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2008–2011 Icelandic financial crisis

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This is an old revision of this page, as edited by JanSuchy (talk | contribs) at 16:25, 17 December 2008 (→Within Iceland: +indexed and foreign currency denominated household debt). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

Former headquarters of Landsbanki in Reykjavik and current headquarters of NBI, founded by FME from the ruins of Landsbanki.
File:1000-krónur.jpg
An Icelandic 1000-krónur note. The value of the Icelandic króna has declined significantly during 2008.
Economic growth in Iceland, Denmark, Norway and Sweden from 2000 to 2007. Iceland is highlighted in red.

The 2008 Icelandic financial crisis is a major ongoing economic crisis in Iceland that involves the collapse of all three of the country's major banks following their difficulties in refinancing their short-term debt and a run on deposits in the United Kingdom. The financial crisis has had serious consequences for the Icelandic economy; the national currency has fallen sharply in value, foreign currency transactions have been virtually suspended, the market capitalisation of the Icelandic stock exchange has dropped by more than 90%, and a severe economic recession is expected.

In late September, it was announced that the Glitnir bank would be nationalised. The following week, control of Landsbanki and Glitnir was handed over to receivers appointed by the Financial Supervisory Authority (FME). Soon after that, the same organisation placed Iceland's largest bank, Kaupthing, into receivership as well. Commenting on the need for emergency measures, Prime Minister Geir Haarde said on 6 October "There [was] a very real danger … that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy."[1] He also stated that the actions taken by the government had ensured that the Icelandic state would not actually go bankrupt.[2] At the end of the second quarter 2008, Iceland's external debt was 9,553 billion Icelandic krónur (50 billion euros), more than 80 percent of which was held by the banking sector:[3] This value compares with Iceland's 2007 gross domestic product of 1,293 billion krónur (8.5 billion euros).[4] The assets of the three banks taken under the control of the FME totaled 14,437 billion krónur at the end of the second quarter 2008.[5]

The full cost of the crisis cannot yet be determined, but already it exceeds 30 percent of the country's GDP. Outside Iceland, more than half a million depositors (far more than the entire population of Iceland) found their bank accounts frozen amid a diplomatic argument over deposit insurance. German bank BayernLB faces losses of up to €1.5 billion, and has had to seek help from the German federal government. The government of the Isle of Man will pay out half of its reserves, equivalent to 7.5 percent of the island's GDP, in deposit insurance.

Development

Currency

The decline of the Icelandic króna against the euro, shown from September to November 2008. The lower solid line (in brown) shows the offshore rate as quoted by the European Central Bank; the higher solid line (in blue) shows the onshore rate as quoted by the Central Bank of Iceland. The two solid lines diverge on 6 October, after Glitnir had defaulted on some wholesale depositors in the UK, although there had been unusually large differences (up to 5%) during the previous week. The lower dashed line (in black) shows the average rate from January to August 2008 (113.31 krónur to the euro, already down from 91.2 krónur to the euro on 31 December 2007), while the upper dashed line shows the long term average from 1999 to 2007 (83.423 krónur to the euro).

The Icelandic króna had declined more than 35 percent against the euro from January to September 2008.[6] Inflation of consumer prices was running at 14 percent,[7] and Iceland's interest rates had been raised to 15.5 percent to deal with the high inflation.[8]

On the Wednesday night, 8 October, the Central Bank of Iceland abandoned its attempt to peg the Icelandic króna at 131 krónur to the euro after trying to set this peg on 6 October.[9] By 9 October, the Icelandic króna was trading at 340 to the euro when trading in the currency collapsed due to the FME's takeover of the last major Icelandic bank, and thus the loss of all króna trade 'clearing houses'.[10] The next day, the central bank introduced restrictions on the purchase of foreign currency within Iceland.[11] From 9 October to 5 November, the European Central Bank quoted a reference rate of 305 krónur to the euro.[12]

Iceland's current account:
Exports (imports) of goods
per month in millions of euros
  2007 2008
Sept. 204.4
(316.3) 		325.0
(323.5)
Oct. 274.6
(370.7) 		310.8
(239.0)
Nov. 346.4
(373.3) 		250.6
(236.7)
Goods excluding ships and aircraft. Data from Statistics Iceland and the Central Bank of Iceland: conversion from ISK at Central Bank of Iceland monthly average exchange rates.
For comparison, monthly average exports (imports) of services were €139.3M (€185.4M) in Q2/2007; €125.6M (€151.9M) in Q2/2008.

The Central Bank of Iceland set up a temporary system of daily currency auctions on 15 October to facilitate international trade. The value of the króna is determined by supply and demand in these auctions.[13] The first auction sold €25 million at a rate of 150 krónur to the euro.[14] Commercial króna trading outside Iceland restarted on 28 October, at an exchange rate of 240 krónur to the euro, after Icelandic interest rates had been raised to 18 percent.[15] The foreign exchange reserves of the Central Bank of Iceland fell by US$289 million during October 2008.[16]

During November, the real exchange rate (discounting inflation) of the Icelandic króna, as quoted by the Central Bank of Iceland, was roughly one-third lower than the average rate from 1980–2008, and 20 percent lower than the historical lows during the same period.[17] The external rate as quoted by the European Central Bank was lower still.[12] On the last trading day of the month, 28 November, the Central Bank of Iceland was quoting 182.5 krónur to the euro,[6] while the European Central Bank was quoting 280 krónur to the euro.[12]

On 28 November, the Central Bank of Iceland and the Minister for Business Affairs agreed a new set of currency regulations,[18] replacing the central bank's restrictions imposed early on in the crisis.[19] Movements of capital to and from Iceland were banned without a license from central bank.[20] It is estimated that foreign investors hold some €2 billion in króna-denominated securities, popularly known as "glacier bonds".

The foreign exchange rules also oblige Icelandic residents to deposit any new foreign currency they receive with an Icelandic bank.[20] There is anecdotal evidence that some Icelandic exporters had been operating an informal offshore foreign exchange market,[21] trading pounds and euros for krónur outside the control of any regulator and starving the onshore market of foreign currency. Hence the central bank had to sell €124 million of currency reserves in November 2008 to make up the difference,[14] compared with an estimated trade surplus of €13.9 million.[22]

The last currency auction was held on 3 December. The domestic interbank foreign exchange market reopened the following day with three market makers, all of them government-owned.[23] On the first two days of domestic trading, the króna climbed to 153.3 to the euro,[24] up 22 percent against the last currency auction rate.

Banks

File:Iceland-Reykjavik-Skolavordustigur-SPRON.jpg
Local branches of the Icelandic savings bank SPRON, which had been due to merge with Kaupthing before the financial crisis.

On 29 September 2008, a plan was announced for the bank Glitnir to be nationalised by the Icelandic government with the purchase of a 75 percent stake for €600 million.[25][26] The government stated that it did not intend to hold ownership of the bank for a long period, and that the bank was 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.[27] It later turned out that Glitnir had US$750 million of debt due to mature on 15 October.[28] However, the nationalization of Glitnir never went through, as it was placed in receivership by the Icelandic Financial Supervisory Authority (FME) before the initial plan of the Icelandic government to purchase a 75 percent stake had been approved by shareholders.

The announced nationalisation of Glitnir came just as the United Kingdom government was forced to nationalise Bradford & Bingley and to sell its retail operations and branch network to Grupo Santander. Over the weekend of 4–5 October, British newspapers carried many articles detailing the nationalisation of Glitnir and the high leverage of its other banks.[29] Influential BBC business editor Robert Peston published an opinion piece on Iceland's banks, stating that debt insurance for Kaupthing, the largest bank in Iceland, required a premium of £625,000 to guarantee the return of £1 million: "the worst case of financial BO I've encountered in some time" was his graphic description.[30] The Guardian said "Iceland is on the brink of collapse. Inflation and interest rates are raging upwards. The krona, Iceland's currency, is in freefall".[31] These articles spooked investors discussing Icesave (the brand name of Landsbanki in the UK and the Netherlands) in online forums and many started moving their savings out of the Internet bank.[32] Problems with access to the site hinted at a run on savings.

On 6 October, a number of private interbank credit facilities to Icelandic banks were shut down.[1] Prime Minister Geir Haarde addressed the nation, and announced a package of new regulatory measures which were to be put to the Althing, Iceland's parliament, immediately, with the cooperation of the opposition parties.[1] These included the power of the FME to take over the running of Icelandic banks without actually nationalising them, and preferential treatment for depositors in the event that a bank had to be liquidated.[33] In a separate measure, retail deposits in Icelandic branches of Icelandic banks were guaranteed in full.[34] The emergency measures had been deemed unnecessary by the Icelandic government less than 24 hours earlier.[1]

That evening, the Guernsey subsidiary of Landsbanki went into voluntary administration with the approval of the Guernsey Financial Services Commission.[35] The administrators would later say that "The main reason for the Bank’s difficulties has been the placing of funds with its UK fellow subsidiary, Heritable Bank."[36] Guernsey's Chief Minister stated "the directors of Landsbanki Guernsey took appropriate steps by putting the bank into administration."[37]

The FME placed Landsbanki in receivership early on 7 October.[38][39] A press release from the FME stated 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" were fully guaranteed.[40] The UK government used the Banking (Special Provisions) Act 2008[41] first to transfer retail deposits from Heritable Bank to a Treasury holding company,[42] then to sell them to Dutch bank ING Direct for £1 million.[43]

That afternoon, there was a telephone conversation between Icelandic Finance Minister Árni Mathiesen and UK Chancellor of the Exchequer Alistair Darling.[44] That evening, one of the governors of the Central Bank of Iceland, Davíð Oddsson, was interviewed on Icelandic public service broadcaster RÚV and stated that "we [the Icelandic State] do not intend to pay the debts of the banks that have been a little heedless". He compared the government's measures to the U.S. intervention at Washington Mutual, and suggested that foreign creditors would "unfortunately only get 5–10–15% of their claims". A long standing opponent of Icelandic membership of the European Union and adoption of the euro as national currency, he also claimed that "[i]f we were tied to the euro, […] we would just have to succumb to the laws of Germany and France."[45]

The next day, the FME placed Glitnir into receivership.[46][47] Alistair Darling announced that he was taking steps to freeze the assets of Landsbanki in the UK.[48] Under the Landsbanki Freezing Order 2008, passed at 10 a.m. on 8 October 2008 to come into force ten minutes later, the Treasury went on to freeze the assets of Landsbanki and assets belonging to the Central Bank of Iceland, and the Government of Iceland relating to Landsbanki.[49] The freezing order took advantage of provisions in sections 4 and 14 and Schedule 3 of the Anti-terrorism, Crime and Security Act 2001,[50] and was made "because the Treasury believed that action to the detriment of the UK's economy (or part of it) had been or was likely to be taken by certain persons who are the government of or resident of a country or territory outside the UK."[51]

The UK Prime Minister, Gordon Brown, announced that the UK government would launch legal action against Iceland over concerns with compensation for the estimated 300,000 UK savers.[52] Geir Haarde said at a press conference on the following day that the Icelandic government was outraged that the UK government applied provisions of anti-terrorism legislation to it in a move they dubbed an "unfriendly act".[53] The Chancellor of the Exchequer also said that the UK government would foot the entire bill to compensate UK retail depositors,[48] estimated at £4 billion.[54][55] It is reported that more than £4 billion in Icelandic assets in the UK have been frozen by the UK government.[56] The UK Financial Services Authority (FSA) also declared Kaupthing Singer & Friedlander, the UK subsidiary of Kaupthing Bank, in default on its obligations,[48] sold Kaupthing Edge, its Internet bank, to ING Direct,[57] and put Kaupthing Singer & Friedlander into administration.[48] Over £2.5 billion of deposits for 160,000 customers were sold to ING Direct.[58] The scale of the run on Kaupthing Edge deposits had been such that many transactions were not completed until 17 October.[59] Although Geir Haarde has described the UK government's actions over Kaupthing Singer & Friedlander as an "abuse of power"[60] and "unprecedented",[61] they were the third such actions taken under the Banking (Special Provisions) Act 2008 in less than ten days, after interventions in Bradford & Bingley and Heritable Bank.

On the same day, the Sveriges Riksbank, Sweden's central bank, made a credit facility of 5 billion Swedish krona (€520 million) available to Kaupthing Bank Sverige AB, the Swedish subsidiary of Kaupthing. The loan was to pay "depositors and other creditors".[62]

On 9 October, Kaupthing was placed into receivership by the FME, following the resignation of the entire board of directors.[63] The bank said that it was in technical default on its loan agreements after its UK subsidiary had been placed into administration.[64] Kaupthing's Luxembourg subsidiary asked for, and obtained, a suspension of payments (similar to chapter 11 protection) in the Luxembourg District Court.[65] Kaupthing's Geneva office, which was a branch of its Luxembourg subsidiary, was prevented from making any payments of more than 5000 Swiss francs by the Swiss Federal Banking Commission.[66] The directors of Kaupthing's subsidiary on the Isle of Man decided to wind up the company after consultation with the Manx authorities,[67] and the Finnish Financial Supervision Authority (Rahoitustarkastus) took control of the Helsinki branch to prevent money from being sent back to Iceland.[68]

On the same day, the UK Treasury issued a licence under the Landsbanki Freezing Order 2008 to allow the London branch of Landsbanki to continue some business.[69] A second licence was issued on 13 October,[70] when the Bank of England provided a £100 million secured loan to Landsbanki "to help maximise the returns to UK creditors."[71]

On 12 October the Norwegian government took control of Kaupthing's Norwegian operations, including "all of the bank's assets and liabilities in Norway."[72]

On 21 October, the Central Bank of Iceland asked the remaining independent financial institutions for new collateral against their loans. This was to replace the shares in Glitnir, Landsbanki and Kaupthing which had been pledged as collateral previously and which were now of much lower value, if not worthless.[73] The value of the collateral was estimated at 300 billion krónur (€2 billion).[73] One of the banks, Sparisjóðabanki (SPB, also known as Icebank), stated the next day that it could not provide new collateral for its 68 billion krónur (€451 million) loan, and would have to turn to the government for help. "This problem won’t be solved in any other way," said CEO Agnar Hansson.[74]

On 24 October, it emerged that Norway's semi-public export credit agency Eksportfinans had made a complaint to Norwegian police concerning the alleged embezzlement of 415 million Norwegian kroner (€47 million) by Glitnir since 2006. The Icelandic bank had acted as an agent for Eksportfinans, administering loans to several companies: however Eksportfinans alleges that, when the loans were paid off early by borrowers, Glitnir kept the cash and merely continued with the regular payments to Eksportfinans, effectively taking an unauthorized loan itself.[75]

Stock market

The value of the OMX Iceland 15 from January 1998 to October 2008 (log scale).

Trading in shares of six financial companies on the OMX Nordic Iceland Exchange was suspended on 6 October by order of the FME.[76] On Thursday 9 October, all trading on the exchange was frozen for two days by the government "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",[77] with share prices having fallen 30 percent since the start of the month.[78] The closure was extended through Monday 13 October due to continuing "unusual market conditions".[79]

The market reopened on 14 October with the main index, the OMX Iceland 15, at 678.4, compared with 3,004.6 before the closure.[78] This reflects the fact that the value of the three big banks, which form 73.2 percent of the value of the OMX Iceland 15,[80] had been set to zero.[81] The values of other equities varied from +8% to –15%.[82] Trading in shares of Exista, SPRON and Straumur-Burðarás (13.66% of the OMX Iceland 15) remains suspended. After a week of very thin trading, the OMX Iceland 15 closed on 17 October at 643.1, down 93% in króna terms and 96% in euro terms from its historic high of 9016 (18 July 2007).

Trading in the shares of two financial services companies, Straumur–Burðarás and Exista, resumed on 9 December: together the companies account for 12.04% of the OMX Iceland 15. The values of the shares in both companies dropped sharply, and the index closed at 394.88, down by 40.17% on the day. Trading in shares in SPRON and Kaupthing remains suspended, at prices of ISK 1.90 and ISK 694.00 respectively.[83]

Sovereign debt

Ratings of Icelandic sovereign debt
(long-term foreign currency)
Agency 29 Sept. 10 Oct.
Fitch A+ BBB–
Moody's Aa1 A1
R&I AA BBB–
S&P A– BBB

The four credit rating agencies which monitor Iceland's sovereign debt all lowered their ratings during the crisis, and their outlook for future ratings changes is negative.[84] The Icelandic government has a relatively healthy balance, with sovereign debt of 28.3 percent of GDP and a budget surplus of 5.5 percent of GDP (2007).[85]

In addition, the value of foreign currency bonds which mature in the remainder of 2008 is only $600 million, and foreign currency debt service in 2009 is only $215 million,[86] well within the government's ability to pay. However the agencies believe that the government will have to issue more foreign currency bonds, both to cover losses as the banks' overseas operations are liquidated and also to stimulate demand in the domestic economy as Iceland goes into recession.[87]

A team of experts from the International Monetary Fund (IMF) arrived in Iceland at the start of October 2008 for talks with the government. Industry Minister Össur Skarphéðinsson was said to be "favourable" to help from the IMF to stabilise the króna and to allow interest rates to be lowered.[88]

On 7 October, the central bank of Iceland announced that they had been in talks with the Russian ambassador to Iceland, Victor I. Tatarintsev, over a €4 billion loan from Russia. The loan would be given across three or four years, with an interest rate 30 to 50 points above LIBOR.[89] Central Bank of Iceland governor Davíð Oddsson later clarified that the loan was still being negotiated.[90] According to RÚV, prime minister Geir Haarde had been investigating the possibility of a Russian loan since the mid-summer.[91] When questioned on the matter in a press conference, Geir Haarde said: "We have not received the kind of support that we were requesting from our friends. So in a situation like that one has to look for new friends."[92]

A team of Icelandic negotiators arrived in Moscow on 14 October to discuss the possible loan. Russian deputy finance minister Dmitri Pankin said that "The meeting took place in a friendly atmosphere … We are working thoroughly on the issue to take a final decision".[93] On the same day, the Central Bank of Iceland drew on its swap facilities with the central banks of Denmark and Norway for €200 million each. Iceland has swap facilities with the other Nordic countries for a total of €1.5 billion.[94] Iceland is also seeking assistance from the European Central Bank (ECB): there is some precedent for the move, as the ECB already has currency swap arrangements with Switzerland, another non-member of the European Union.[95]

On 24 October, the IMF tentatively agreed to loan €1.58 billion.[96] However the loan had still not been approved by the Executive Board of the IMF on 13 November[97] Apparently, Iceland had not secured the necessary loans (nearly €3bn) from other countries: the Icelandic government spoke of a $500M (€376M) gap in the funding plans. Dutch finance minister Wouter Bos also said that the Netherlands would oppose the loan unless agreement was reached over deposit insurance for Landsbanki customers in the Netherlands.[98]

The IMF-led package of $4.6bn was finally agreed on 19 November, with the IMF loaning $2.1bn and another $2.5bn of loans and currency swaps from Norway, Sweden, Finland and Denmark. In addition, Poland has offered to lend $200M and the Faroe Islands have offered 300M Danish kroner ($50M, about 3% of Faroese GDP).[99] The Icelandic government also reported that Russia has offered $300M.[100] The next day, Germany, the Netherlands and the United Kingdom announced a joint loan of $6.3bn (€5bn), related to the deposit insurance dispute.[101][102]

Causes

In 2001, banks were deregulated in Iceland.[103] This set the stage for banks to upload debts when foreign companies were accumulated.[103] The crisis unfolded when banks became unable to refinance their debts. It is estimated that the three major banks hold foreign debt in excess of €50 billion,[3] or about €160,000 per Icelandic resident, compared with Iceland's gross domestic product of €8.5 billion.[4][104] As early as March 2008, the cost of private deposit insurance for deposits in Landsbanki and Kaupthing was already far higher (6–8½ percent of the sum deposited) than for other European banks.[105] The króna, which was ranked by The Economist in early 2007 as the most overvalued currency in the world (based on the Big Mac Index),[106] has further suffered from the effects of carry trading.[107]

Coming from a small domestic market, Iceland's banks have financed their expansion with loans on the interbank lending market and, more recently, by deposits from outside Iceland (which are also a form of external debt). Households also took on a large amount of debt, equivalent to 213 percent of disposable income, which led to inflation.[108] This inflation was exacerbated by the practice of the Central Bank of Iceland issuing liquidity loans to banks on the basis of newly-issued, uncovered bonds[109] – effectively, printing money on demand.

In response to the rise in prices—14 percent in the twelve months to September 2008,[7] compared with a target of 2.5 percent—the Central Bank of Iceland has held interest rates high (15.5 percent).[8] Such high interest rates, compared with 5.5 percent in the United Kingdom or 4 percent in the eurozone for example, have encouraged overseas investors to hold deposits in Icelandic krónur, leading to monetary inflation: the Icelandic money supply (M3) grew 37.8 percent in the twelve months to August 2008, compared with 5.0 percent GDP growth.[7] The situation was effectively an economic bubble, with investors overestimating the true value of the króna.

As with many banks around the world, the Icelandic banks found it increasingly difficult or impossible to roll over their loans in the interbank market, their creditors insisting on repayment while no other banks were willing to make fresh loans. In such a situation, a bank would normally have to ask for a loan from the central bank as the lender of last resort. However in Iceland the banks were so much larger than the national economy that the Central Bank of Iceland and the Icelandic government could not guarantee the repayment of the banks' debts, leading to the collapse of the banks. The official reserves of the Central Bank of Iceland stood at 374.8 billion krónur at the end of September 2008,[110] compared with 350.3 billion krónur of short-term international debt in the Icelandic banking sector,[3] and at least £6.5 billion (1,250 billion krónur) of retail deposits in the UK.[111]

The Icesave logo, advertising it as "part of Landsbanki, Reykjavik, Iceland".

The situation was made worse by the fact that Icesave was operating as a branch of Landsbanki, rather than as a legally independent subsidiary. As such, it was completely dependent on the Central Bank of Iceland for emergency loans of liquidity, and could not turn to the Bank of England for help. The UK Financial Services Authority (FSA) was aware of the risk, and was considering imposing special liquidity requirements on Icelandic deposit-taking banks in the weeks before the crisis.[112] However the plan – which was never implemented – would have forced the Icelandic banks to cut interest rates or stop taking new deposits, and might even have sparked the sort of bank run it was designed to prevent. The Guernsey authorities were also planning on bringing in restrictions on foreign banks operating as branches and on transfers of funds between Guernsey subsidiaries and parent banks ("parental upstreaming").[113] Landsbanki operated in Guernsey through a legally independent subsidiary.

The existence of a bank run on Landsbanki accounts in the UK in the period up to 7 October seems confirmed by a statement from the bank on 10 October, which said "Landsbanki Íslands hf. transferred substantial funds to its UK branch during this time to fulfil its Icesave commitments."[114] The transfer of funds from Landsbanki Guernsey to Heritable Bank,[36] a Landsbanki subsidiary in the UK, also suggests a bank run in the UK. A transfer of "substantial funds" from Iceland to the UK would have been a significant downward push on the value of the króna, even before the effects of any speculation.

Bank restructuring

The Financial Supervisory Authority (FME) has acted to "ring-fence" the Icelandic operations of Landsbanki and Glitnir, stating its aim of "continued banking operations for Icelandic families and businesses."[115] NBI (originally known as Nýi Landsbanki) was set up on 9 October with 200 billion krónur in equity and 2,300 billion krónur of assets.[116] Nýi Glitnir was set up on 16 October with 110 billion krónur in equity and 1,200 billion krónur of assets.[117]

Talks with Icelandic pension funds to sell Kaupthing as a going concern broke down on 17 October,[118] and Nýja Kaupþing was set up on 22 October with 75 billion krónur in equity and 700 billion krónur of assets.[119]

The equity in all three new banks was supplied by the Icelandic government, and amounts to 30 percent of Iceland's GDP. The new banks will also have to reimburse their predecessors for the net value of the transferred assets, as determined by "recognised appraisers". As of 14 November 2008, these net values were estimated as:[120] NBI ISK558.1bn (€3.87bn), Nýi Glitnir ISK442.4bn (€2.95bn); Nýja Kaupþing ISK172.3bn (€1.14bn).[121] The total debt of 1173 billion krónur is more than 90 percent of Iceland's 2007 gross domestic product.

Glitnir and Kaupthing, shorn of their Icelandic operations, obtained moratoriums on payments to creditors (similar to Chapter 11 protection) from the District Court of Reykjavík on 24 November.[122][123]

Effects

Within Iceland

The current economic climate in the country has affected many Icelandic businesses and citizens. With the creation of Nýi Landsbanki, the new organisation which replaces the old Landsbanki, around 300 employees will lose their jobs due to a radical restructuring of the organisation which is intended to minimise the bank's international operations. Similar job losses are expected at Glitnir and Kaupthing[124] The job losses can be compared with the 2,136 registered unemployed and 495 advertised vacancies in Iceland at the end of August 2008.[7]

Other companies have also been affected. For example, the private Sterling Airlines declared bankruptcy on 29 October 2008. The national airline Icelandair has noticed a significant slump in domestic demand for flights. However, the airline states that year-on-year international demand is up from last year. Guðjón Arngrímsson, a spokesman for the airline, said "we're getting decent traffic from other markets... we are trying to let the weak [króna] help us." He has also stated that it is impossible to predict whether the company will be profitable this year.[125] Morgunblaðið, an Icelandic newspaper, is cutting some jobs and merging parts of its operations with the media corporation 365. The newspaper 24 stundir has ceased publication due to the crisis, resulting in the loss of 20 jobs.[125]

Importers are particularly hard hit, with the government restricting foreign currency to essential products such as food, medicines and oil.[126] The €400 million loan from the central banks of Denmark and Norway is sufficient to pay for a month's imports,[7] although on 15 October there was still a "temporary delay" which affected "all payments to and from the country".[127]

The assets of Icelandic pension funds are, according to one expert, expected to shrink by 15–25 percent.[128] The Icelandic Pension Funds Association has announced that benefits will in all likelihood have to be cut in 2009.[129] Iceland's GDP is expected by economists to shrink by as much as 10 percent as a result of the crisis, putting Iceland by some measures in an economic depression.[130] Inflation may climb as high as 75 percent by the end of the year.[131]

Unemployment had more than tripled by late November 2008, with over 7000 registered jobseekers[132] (about 4% of the workforce) compared to just 2136 at the end of August 2008.[7] As 80% of household debt is indexed and another 13 percent denominated in foreign currencies[133], debt repayment is going to be more costly.

Outside Iceland

Over £840 million in cash from more than 100 UK local authorities was invested in Icelandic banks.[134] Representatives from each council are meeting to try to persuade the Treasury to secure the money in the same way that customers' money in Icesave was fully guaranteed.[134] Of all the local authorities, Kent County Council has the most money invested in Icelandic banks, currently £50 million.[134] Transport for London, the organisation that operates and coordinates transport services within London, also has a large investment at £40 million.[134] Local authorities were working under government advice to invest their money across many national and international banks as a way of spreading risk. Other UK organisations said to have invested heavily include police services and fire authorities,[134] and even the Audit Commission.[135] It is hoped that about one-third of the deposited money will be available fairly rapidly, corresponding to the liquid assets of the UK subsidiaries: liquidation of other assets, such as loans and offices, will take longer.[136]

In an emergency sitting of the Tynwald on 9 October, the Isle of Man government raised compensation from 75 percent of the first £15,000 per depositor to 100 percent of £50,000 per depositor.[137] The Chief Minister of the Isle of Man, Tony Brown, confirmed that Kaupthing had guaranteed the operations and liabilities of its Manx subsidiary in September 2007, and that the Manx government was pressing Iceland to honour this guarantee.[138] Depositors with Landsbanki on Guernsey found themselves without any depositor protection.[139]

On 11 October, an agreement was reached between the Icelandic and Dutch governments on the savings of about 120,000 Dutch citizens. The Icelandic government will cover the first €20,887 on savings accounts of Dutch citizens held by Landsbanki subsidiary Icesave, using money lent by the Dutch government. The total value of Icesave deposits in the Netherlands is €1.7 billion.[140] At the same time Iceland and Britain reached an agreement on the general contours of a solution: Icesave deposits in the UK total £4 billion (€5 billion) in 300,000 accounts.[141] The figure of €20,887 is the amount covered by the Icelandic Depositors' and Investors' Guarantee Fund (DIGF; Tryggingarsjóður in Icelandic):[142] however, the DIGF had equity of only 8.3 billion krónur at the end of 2007,[143] €90 million at the exchange rates of the time and far from sufficient to cover the Dutch and British claims.

The cost of deposit insurance in the UK is not completely clear as of November 2008. The Financial Services Compensation Scheme (FSCS) paid around £3 billion to transfer deposits from Heritable Bank and Kaupthing Singer & Friedlander to ING Direct, while the UK Treasury paid an additional £600 million to guarantee retail deposits that were higher than the FSCS limit.[144] The Treasury also paid out £800 million to guarantee Icesave deposits that were higher than the limit. A loan of £2.2 billion to the Icelandic government is expected to cover the claims against the Icelandic DIGF relating to Icesave, while the exposure of the UK FSCS is expected to be £1–2 billion.

Political aftermath

Some of the 6000 protesters in front of the Alþingishús, seat of the Icelandic parliament, on 15 November 2008.

Parts of the Icelandic public have arranged protests against the Central Bank, the Parliament and the government's alleged lack of responsibility before and after the crisis, attracting between 3000 and 6000 people (1–2% of Iceland's population) on Saturdays.[145]

In early November, the President of Iceland, Ólafur Ragnar Grímsson, at an informal lunch with foreign diplomats, criticized Iceland's traditional friends (particularly Britain, Sweden and Denmark) as well as the International Monetary Fund. According to a memo from the Norwegian embassy, he suggested that the Russians might want to use the Keflavík Air Base, the Russian ambassador replied that they had no need for it. The President is quoted to have said that Iceland would soon recover, even if they had to fight alone. The President does not necessarily agree with the government on these issues.[146][147]

In October 2008, the UK PM Gordon Brown used powers dating from the Second World War to freeze Landsbanki holdings in the United Kingdom.[148] Iceland's prime minister Geir Haarde protested against what he described "a terrorist law being applied against us", calling it "a completely unfriendly act".[149][150]

The diplomatic row with Britain has threatened to spill over into the traditional defence links between the two countries. Iceland has no armed forces of its own, and relies on NATO (and geography) for its defence: the UK Royal Air Force was due to take its turn in patrolling Icelandic airspace from December 2008, but this has now been cancelled.[151]

According to a poll from late November 2008, 64% were in favour of early elections, with only 29.3% opposed.[152] A poll from 22 November 2008 saw the Social Democratic Alliance lead with 33.6%, followed by the Left-Green Alliance at 27.8% and the Independence Party at 24.8%; the Progressive Party and the Liberal Party were far behind, with only 6.3% and 4.3%, respectively.[153]

See also

  • Swedish banking rescue, a systemic crisis in the early 1990s which cost the Swedish taxpayer 4% of GDP in the short term (much of the money was later recovered)
  • Savings and loan crisis in the United States in the 1980s and 1990s, costing $125 billion to the U.S. taxpayer (about 2% of GDP)
  • Crédit Lyonnais, a French state bank which almost failed in 1993, costing the French taxpayer €16 billion (about 1% of GDP)
  • Washington Mutual, formerly the largest savings and loan association in the United States, intervened by the U.S. government in September 2008
  • Darien scheme, a historical failure of overseas expansion, resulting in the loss of one-fifth of the wealth of Scotland at the end of the seventeenth century

References

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  4. ^ a b Statistics Iceland (11 September 2008). "Gross domestic product 2007 – Revision". Retrieved 2008-10-13.
  5. ^ Glitnir ISK 3,863 bn Interim Financial Statement 2008Q2; Landsbanki ISK 3,970 bn Interim Financial Statement 2008Q2; Kaupthing ISK 6,604 bn Interim Financial Statement 2008Q2. The borrowings of the three banks at the same date were: Glitnir ISK 2,242 bn; Landsbanki ISK 1,220 bn; Kaupthing ISK 2,883 bn.
  6. ^ a b Central Bank of Iceland. "Exchange rate". Retrieved 2008-10-15.
  7. ^ a b c d e f Central Bank of Iceland (September 2008). "Economic Indicators". Retrieved 2008-10-11.
  8. ^ a b The policy rate was raised from 13.75 percent to 15 percent on 25 March 2008, and to 15.5 percent on 10 April 2008: Central Bank of Iceland (2008Q2). "Monetary Bulletin". Retrieved 2008-10-11. {{cite web}}: Check date values in: |date= (help)
  9. ^ Central Bank of Iceland (8 October 2008). "Foreign exchange market". Retrieved 2008-10-13.
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  12. ^ a b c "Euro foreign exchange reference rates". European Central Bank. Retrieved 1 December 2008.
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  18. ^ Rules on foreign exchange No. 1082 (28 November 2008).
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  30. ^ Peston, Robert (4 October 2008). "Markets call time on Iceland". BBC News. Retrieved 2008-10-16.
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  32. ^ "How Long Can Icelandic Banks Last?, Will all Icelanders go bankrupt?". HousePriceCrash Forums. 4–5 October 2008. Retrieved 2008-10-16.
  33. ^ Act No. 125/2008 on the Authority for Treasury Disbursements due to Unusual Financial Market Circumstances etc.
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  57. ^ The Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order 2008 No. 2674.
  58. ^ "Icelandic compensation to start". BBC News. 9 October 2008. Retrieved 2008-10-12.
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  66. ^ Swiss Federal Banking Commission (9 October 2008). "SFBC takes measures to protect investors of the Swiss Branch of Kaupthing Bank". Retrieved 2008-10-13.
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  69. ^ The Landsbanki Freezing Order 2008 (General Licence).
  70. ^ The Landsbanki Freezing Order 2008 (General Licence) (L2).
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  72. ^ "Norway takes charge of Kaupthing's Norwegian arm". Reuters. 12 October 2008. Retrieved 2008-10-12.
  73. ^ a b "Central Bank Calls for Increased Collateral". Iceland Review. 21 October 2008. Retrieved 2008-10-26.
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  76. ^ Financial Supervisory Agency (FME) (6 October 2008). "Temporary suspension from trading". Retrieved 2008-10-15.
  77. ^ "Iceland halts all share trading". BBC News. 9 October 2008. Retrieved 2008-10-09.
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  80. ^ OMX Nordic Exchange (30 June 2008). "Definitive list of constituents in OMXI15 index".
  81. ^ OMX Nordic Exchange. "Equities resume trading in Iceland". Retrieved 2008-10-14.
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  83. ^ http://www.nasdaqomxnordic.com/indexes/index_info/?Instrument=ICEIS0000004380
  84. ^ Central Bank of Iceland. "The Republic of Iceland's sovereign credit rating". {{cite web}}: Unknown parameter |accessadate= ignored (help)
  85. ^ Fitch Ratings (6 October 2008). "International Credit Update – Republic of Iceland". Retrieved 2008-10-11.
  86. ^ Fitch Ratings (8 October 2008). "Fitch downgrades Iceland to 'BBB-'; remains on Rating watch Negative". Retrieved 2008-10-11.
  87. ^ Moody's (8 October 2008). "Moody's downgrades Iceland's ratings to A1 from Aa1; review continues". Retrieved 2008-10-11.
  88. ^ Brogger, Tasneem; Einarsdottir, Helga Kristin (12 October 2008). "Iceland Minister Says IMF Aid Needed to Attract Foreign Loans". Bloomberg. Retrieved 2008-10-12.{{cite news}}: CS1 maint: multiple names: authors list (link)
  89. ^ "Russia Grants Iceland Giant Loan in Euros". Iceland Review. 7 October 2008. Retrieved 2008-10-11.
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  91. ^ "Ísland fær risalán frá Rússlandi". RÚV. 7 October 2008. Retrieved 2008-10-11. Template:Is icon
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  98. ^ Ibison, David (11 November 2008). "Iceland's rescue package flounders". Financial Times. Retrieved 2008-11-15. {{cite news}}: Italic or bold markup not allowed in: |publisher= (help)
  99. ^ Brogger, Tasneem; Einarsdottir, Helga Kristin (20 November 2008). "Iceland Gets $4.6 Billion Bailout From IMF, Nordics". Bloomberg. Retrieved 2008-11-20.{{cite news}}: CS1 maint: multiple names: authors list (link)
  100. ^ Source: Prime Minister's Office.
  101. ^ "Dutch €1.3bn loan to Iceland agreed". DutchNews. 20 November 2008. Retrieved 2008-11-21.
  102. ^ Mason, Rowena (20 November 2008). "UK Treasury lends Iceland £2.2bn to compensate Icesave customers". Daily Telegraph. Retrieved 2008-11-21. {{cite news}}: Italic or bold markup not allowed in: |publisher= (help)
  103. ^ a b Robert Jackson (15/11/2008). Financial Times. {{cite journal}}: Check date values in: |date= (help); Missing or empty |title= (help); Unknown parameter |Title= ignored (|title= suggested) (help)
  104. ^ For the purposes of comparison, both the external debt of Icelandic banks and the Icelandic GDP have been converted at an approximate exchange rate of ISK 150 = 1 EUR.
  105. ^ Watkins, Simon (16 March 2008). "Iceland's banks top 'riskiness league'". ThisIsMoney.co.uk. Retrieved 2008-10-12.
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  107. ^ Wardell, Jane (7 October 2008). "Iceland teeters on the brink of bankruptcy". Associated Press. Retrieved 2008-10-08.
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  109. ^ Para. 19, Letter of Intent to the International Monetary Fund. (3 November 2008).
  110. ^ Central Bank of Iceland (7 October 2008). "International reserves and foreign currency liquidity – September 2008". Retrieved 2008-10-11.
  111. ^ Calculated as £4 billion in Icesave deposits and £2.5 billion in deposits at Heritable Bank and Kaupthing Singer & Friedlander that were handed to ING Direct.
  112. ^ Leftly, Mark; Northedge, Richard (12 October 2008). "Lawyers head to Iceland to get cash back". The Independent. Retrieved 2008-10-15. {{cite news}}: Italic or bold markup not allowed in: |publisher= (help)CS1 maint: multiple names: authors list (link)
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  114. ^ Landsbanki Íslands hf (10 October 2008). "Statement from Landsbanki Íslands hf: Landsbanki did not transfer funds from the UK to Iceland". Retrieved 2008-10-15.
  115. ^ Financial Supervisory Authority (FME) (9 October 2008). "New Landsbanki Takes Over Domestic Operations of Landsbanki Islands hf". Retrieved 2008-10-16.
  116. ^ Financial Supervisory Authority (FME) (9 October 2008). "Decision of the Financial Supervisory Authority (FME) on the disposal of assets and liabilities of Landsbanki Íslands hf., ID no. 540291-2259, to New Landsbanki Íslands hf., ID no. 471008-0280". Retrieved 2008-10-16.
  117. ^ Financial Supervisory Authority (FME) (16 October 2008). "Decision of the Financial Supervisory Authority (FME) on the disposal of assets and liabilities of Glitnir Bank hf., ID no. 550500-3530, to New Glitnir Bank hf., ID no. 491008-0160". Retrieved 2008-10-16.
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  120. ^ Financial Supervisory Authority (FME) (14 November 2008). "The provisional opening balance sheets of the three new banks". Retrieved 2008-11-25.
  121. ^ Euro equivalents for these amounts have been calculated using the Central Bank of Iceland rate for the date on which the new bank was set up: Nýi Landsbanki, 9 October 2008, EURISK = 144.27; Nýi Glitnir, 15 October 2008, EURISK = 150; Nýja Kaupþing, 21 October 2008, EURISK&nsbp;= 150.5.
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  132. ^ "Interest in jobs abroad". IceNews. 22 November 2008.
  133. ^ Iceland: Financial System Stabulity Assessment, IMF country report No. 08/368, December 2008, page 11
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  136. ^ Prince, Rosa (15 October 2008). "Councils can recover a third of frozen Iceland deposits within months". Daily Telegraph. Retrieved 2008-10-15. {{cite news}}: Italic or bold markup not allowed in: |publisher= (help)
  137. ^ "Tynwald Approves Raising of £50,000 Savings Guarantee". Isle of Man Today. 9 October 2008. Retrieved 2008-10-12.
  138. ^ "Isle of Man Pledges Action on Kaupthing Collapse". Isle of Man Today. 10 October 2008. Retrieved 2008-10-12.
  139. ^ Lewis, Paul (11 October 2008). "Offshore Icelandic Funds At Risk". BBC News. Retrieved 2008-10-12.
  140. ^ Brogger, Tasneem; Einarsdottir, Helga Kristin (11 October 2008). "Iceland Reaches Deposit Accord With U.K., Netherlands". Bloomberg. Retrieved 2008-10-11.{{cite news}}: CS1 maint: multiple names: authors list (link)
  141. ^ Young, Brett (11 October 2008). "Britain, Iceland make progress on Icesave deposits". Reuters. Retrieved 2008-10-11.
  142. ^ Art. 10, Act No 98/1999 on Deposit Guarantees and Investor- Compensation Scheme.
  143. ^ Icelandic Depositors' and Investors' Guarantee Fund Financial statements 2007.
  144. ^ The Chancellor of the Exchequer (Mr. Alistair Darling) (13 October 2008). "Written ministerial statements – TREASURY – Contingencies Fund". Hansard. Retrieved 2008-11-25. {{cite web}}: Italic or bold markup not allowed in: |publisher= (help)
  145. ^ Einarsdottir, Helga Kristin; Brogger, Tasneem (15 November 2008). "Icelanders Take to Streets to Protest Policy Makers' Failures". Bloomberg. Retrieved 2008-11-15.{{cite news}}: CS1 maint: multiple names: authors list (link)
  146. ^ Skjeseth, Alf (12 November 2008). "Inviterer Russland". Klassekampen. Retrieved 2008-11-13. {{cite news}}: Italic or bold markup not allowed in: |publisher= (help) Template:No icon
  147. ^ "Iceland: Denmark has turned its back". Politiken. 12 November 2008. Retrieved 2008-11-13. {{cite news}}: Italic or bold markup not allowed in: |publisher= (help)
  148. ^ Iceland to Britain: 'We're No Terrorists', TIME, November 3, 2008
  149. ^ Who are you calling terrorists, Mr Brown?, The Independent, October 24, 2008
  150. ^ Relations in deep freeze as Iceland denounces UK’s ‘unfriendly’ action, The Times, October 10, 2008
  151. ^ "British air force mission to Iceland scrapped". International Herald Tribune. 14 November 2008. Retrieved 2008-11-15. {{cite news}}: Italic or bold markup not allowed in: |publisher= (help)
  152. ^ http://english.people.com.cn/90001/90777/90853/6540625.html
  153. ^ http://www.angus-reid.com/polls/view/32339/social_alliance_leads_rivals_in_iceland
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