Icelanders in shock after economy's rapid collapse

Struggle to cope with soaring prices and wave of layoffs

Few shoppers visited Kringlan shopping center in Reykjavik last month. Inflation is at 16 percent and rising. (Pierre-Henry Deshayes/ AFP/ Getty Images)

REYKJAVIK, Iceland - The collapse came so fast it seemed unreal, impossible. One woman compared it to being hit by a train. Another said she felt as if she were watching it through a window. Another said, "It feels like you've been put in a prison, and you don't know what you did wrong."

This country, as modern and sophisticated as it is geographically isolated, still seems to be in shock. But if the events of last month - the failure of Iceland's banks; the plummeting of its currency; the first wave of layoffs; the loss of reputation abroad - felt like a bad dream, Iceland has now awakened to find that it is all coming true.

It is not as if Reykjavik, where about two-thirds of the country's 300,000 people live, is filled with bread lines or homeless shanties or looters smashing store windows. But this city, until recently the center of one of the world's fastest economic booms, is now the unhappy site of one of its great crashes.

Overnight, people lost their savings. Prices are soaring. Once-crowded restaurants are almost empty. Banks are rationing foreign currency, and companies are finding it dauntingly difficult to do business abroad. Inflation is at 16 percent and rising. People have stopped traveling overseas.

The local currency, the krona, was 65 to the dollar a year ago; now it is 130. Companies are slashing salaries, reducing workers' hours, and, in some instances, embarking on mass layoffs.

"No country has ever crashed as quickly and as badly in peacetime," said Jon Danielsson, an economist for the London School of Economics.

The loss goes beyond the personal, shattering a proud country's sense of itself.

"Years ago, I would say that I was Icelandic and people might say, 'Oh, where's that?' " said Katrin Runolfsdottir, 49, who was fired from her secretarial job Oct. 31.

"That was fine. But now there's this image of us being overspenders, thieves."

Aldis Nordfjord, 53, a architect, also lost her job last month. So did all 44 of her coworkers, everyone in the company except its owners. Some 75 percent of Iceland's private-sector architects have been fired in the last few weeks, she said.

Until last spring, Iceland's economy seemed white-hot. It had the fourth-highest gross domestic product per capita in the world. Unemployment hovered between 0 and 1 percent (forecasts for next spring are as high as 10 percent).

There was so much work, employers had to import workers. Nordfjord worked so much overtime last year that she doubled her salary.

Two months ago, her company canceled all overtime. Two weeks ago, it acknowledged that work was slowing, but it promised that there would be enough to last through next summer. The next day, everyone was herded into a conference room and fired.

Employers are hurting as well. Adalheidur Hedinsdottir, who runs a chain of coffee shops called Kaffitar, has laid off seven part-time employees, cut full-time workers' hours, and raised prices. The Kaffitar branch on Reykjavik's central shopping street was perhaps half full; in normal times, it would have been bursting at its seams.

When the government took over the country's failing banks in October, Hedinsdottir's latest shipment of coffee - more than 109,000 pounds - was already on the water, en route from Nicaragua. She had the money to pay for it, but because the crisis made foreign banks leery of doing business with Iceland, she said, she was unable to convert enough into foreign currency.

"They got really nervous," Hedinsdottir said of her creditors.

In a recent survey, one-third of Icelanders said they would consider emigrating. Foreigners are already leaving.

Despite all this, Icelanders are naturally optimistic, a trait born, perhaps, of living in one of the world's most punishing landscapes and depending for so much of their history on the fickle fishing industry. The weak krona will make exports more attractive, they point out. Also, Iceland has a highly educated, young, and flexible population, and has triumphed after hardship before.

Ragna Sara Jonsdottir, who runs a small business consultancy, said she had met for the first time with other businesses in her office building. "We sat down and said, 'We all have ideas, and we can help each other through difficult times,' " she said.