Iceland

[Guy Berger]

October 8, 2008

Iceland, in a Precarious Position, Takes Drastic Steps to Right Itself

By ERIC PFANNER and JULIA WERDIGIER REYKJAVIK, Iceland — The government of Iceland took extraordinary measures on Tuesday to stave off “national bankruptcy,” as the credit crisis tightened its grip on this remote island nation in the North Atlantic.

Iceland’s banks had propelled years of significant growth, lending so freely that their assets ballooned to many times the size of the country’s economy. But now the boom has turned to a bust.

In an effort to avoid financial collapse, the government took control on Tuesday of the country’s second-largest bank — its second takeover in two weeks. And, in a measure more characteristic of troubled developing economies than one of the wealthiest in the world, Iceland’s central bank pegged the currency to a basket of others.

Most surprising, the government announced that it had asked Russia for a loan of 4 billion euros, about $5.5 billion, to try to keep the economy afloat.

Iceland is uniquely exposed to the global economy. Although it has a population of about 300,000 — smaller than that of Wichita, Kan., or Tampa, Fla. — it has played an outsize role in global trade. The country is highly leveraged in international financial markets, and the total assets of its banks grew to nine times as large as its gross domestic product at the end of 2006, from 96 percent of its G.D.P. at the end of 2000. Some estimates place the current size of the banking sector at more than 10 times as large as the G.D.P.

And Icelandic companies had been aggressively expanding in Northern Europe and across the Atlantic. The Baugur Group, an Icelandic investment company, for instance, owns the House of Fraser department store chain in Britain, as well as a stake in Saks Fifth Avenue. Another Icelandic company, the FL Group, now called Stodir, has investments in the parent of American Airlines.

The boom in the financial sector was a relatively recent phenomenon. The Iceland Stock Exchange was created only in 1985; trading in shares began several years later. Though Iceland has one of the highest per capita incomes in the world, not long ago its economy was rooted in basic industries like fishing.

To stanch the current crisis, the government said it had secured the backing for a loan from Moscow. But Russian officials told Interfax that no decision had been made. Iceland later acknowledged that its announcement had been premature.

The confusion over the status of any loan added to the sense of bewilderment here over the speed with which the financial situation went from bad to worse.

“We are still in the midst of events unfolding, and it’s impossible to see where it’s going to end up,” said Björn Gudmundsson, head of research at Landsbanki, the second-largest bank in Iceland, after Kaupthing Bank.

Landsbanki was nationalized on Tuesday under new powers rushed into effect by the government. At the end of last month, the government took control of Glitnir, another lender.

“We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy,” Prime Minister Geir H. Haarde said late Monday.

Concerns about the government’s ability to support the banking sector have put the currency into a tailspin. The fall in the krona has pushed inflation into double digits, requiring the central bank to raise its benchmark interest rate to more than 15 percent.

Mr. Gudmundsson said new financing, like the proposed loan from Russia, was essential to help the central bank keep the currency from sliding further; it fell more than 30 percent against the dollar in the last month.

The central bank said that it had asked Russia about the loan “some months ago” but that the situation with the country’s banks and economy deteriorated so rapidly over the last two days that a loan agreement became urgently needed.

It said that Russia — home to branches of Icelandic banks — would grant the loan for the next three to four years with an interest rate of up to half of a percentage point above the interbank lending rate.

For Russia, a loan would be a way to show its financial power and willingness to help distressed economies.

“It’s a P.R. stunt to reassert Russia’s position in the global economy of the 21st century,” said James Beadle, a fund manager at Pilgrim Asset Management in Moscow. “But Russia also has a lot of cash it can’t use domestically because of the inflation problem.”

In Reykjavik, the government reiterated that all deposits in its banks were guaranteed. But the crisis could reverberate in foreign markets where Icelandic banks have set up branches, luring customers with attractive savings rates.

Customers of Icesave bank in Britain, controlled by Landsbanki, were not able to access their money on Tuesday. A note on the bank’s Web site did not give any further information.

In the meantime, the deposit compensation unit of the Financial Services Authority in Britain was readying on Tuesday application forms for Icesave’s 300,000 British customers, who have an estimated £2.5 billion in deposits with the bank. Icesave provides only an Internet-based service in Britain; its depositors are partly covered by Britain’s deposit insurance system.

Customers will probably have to wait a couple of weeks to receive their savings, up to £50,000, a spokesman at the deposit unit said. Britain recently increased the level of guaranteed deposits to £50,000.

But in Reykjavic, the government guarantee seems to have reassured many Icelanders about the safety of their money. There were no signs of lines at banks for withdrawals.

[connoisseur series500]

Incredible story.

Bobby Fischer's millions are deposited there somewhere.

[Christiern]

The country of my birth has come a long way from the old fish wars, but it looks like it hasn't all been good.

[catesta]

The country of my birth has come a long way from the old fish wars, but it looks like it hasn't all been good.

Well, I mean really, how long did you think they could hold it all together after you left?

I'm surpised they made it through the 60s.

[sidewinder]

Meanwhile - over here there is fallout - as a truck load of local authorities have disclosed that they invested in Icelandic banks. Nice one..

And the Icelandic PM blames this country for the demise of his banks. Oh yeah?

Gordon's not impressed:

Icelandic Mess

Reminds me of way back in the late 70s seeing a couple of our warships being patched up in one of our Royal Dockyards after cod war 'altercations' Up North. It was pretty serious at the time - I wonder if we will see more of this friction as the writs fly and Icelandic assets get impounded?

Edited October 10, 2008 by sidewinder

[Claude]

From the "Icelandic Mess" article:

Mr Brown said the behaviour of the Icelandic government in failing to guarantee the return of British money was “unacceptable”. He vowed to go beyond the action already taken against Landsbanki, one of the Icelandic banks which had its UK assets seized on Wednesday under anti-terrorism laws meant to stop extremist groups laundering money.

Mr Brown told the BBC: “We are freezing the assets of Icelandic companies in the UK where we can. We will take further action against the Icelandic authorities wherever that is necessary to recover the money.”

It's good to finally have laws against those extremist managers

[Christiern]

I did not choose to be born in Reykjavík, but I do choose to boycott Björk and her avant-pop band of aural terrorists. Where does she keep her money? Hmmmmmm

[Swinging Swede]

Iceland for sale on eBay

[A Lark Ascending]

Troops have been deployed to protect Lindisfarne and Jarrow.

[Jazzmoose]

I did not choose to be born in Reykjavík, but I do choose to boycott Björk and her avant-pop band of aural terrorists. Where does she keep her money? Hmmmmmm

Boooo! My favorite Icelandic export!!

[7/4]

+1

I happen to like what Björk does.

.

Edited October 10, 2008 by 7/4

[Jazzmoose]

Yes! Plus I'm just not that into fish...

[7/4]

It's nice when prepared properly.

.

[Christiern]

I never (and I do mean NEVER) eat fish. Iceland did that to me. They have fresh fish that seafood lovers rave about, but having it six days a week (horse, whale or lamb on Sundays) siured me on the species, entirely.

Moosie, I was only kidding about Björk, I like her stuff.

[7/4]

Oh....you apologize to Moose, but not me. I'll remember that...

.

[gslade]

I did not choose to be born in Reykjavík, but I do choose to boycott Björk and her avant-pop band of aural terrorists. Where does she keep her money? Hmmmmmm

[Christiern]

Ég vonar að þú fyrirgefur mig, 7/4.

[7/4]

hm....that's easy for you to say.

.

[7/4]

what did you say?

.

[Christiern]

I hope you forgive me, 7/4

[7/4]

I can do that!

I wasn't as traumatized as I sounded.

[sidewinder]

They have fresh fish that seafood lovers rave about, but having it six days a week (horse, whale or lamb on Sundays) siured me on the species, entirely.

Crikey !

Sounds very much like Orkney and the Shetland Islands (not suprisingly in view of the common Norse ancestry) - although I think they add lamb to the menu on occasions. And probably deep-fried mars bars .

[Jazzmoose]

Moosie, I was only kidding about Björk, I like her stuff.

Don't be yankin' my antlers!

[Rooster_Ties]

Stunned Icelanders Struggle After Economy’s Fall

REYKJAVIK, Iceland — The collapse came so fast it seemed unreal, impossible. One woman here 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. It is impossible to meet anyone here who has not been profoundly affected by the financial crisis.

FULL ARTICLE (from the NYT).

[Christiern]

Rooster Ties: "One woman here compared it to being hit by a train."

This woman has obviously been "outside," as Icelanders call it when anyone takes a trip abroad.

Other than the toy variety, there are no trains in Iceland.