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Iceland Teeters on the Brink

by Norwegian Chef Thu Oct 9th, 2008 at 03:30:50 PM EST

As the meltdown in the Icelandic financial system quickened, with the government seemingly powerless to do anything about it, analysts said there was probably only one realistic option left: for Iceland to be bailed out by the International Monetary Fund.

"Iceland is bankrupt," said Arsaell Valfells, a professor at the University of Iceland. "The Icelandic krona is history. The IMF has to come and rescue us."

This is the opening of the latest International Herald Tribune article about Iceland's financial crisis.

Several of us have been putting together a Wiki Article on the crisis entitled 2008 Icelandic financial crisis that outlines the latest weeks of the crisis up to the end of today October 9th.

Here are the main elements below:

The 2008 Icelandic financial crisis is an ongoing series of problems in Iceland, which are having effects on the country's economy and banking system, in the context of a 2008 world economic crisis. All three of the major banks in Iceland have been affected by the crisis, and their control has been seized by the government. The first, Glitnir, was nationalised in late September. Shortly afterwards, the control of Landsbanki was handed over to the Financial Supervisory Authority. Soon after that, the same organisation nationalised Iceland's largest bank, Kaupthing. The effects are also being felt in the United Kingdom, as customers of the insolvent bank Icesave (a subsidiary of Landsbanki) were told on October 7 that they were unable to withdraw their funds. Over 95 local authorities in the UK hold more than £760 million of cash in Icelandic banks, and there have been fears that this unsecured money will be lost.

According to the Associated Press, Iceland "is on the brink of becoming the first `national bankruptcy' of the global financial meltdown."

The Icelandic króna has declined 40% against the euro during 2008 and has experienced inflation of 14%. Iceland's interest rates have been raised to 15.5% to deal with the high inflation and the króna's decline is reportedly only beaten by that of the Zimbabwean dollar. This depreciation in currency value has put pressure on banks in Iceland, which are largely dependent on foreign debt.

On Wednesday night, October 8, the Central Bank of Iceland abandoned its attempt to peg the Icelandic króna at 131 króna to the euro after trying to set this peg on Monday, October 6. By Thursday October 9, the Icelandic króna was trading at 340 to the euro when the government suspended all trade in the currency.

On September 29, 2008, the bank Glitnir was nationalised by the Icelandic government when they purchased a 75% stake for 600 million euros. The government states it does not intend to hold ownership of the bank for a long period, and the bank is expected to carry on operating as normal. According to the government the bank "would have ceased to exist" within a few weeks if there had not been intervention.

The Financial Supervisory Authority took control of Landsbanki on October 7. A press release by the IFSA states that all of Landsbanki's domestic branches, call centres, ATMs and internet operations will be open for business as usual, and that all domestic deposits are fully guaranteed. The Guardian reported that the Government had moved quickly to use the sweeping powers granted by the Reykjavik parliament, the night before. The country's financial regulator said on Tuesday that Landsbanki's branches would open as usual and that all "domestic deposits" were fully guaranteed.

On October 8 British Prime Minister Gordon Brown announced that the UK government would launch legal action against Iceland, whose government announced that they had no intention of compensating any of the estimated 300,000 UK savers after the nationalization of Landsbanki and its online brand, Icesave.Chancellor of the Exchequer Alistair Darling announced that the UK government would foot the entire bill, estimated at £4 billion, and that he was taking steps to freeze the assets of Landsbanki. Under the Landsbanki Freezing Order 2008, passed on 8 October 2008, Her Majesty's Treasury went on to freeze the assets of Landsbanki in the UK, and assets belonging to the Central Bank of Iceland, and the Government of Iceland relating to Landsbanki. The freezing order took advantage of provisions in sections 4, 14 and Schedule 3 of the Anti-terrorism, Crime and Security Act 2001. Icelandic Prime Minister Geir H. Haarde said on a press conference the following day that the Icelandic government was displeased and outraged that the British government applied provisions in an anti-terrorism act to it in a move they dubbed an "unfriendly act".

On October 9, the largest bank in Iceland, Kaupthing, was nationalised by the FSA, following the resignation of the entire board of directors. This came about when "Britain transferred control of the business of Kaupthing Edge, its Internet bank, to ING Direct and put Kaupthing's UK operations into administration" placing Kaupthing in technical default according to loan agreements. Over £2.5 billion of deposits for 160,000 customers were handed over to ING Direct.

On the same day, all trading on the OMX Nordic Iceland Exchange was frozen by the government temporarily for two days, according to the BBC: "in an attempt to prevent further panic spreading throughout the country's financial markets". The decision was made to do so due to "unusual market conditions".

British local authority accounts

It emerged on October 9 that over £760 million in cash for around 95 local authorities is invested in Icelandic banks. Ministers from each council are meeting to try and persuade The Treasury to secure the money in the same way that customer's money in the now insolvent bank Icesave was fully guaranteed. The Local Government Association assured that council services were not at risk of suffering due to a lack of liquidity. Of all the local authorities, Kent County Council has the most money invested in Icelandic banks, with the figure standing at £50 million. Transport for London, the organisation that operates and coordinates transport services within London also has a large investment at £40 million. Local authorities were working under government advice to invest their money across many national and international banks as a way of spreading risk, which stated that the Icelandic banks had been given a "double A" rating. Icelandic Prime Minister Geir Haarde said that "[his] government was working to repair relations with Britain amid the crisis".

Gordon Brown condemned Iceland's refusal to secure the deposits of UK customers of Icelandic banks as "completely unacceptable" and "effectively illegal", and that the regulators have failed "not only the people of Iceland, they have failed people in Britain".

Great power politics are starting to come into play also.

But what price will the Russians demand for their bailout? A highly-placed source in Reykjavik tells Coffee House that Iceland might look kindly on requests from Russia's military to use America's former military base in Iceland. America closed its Naval Air Station at Keflavik Airport two years ago, handing back the Nato facility to the Icelandic government.

Now the word in Reykjavik is that the Russians could have use of it in return for the loan. Not that Keflavik would become a Russian air base -- Iceland is a member of Nato, so that is out of the question -- but it would suit the Kremlin to be able to use it for, say, refuelling and maintenance. Having use of such a facility only a few hours flying time from North America would be a major Russian propaganda coup and cause consternation in Washington.

Iceland is in two minds. It wants to remain a loyal Nato member. But it is also in financially desperate straits and there is some resentment about the abrupt manner in which the Americans left, leaving the massive facility to deteriorate. So Iceland might look more kindly on any Russian request than the rest of Nato thinks.

UPDATE: Sources in Reykjavik, who've now read our story, tell Coffee House that Iceland turned to Russia for a loan after the EU, the Scandinavian countries and the US Federal Reserve turned it down.

The irony of Iceland's emergence as an over-sized player in financial markets, is that it's likely to leave the country less politically independent.  Will Iceland turn towards the EU and the US, or will they look to Russia for salvation?  Keflavik is only 4.5 hours by Bear Bomber from New York, and that is one hell of a check on any missile defense system, because strategic bomber trajectories are much more easily made other than straight lines than missiles.  And they can fly in low under radar.  Not to mention that open access to the North Atlantic means that the Russian Arctic Fleet can go play games in the North Atlantic a lot easier.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Oct 9th, 2008 at 04:20:48 PM EST
If the Americans have any sense this will scare them into bailing out Iceland. After all, the cost is nothing compared to either their other bailouts so far, or the the cost of some individual weapon system (like DDG1000 anyone?) which will be far less cost efficient geopolitically speaking than keeping the Russians off Iceland.

Might I remind you that Iceland is smack bang in the middle of the GIUK gap?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Oct 9th, 2008 at 04:42:48 PM EST
[ Parent ]
GIUK= Greenland/Iceland/UK gap.  The passage to open water for Russian fleets coming from Arctic ports to the North Atlantic.

It's another shitty day in paradise.

But of course, Iceland is not going to turn to Russia.  Iceland is Europe. (shakes head) Or not.

Peeling Iceland off from NATO is a cheap way to outflank Western Europe.

Another shitty day in paradise.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Oct 9th, 2008 at 05:45:57 PM EST
[ Parent ]
Alda at The Iceland Weather Report blog wrote Will there be no Nuremberg trial?

The [snip]s are my trims from the original post.

One of my favourite Icelandic bloggers, Dr Gunni, can always be relied on for a glimmer of sanity, not to mention a chuckle. In his post from October 7 he's got a pretty interesting take on the situation that's was under discussion in the last post [I hope he forgives me for the somewhat inadequate translation of the following excerpts - his is the sort of text that loses a lot] ...



In the future people will ask: How did it happen that all of a sudden it was OK in Iceland, a dwarf-nation of 300,000 people, and indeed just perfectly fine, for people to swipe piles of money to stick into wage deals, severance packages and you name it, and that some guy could earn in a month the same amount as it took a regular Joe standing next to him in line at the supermarket 20-30 years to earn? That a six-fold lotto prize was equal to the monthly wages of the rich? How did society tolerate such insane discrimination?

Incidentally, this Norwegian interview is brilliant. Why didn't anyone here in Iceland ask questions like this? Oh, right, I remember. The owners of the banks also own the media. The research departments wrote the questions. And what 20-30 individuals sent everything here straight to hell like Vilhjálmur Bjarnason is claiming in this Norwegian report? Will we never know? Will there be no Nuremberg trial?


Incidentally, the voices are growing increasingly stronger here who want the government to freeze the assets of the 20-30 people who "sent everything straight to hell" and I'm adding my voice to that chorus. They've flown off on their private jets, no doubt to tend to their bank accounts in the Caymans, while we're left to clean up their mess. The owners of the banks all have holdings elsewhere - why are those holdings not being used to offset the losses of their companies?

The people of Iceland cannot let those responsible get away with this. The same goes for the people of the rest of Europe and the U.S.

by Magnifico on Thu Oct 9th, 2008 at 07:03:54 PM EST
The people of Iceland cannot let those responsible get away with this. The same goes for the people of the rest of Europe and the U.S.

Damn right.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Oct 10th, 2008 at 08:19:45 PM EST
[ Parent ]
It is sad to say, but I hope that Iceland's plight would serve as an example on the dangers of uncontrolled (and in fact encouraged) indebtedness.
What also surprised me is the refusal of Scandinavian countries to come to the rescue.
In fact I don't know much about what is going on in Norway, Sweden or Finland, but could it be that those countries feel that they could soon have problems too? (Hopefully not on the same scale as Iceland).
by Eddie on Fri Oct 10th, 2008 at 06:56:10 AM EST
has provided a liquidity line, now.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Oct 10th, 2008 at 07:27:23 AM EST
[ Parent ]
In fact I don't know much about what is going on in Norway, Sweden or Finland, but could it be that those countries feel that they could soon have problems too?

It appears to me that Sweden, Finland and Norway are managing this pretty well (just recension and lay-offs, not massive implosion of the banking sector), while Denmark is having plenty of troubles on their own.

Sweden, Finalnd and Norway each had a banking crises some 20 years ago, which might have created structures to prevent this round of casino games to go to far here. Or maybe it is still waiting to implode.

Se also, Trond Oves LQD: Banking crisis showdown: Norway versus Sweden (and the Finns)

The differences in approaches between the handling in Norway and Sweden wasn't as big as I thought however. Norway was the "pioneer", and was much more agressive than Sweden and Finland in nationalising failing banks, but they all more or less followed the same pattern.

And Jake S Danish news roundup

So what's been going on in the Danish financial sector recently? Well, I've been alluding to a variety of bail-outs, bank failures and general unrest, so I figured I'd bring together what I consider the most important highlights in one place.

I am btw not surprised that the Scandinavian countries are not riding to the rescue, economic crises management has (afaik) never been part of the Scandinavian cooperation.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Oct 10th, 2008 at 12:40:01 PM EST
[ Parent ]

Denmark's got trouble on the money markets. But so far it's just funny-money going away. It hasn't hit the real economy yet.

For all the doom and gloom (I plead guilty) we still have a "boom contraction" in the sense that we are still at full employment or the next best thing (compare: "growth recession" for when GDP is growing but employment is not). How long that will last is very much an open question, but the panic is limited to the punditry and the people who cut them their paycheques.

When unemployment starts going up or Danske Bank, Arbejdernes Landsbank, Nykredit or someone else on that scale gets into hot water, you may colour me scared. Until then... easy come, easy go.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 11th, 2008 at 02:31:59 PM EST
[ Parent ]
... that my impression is that the Royal Danish Shitpile has been accumulated outside the banking sector and merely underwritten by some of the Danish banks, rather than created directly by the banking sector.

I.o.w., some of the Danish banks have been conned by pyramid scammers (including, I would claim, Mr. Fogh), but so far it does not appear that they have been actively pyramid-scamming themselves.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 11th, 2008 at 02:37:19 PM EST
[ Parent ]
Thanks for clearing that up. It is a bit hard to keep track of whats happening through all the fog of mediapanik.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Sat Oct 11th, 2008 at 08:46:48 PM EST
[ Parent ]
to ask a question.  My economics understanding doesn't go much further that the Law of Supply and Demand, but in the last year or so, you could say that I am getting a, um, ahem..."crash" course in economics and finance.

So my questions are these:

*Hypothetically, supposed someone had a tax free stady income of veteran disability benefits of around 2,600 USD and a back pay of the benefits to 2002 of around 70 - 80k Euro, would now be the time to think of moving to Iceland and buy a house in cash?

*Or would the inflation and import food stuffs, basic cost of living, negate what ever advantage of dollar worth that may be gained?

*Lastly, what are the chances of the dollar following the Krona?

Thanks for any answers in advance.

"Schiller sprach zu Goethe, Steck in dem Arsch die Flöte! Goethe sagte zu Schiller, Mein Arsch ist kein Triller!"

by Jeffersonian Democrat (rzg6f@virginia.edu) on Fri Oct 10th, 2008 at 08:53:37 AM EST
If things go very bad, and sea transportation becomes horribly expensive (think Somalia-like piracy growing stronger), Iceland might become a rather disagreeable place to live in...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Sat Oct 11th, 2008 at 07:25:31 AM EST
[ Parent ]
Thanks for the answer, that thought had been bouncing around in my head.

I am actually concerned about now, today, how are they going to feed their citizens when they cannot buy even the food in port.

I came across a report on South America where there are wheat shipments on the dock in Brazil but no one can get the credit to buy and distribute it.

As we say in the Army, everything is going to shit, what is your go to shit plan?

"Schiller sprach zu Goethe, Steck in dem Arsch die Flöte! Goethe sagte zu Schiller, Mein Arsch ist kein Triller!"

by Jeffersonian Democrat (rzg6f@virginia.edu) on Sat Oct 11th, 2008 at 08:23:01 AM EST
[ Parent ]
Shipping is cheap, and will stay cheap no matter what.

Air traffic though... But there are ways to make air traffic cheap again, if we're just willing to radically reconsider what flying is about, and how we arrange the internal infrastructure of airplanes. ;)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Oct 11th, 2008 at 09:18:01 AM EST
[ Parent ]
As I said, if sea security becomes again hard to organise, shipping could be hard to organise. Which brings us back to the necessary autarcy of the middle age, or indeed WWII... I'd go for a place with plenty of agricultural land.

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Sat Oct 11th, 2008 at 09:40:21 AM EST
[ Parent ]

You have to compare your $2,600/mo with the prices of food and energy. These being commodities with global markets, the exchange rates more or less cancel out and it doesn't matter where you live, to a first approximation.

The last place I'd put €70-80k in cash is into real estate, right now. Liquidity is at a premium and will be for a long time.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Sat Oct 11th, 2008 at 09:19:52 AM EST
[ Parent ]
In a surprise move, which reverberated across the international community, Russia issued a four billion Euro state loan to Iceland. The statement on Russia's central bank website reads that the loan maturing in three-four years and an interest rate as low as 30-50 basis points above Libor has been given the green light by Prime Minister Vladimir Putin.

The news comes as the Iceland government has been rocked by prospects of looming state bankruptcy, with its main banks nationalized. The Kremlin, which has opened its international reserves to bail out the Russian banking system, energy corporations, --and was also forced to suspend operations in stock markets--, seems to not have forgotten the strategic location of bankrupt Iceland.

Not surprising...

by Solveig (link2ageataol.com) on Fri Oct 10th, 2008 at 06:00:02 PM EST
From Robert Amsterdam:

"Pretending that you already know the answer when you don't is not actually very helpful." ~Migeru.

by poemless on Sat Oct 11th, 2008 at 02:09:22 PM EST
The Norway Post : Norway supports Icelandic Bank
The Norwegian branch of the Icelandic Glitnir Bank is now secured through the Norwegian Bank Security Fund, which has granted a total of NOK 5 billion.
by Solveig (link2ageataol.com) on Sun Oct 12th, 2008 at 08:52:14 AM EST

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