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ICELAND has a population not much bigger than one of the smaller London boroughs — a little over 270 000 — and a flat, fea-tureless landscape that, because of its vol-canic nature, has so few trees that even Icelanders joke that a single Christmas tree constitutes a forest.

It was here, in the mid-70s, that the chess match of the century — Spassy v Fisher — took place. Then, in the mid-80s, it played host to the seminal meeting of the post-war world when Reagan met Gorbachev. But, while both these events went on to have global repercus-sions, Iceland returned to its historic role as a quiet backwater, difficult to get to and even more difficult to learn about.

In actual fact, the country’s history is fasci­nating, marking it out in some ways as a European developing country. Until 1944, it was a colony of Denmark and like much of Asia and Africa it has spent the last year cele­brating 50 years of independence. Denmark does not quite provoke the sort of anger that some newly emerging countries in Asia and Africa show towards their colonial European masters, but there is still the feeling that Iceland did not develop as quickly as it might have done if it had not been for so long an appendage of its bigger, more powerful neigh­bour.

There are many stories telling of how far Iceland has progressed in the last 50 years, both to catch up with the rest of Europe and overcome some of the pain of being a colony. Under Danish rule, university opportunities in Iceland were scarce, and students had to go to Denmark for a higher education. Stefan Haldorsson, president of the Icelandic Stock Exchange, says: “My father grew up in a remote part of the country and he did not see a tractor until the Americans arrived here during the war. That was what Iceland was like — even in the 1940s.”

In that sense, Iceland shares some of the qualities of Ireland, and seems to combine ele­ments of both Europe and America. At Pingvellir, where the ancient Icelandic parlia­ment met at the beginning of this millennium, you are actually standing on the tectonic plate that once joined Europe to North America but has, over many thousands of years, drifted apart. Across almost the whole ridge is carved the face of Winston Churchill, a man who had an English father and an American mother, symbolising the relation of the nations.

Like Ireland, modem Iceland has tried to repair this geographical rift by economic and cultural links and the best-selling campaign of its airline Icelandair is that the best way to get from London to New York is via Reykjavik, the Icelandic capital. This sounds Irish, but it is quite a cheap way to cross the Atlantic and does not add more than a couple of hours to the direct journey from London. What is more, the airline provides a three-day stopover in Reykjavik, reminding passengers that this was the route Bill Clinton, then just another American student, took when he made his way to Europe and Oxford in the 60s. Then it was known as the hippie airline. Now, with a stock market quotation, Icelandair markets itself as providing business passengers with a more cost-effective service than some of the better known airlines.

As in Ireland, there has been talk, from the Prime Minister no less, of making the country a tax haven. Sigurdur Stefansson, managing director of VIB, the securities arm of a private bank, sees one of two ways Iceland could achieve such a status. “As in Ireland, there could be a special tax structure for people who bring money into the country, or there could be laws for banking secrecy like there are in the offshore havens of Guernsey and the Bahamas. But whether this will come or not I do not know.”

However, even if talk of Iceland as a tax haven is premature, in the next few years it could well prove to be the developed world’s most interesting economy. There are already signs that its young stock market may be able to take advantage of the Asian recession. Having recovered from horrendous inflation averaging over 40% for a decade after 1973, and the first oil price shock — reaching 100% in 1983 — it has, in the last couple of years, not only tamed inflation but achieved double-figure growth rates. What is more, it has converted a population that at the end of the last war was mainly a community living on the export of fish into one where stock mar-ket investment is quite com-monplace.

Iceland does not have a word for stock market. The term used, Verdbrefaping Island, means congregation or parliament, and a parliament of securities is such a mouthful that when you ask for directions to the Reykjavik Stock Exchange you can get blank looks even from trained tourist guides.

Mr Haldorsson is quite proud of the fact that, unlike their Nordic neighbours, they have not introduced the word `Bourse’. “We have an old Icelandic language and we felt that, while in Icelandic it means a parliament of securities, we did not want to use a foreign word like `Bourse’.” This pride in the language runs deep — Iceland has even locked horns with Bill Gates and Microsoft about the fact that Microsoft is not available in the Icelandic lan-guage. Iceland refuses to accept Microsoft’s attempts to import its own language.

But whatever the language problems of describing shares, in the last decade the Icelandic population can claim to live up to the Thatcherite dream of being both a property owning democracy — most people own their homes — and a share-owning democracy. Since the stock exchange was started in 1985, the appetite for owning shares has been well and truly met. An estimated 20% of the adult population own shares and the largest Icelandic company, a shipping company, has some 15,000 shareholders — 5% of the population.

As in all stock markets, institutional investors are prominent, but their prominence is more in the bond market. When it comes to listed equities, the private investors own 35% with institutional investors holding some 30%. The stock market may be small by our stan­dards with a market capitalisation of £1.5 bn, but such private penetration is impressive by any standards.

This demand for shares has been fed by shrewd government tax incentives that allowed investors in shares to claim tax relief at the highest marginal rate. At its height, investors could claim tax relief on yearly investments in shares of up to £1,200. It was so attractive that Thomson Holidays, before their recent flotation, considered floating on the Icelandic exchange. However, the tax incen­tives are being whittled down and, like mort­gage interest relief in this coun­try, it is now down to a few hun­dred pounds a year.

The appetite for stock mar­ket investment has also been fuelled by the privatisations of the last few years. Iceland’s emergence as a modern econo­my, after independence and war, was through the sort of government intervention com­mon in so many emerging countries in Asia and Africa. But in the last few years, the government owned banks have been successfully privatised and, while the utilities and telecommunications are still government-controlled, even a banker such as Sigurdur Stefansson can feel comfortable that the gov­ernment does not exert too much influence. “We have a very free economy. There is no government control and although the economy is mixed, the government part of the mix is not too heavy.”

It is, however, the impact of the Asian recession and how it might reshape the Icelandic stockmarket that could prove fasci­nating. A decade ago, the Asian markets, then about to display their tiger status, attracted western capital keen to have a flutter. But with the Asian tigers proving to be the most docile of lambs and capital fleeing the Asian markets, there is now growing interest in the Icelandic stock exchange as an investment opportunity.

Mr Haldorsson is cautious, but optimistic, that the Icelandic market could grow as a result. “So far there has not been much inflow or out­flow of capital from our stock market; not much interest shown from outside in our markets. But ever since the Asian bubble burst we have had enquiries about our companies and requests for research material, and we could get overseas capital taking some interest.”

That, of course, would prove the ultimate irony. Iceland, the last European colony replacing the old European colonies of Asia as the most interesting of the emerging stock markets.

© Mihir Bose

      

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