and expect to go back in, but that remains to be seen.

To the extent you invest at the country level, occasionally you will need to sell a country you otherwise like. This does not mean you should forever turn your back on that country.

The pictures are from our trip to Iceland in 2006.