Kreppa –you don't need to speak any Icelandic to know that this word can't mean anything good. Kreppa means buckling, economic crisis, recession. And it's the Icelandic media's favourite word in these troubled times.

Perhaps I should have sensed that something was amiss when my happy-consumer friend Halldor mailed me two weeks back saying: "I can't come to visit you in Berlin in November as planned. The currency has taken a nose-dive."

At the time, however, I saw no grounds for concern, because the Icelandic krone was never a stable currency at the best of times. But when, in the middle of the day at the end of September, Icelandic TV showed a press conference of the central bank, the gravity of the situation in my second homeland suddenly hit me. The currency guardian, David Oddsson, said in his more melancholy than serious-sounding way, that the night before, the Glitnir Bank had been taken over by the state, to protect it against bankruptcy.

There followed a series of events which put the Iceland into the media spotlight as never before. Firstly we heard that the Russians had promised billions, then that they hadn't. Glitnir's majority shareholders described the forced nationalisation as the biggest bank robbery in Icelandic history, and finally Prime Minister Geir Haarde started talking about impending state bankruptcy. He is now the first Icelandic politician to need professional bodyguards. Then the Landesbanki was nationalised, and now Kaupthing bank, too.

How did it come to this? The proverbial buck has already been passed round the ministerial departments and political parties - to varying degrees of amusement or dismay among the Icelandic population. But if you look deeper into Icelandic culture and history for reasons behind the current misery, you will find something that is familiar to all Europeans: the desire to be modern, to be one of the winners in the globalised world – paired with the inability to shed traditional behavioural patterns.

From the summer holidays which I often spent in Iceland as a child, I remember another Icelandic word with a equally foreboding ring to it: verdbolga. Literally it means price combustion, in other words: inflation. In the 80s double-figure inflation rates were normal. The economy was completely dependent on fish exports, the majority of the banks were state-owned, you needed authorisation to exchange the notoriously weak krone into Deutsch marks or dollars and trade was strictly regulated – it was even illegal to sell beer until 1989. This was the time when my father asked me: "Why don't you take out a loan and buy a house. Inflation will pay."

Over the course of decades, Icelanders had grown accustomed to inflation levels which made a mockery of saving. Everyone tried to spend their money as quickly as possible and did what every other Icelander did, which was to accumulate as much debt as possible. For many years this behaviour was concealed by export revenues from the fishing industry. Every five years a new suburban outpost of Reykjavik was blown into the lava to make way for ever bigger houses. All first-time buyers were entitled to a loan of 90 percent of the cost price. When I returned to Iceland in 1991 and asked a friend what had gone on in my absence, he proudly replied:"We now have more cars per capita than the Americans!"

And that was only the beginning. In the 90s the state privatised the banks and aluminium production and tourism expanded the base of economic growth. But when inflation reached the normal western European levels, Icelanders were still spending money like there was no tomorrow. Even my more elderly relatives said: "Why save? After all I've got my house."

I readily admit that, having returned to Germany, I used to look back wistfully on my time in Iceland. Unemployment was as rare as pessimism, ever more tourists were pouring in and, thanks to the music of Björk and Sigur Ros, the island had even become cool. And on into the new millennium, it looked as if the good times were here to stay. While in Germany, everyone was talking about the economic downturn in the west, little Iceland Air had bought nearly ten percent of Easyjet. Kaupthing had taken over the Danish FIH Bank, doubling its total assets in one fell swoop and then even signed Monty-Python star John Cleese to do an advert. John Cleese! For 300,000 people. For that money they could have called up everyone in Iceland. But the days when it was just about Iceland were long gone. This was about the world, and Icelandic investors announced unabashed that their assets had far surpassed the GDP of the entire country.

This was characteristic of the pride that all Icelanders felt at finally being able to show the world that they could not only catch fish, but control supermarket chains and football clubs as well. Even Copenhagen's D'Angleterre passed into Icelandic hands, the traditional hotel of the Danes, who exercised colonial rule over Iceland for centuries. The joy at this sudden rise in status was certainly one reason why almost no one took exception to the enormous growth in the financial sector. Or why there wasn't so much as a anti-capitalist eyelid-bat at the influx of flatscreen TVs, home cinemas and designer kitchens into average Icelandic households.

The public wasn't complaining, but what about the state? Of course state supervision of the banks in Iceland existed, but here, too, we saw a failed attempt to become an international player with the traditional means and resources of a mini-state.

A country with 300,000 inhabitants, which wants to take on all the duties and responsibilities of a modern, economically efficient nation, has a problem. Unlike Germany, where the bugbear is blinkered expertise, Iceland's problem is dilettantism. The people are industrious and dynamic, and they have a tendency to take on tasks that are beyond them. The current prime minister used to be the foreign minister and he also happened to be the minister of finance - at the time when the head of the central bank, who also did a stint as foreign minster, was the prime minister, and the current finance minister was serving office as minister of fisheries. This thoroughly provincial brand of cronyism was not up to the job of supervising internationally-active banks. The system functioned as long as the few key actors all lived in Reykjavik and every now and then would run into each other at a confirmation or at the theatre. But as soon as men as influential as Landesbanki boss Björgolfur Thor Björgolfsson moved to London, social control could not longer replace institutional control.

Add this to the fact that no Icelander likes a regulator or a watchdog. The memory of their risk-loving ancestors, who left Scandinavia over 1,000 years before to lead a life of freedom on an inhospitable island in the middle of the Atlantic far away from the Medieval feudal lords, is still very much alive today: If we had wanted authorities meddling in our affairs, we would never have left Norway in the first place.

Now things are almost back to the way they were in the 80s: the inflation rate is almost double-digit; the state controls the banks and rations currency exchange. All we need now is to re-introduce the beer-ban, and it will look as if the Icelanders want to start the process of globalisation all over again.

My generation has been particularly hard hit by the crisis, my friends, in their thirties, who are still paying off their student loads, starting families, and who have just bought their first homes. Of course my friends are angry and feel betrayed, but they can still fall back on the two great national Icelandic national virtues: energy and optimism. And why not? The Icelanders have the best fish in the world and the cleanest energy, and somehow this should be able to stretch for 300,000 people. Perhaps if they get rid of a few cars.

This optimism is not limited to my generation. Siggi Hall, a famous restauranteur and TV cook, who opened a new restaurant in Reykjavik this month, was asked whether he was concerned that the "kreppa" would keep his guests at bay. He answered: "For every person who used to be well off and can no longer afford my food, there will be another who used to be rich and who can no longer afford to fly to New York for the weekend."

Siggi Hall makes a point of using Icelandic ingredients in his restaurant: shellfish, lamb, potatoes. From global players in investment banking to "local products". Sounds like progress to me.


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This article originally appeared in German the Financial Times Deutschland on 13.10.2008

Kristof Magnusson (born 1976 in Hamburg) is a novelist and playwright. He lives in Berlin and Langenthal, Switzerland.

Translation: lp