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".