U.S. Credit Crisis Adds To Gloom In Norway

NARVIK, Norway, Nov. 30 — At this time of year, the sun does not rise at all this far north of the Arctic Circle. But Karen Margrethe Kuvaas says she has not been able to sleep well for days.

What is keeping her awake are the far-reaching ripple effects of the troubled housing market in sunny Florida, California and other parts of the United States.

Ms. Kuvaas is the mayor of Narvik, a remote seaport where the seasons perpetual gloom deepened even further in recent days after news that the town — along with three other Norwegian municipalities — had lost about $64 million, and potentially much more, in complex securities investments that went sour.

I think about it every minute, Ms. Kuvaas, 60, said in an interview, her manner polite but harried. Because of this, we cant focus on things that matter, like schools or care for the elderly.

Norways unlucky towns are the latest victims — and perhaps the least likely ones so far — of the credit crisis that began last summer in the American subprime mortgage market and has spread to the farthest reaches of the world, causing untold losses and sowing fears about the global economy.

Where all the bad debt ended up remains something of a mystery, but to those hit by the collateral damage, it hardly matters.

Tiny specks on the map, these Norwegian towns are links in a chain of misery that stretches from insolvent homeowners in California to the state treasury of Maine, and from regional banks in Germany to the mightiest names on Wall Street. Citigroup, among the hardest hit, created the investments bought by the towns through a Norwegian broker.

For Ms. Kuvaas, being in such company is no comfort. People here are angry and scared, fearing that the losses will hurt local services like kindergartens, nursing homes and cultural institutions. With Christmas only weeks away, Narvik has already missed a payroll for municipal workers.

Above all, the residents want to know how their close-knit community of 18,000 could have mortgaged its future — built on the revenue from a hydroelectric plant on a nearby fjord — by dabbling in what many view as the black arts of investment bankers in distant places.

The people in City Hall were naïve and they were manipulated, said Paal Droenen, who was buying fish at a market across the street from the mayors office. The fund guys were telling them tales, like, This could happen to you. Its a catastrophe for a small town like this.

Now, the towns are considering legal action against the Norwegian brokerage company, Terra Securities, that sold them the investments. They allege that they were duped by Terras brokers, who did not warn them that these types of securities were risky and subject to being cashed out, at a loss, if their market price fell below a certain level.

When you sell something that is not what you say it is, that is a lie, Ms. Kuvaas said. She disputed the suggestion that people here lacked the sophistication to understand what they were buying. Were not especially stupid because we live so far in the north, she said.

Norways financial regulator agreed that the brokers had misled the towns, and it revoked the license of Terra Securities, prompting the company to file for bankruptcy. But the companys parent, Terra Group, which is in turn owned by 78 savings banks and remains in business, rejected calls for it to compensate the towns. A spokesman for the group said it too had taken a hit from the episode.

Norways finance minister, Kristin Halvorsen, has ruled out the possibility of a state bailout, and Citigroup, which announced Thursday that it would shut down one of the money-losing investments Narvik bought, said it had no legal obligation to step in.

At City Hall, the stark reality of the situation is starting to set in. Narviks chief administrator, Trond L. Hermansen, figures he may recoup half of the towns $9.4 million investment in the defunct Citigroup product — a package of securities linked to municipal bonds in the United States. Those securities declined in value after the market for bonds dried up.

Walter Gibbs contributed reporting from Oslo.

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