2008 Icelandic financial crisis

The 2008 Icelandic financial crisis involves all three of the major banks in Iceland and their control has been seized by the government. In late September, it was announced that Glitnir would be nationalised. The following week, the control of Landsbanki and Glitnir was handed over to the Financial Supervisory Authority (FME). Soon after that, the same organisation seized Iceland’s largest bank, Kaupthing.

According to the Associated Press, Iceland “is on the brink of becoming the first ‘national bankruptcy’ of the global financial meltdown.”cite web | url=http://news.yahoo.com/s/ap/20081007/ap_on_re_eu/eu_iceland_meltdown| title=Iceland teeters on the brink of bankruptcy | publisher=AP | accessdate = 2008-10-08] Prime Minister Geir Haarde has stated that the actions taken by the government have ensured that the Icelandic state will not go bankrupt. [cite web|title=Ikke mulig å veksle penger|publisher=E24|accessdate=2008-10-10|url=http://e24.no/utenriks/article2699322.ece] At the end of the second quarter 2008, Iceland's external debt was 9,553 billion Icelandic krónur, more than 80 percent of which was held by the banking sector:cite web | url = http://www.sedlabanki.is/?pageid=552&itemid=a55be3a0-9943-484e-a8de-46d23f17ba25&nextday=4&nextmonth=12 | title = Central Bank of Iceland Statistics – External debt | accessdate = 2008-10-11] This value compares with Iceland's gross domestic product of 1,279 billion krónur (2007). [cite web | url = http://www.statice.is/Pages/444?NewsID=2943 | title = Statistics Iceland – Gross domestic product 2007 | accessdate = 2008-10-11] The assets of the three banks taken under the control of the FME totaled 11,353 billion krónur at the end of 2007. [Glitnir ISK 2,948 bn [http://www.glitnirbank.com/servlet/file/glitnir-annual-report-2007.pdf?ITEM_ENT_ID=5621&COLLSPEC_ENT_ID=156 Annual Report 2007] ; Landsbanki ISK 3,058 bn [http://www.landsbanki.is/Uploads/Documents/ArsskyrslurOgUppgjor/landsbanki_annual_report_2007.pdf Annual Report 2007] ; Kaupthing ISK 5,347 bn [http://www.kaupthing.com/library/13859 Annual Report 2007] . The borrowings of the three banks at the same date were: Glitnir ISK 1,746 bn; Landsbanki ISK 836 bn; Kaupthing ISK 2,616 bn.]

The effects are being felt in various other European countries.cite web |title=Iceland's Banks Face Overseas Claims |publisher=New York Times |accessdate=2008-10-11 |url=http://www.nytimes.com/2008/10/11/business/worldbusiness/11icebank.html?ref=worldbusiness] In the United Kingdom and the Netherlands, customers of Icesave (a now-bankrupt subsidiary of the former Landsbanki) found on 7 October that they were unable to withdraw their funds. [cite web |title=Icesave savers warned on accounts |publisher=BBC News |accessdate=2008-10-07 |url=http://news.bbc.co.uk/1/hi/business/7656387.stm] Many UK local authorities, charities, police authorities and other organisations had funds in Icelandic banks. Many European banks had hundreds of millions of euros' exposure to the Icelandic banks.

Development

Currency

The Icelandic króna has declined nearly 50 percent against the euro during 2008. Inflation of prices in the economy is running at 14 percent.cite news|url=http://online.wsj.com/article/SB122331879240408481.html?mod=googlenews_wsj|title=Iceland Risks Bankruptcy, Leader Says|publisher=The Wall Street Journal|last=Forelle|first=Charles|date=2008-10-07|accessdate=2008-10-07] Iceland’s interest rates have been raised to 15.5 percent to deal with the high inflation and the króna’s decline is reportedly only beaten by that of the Zimbabwean dollar. [cite news|url=http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3147866/Financial-crisis-Icelands-dreams-go-up-in-smoke.html|title=Financial crisis: Iceland's dreams go up in smoke|publisher=The Daily Telegraph|last=Pierce|first=Andrew|date=2008-10-06|accessdate=2008-10-07] This depreciation in currency value has put pressure on banks in Iceland, which are largely dependent on foreign debt.

On Wednesday night, 8 October, 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, 6 October. [cite web|url=http://www.forbes.com/home/2008/10/08/iceland-sovereign-currency-markets-currency-cx_po_1008markets28.html|title=Iceland Teeters On Bankruptcy|publisher=Forbes|date=2008-10-09|accessdate=2008-10-08] By Thursday, 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’. [cite web|url=http://www.investmentmarkets.co.uk/20081009-2520.html|title=Trade halted on Icelandic krona|publisher=Investment markets|last=Frei|first=Elaine|date=2008-10-09|accessdate=2008-10-08] [cite web|url=http://www.bloomberg.com/apps/news?pid=20601085&sid=aiz5QIq94nrw&refer=europe |title=Iceland's Krona Currency Trading Halts as Kaupthing Taken Over |publisher=Bloomberg.com |date=2008-10-09 |accessdate=2008-10-11]

Banks

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. [cite web |url=http://www.glitnir.is/english/about-glitnir/news/detail/item14983/The_government_of_Iceland_acquires_75_percent_share_in_Glitnir_Bank/ |publisher=Glitnir |title=The government of Iceland acquires 75 percent share in Glitnir Bank |date=2008-09-29 |accessdate=2008-09-30] [cite web |url=http://eng.forsaetisraduneyti.is/news-and-articles/nr/3016 |publisher=Prime Minister's Office |title=News and Articles: The Government of Iceland provides Glitnir with new equity |date=2008-09-29 |accessdate=2008-09-30] 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. [cite web |url=http://news.bbc.co.uk/1/hi/business/7641753.stm |title=Iceland nationalises Glitnir bank |publisher=BBC News |date=2008-09-29 |accessdate=2008-09-30] However, the nationalization of Glitnir never went through, as Glitnir was taken over by the Financial Supervisory Authority before the initial plan of the Icelandic government to purchase a 75 percent stake in the bank had been approved by the bank. The Financial Supervisory Authority (FME) took control of Landsbanki on 7 October. [ [http://www.fme.is/?PageID=581&NewsID=331 The Financial Supervisory Authority - Iceland, "News: Based on New Legislation, the Icelandic Financial Supervisory Authority (IFSA) Proceeds to take Control of Landsbanki to ensure Continued Commercial Bank Operations in Iceland" (07.10.2008)] ] [ [http://www.landsbanki.is/english/aboutlandsbanki/pressreleases/?GroupID=720&NewsID=13284&y=0&p=1 Landsbanki Íslands, "Press release: Landsbanki's Operations Continued Under Unchanged Management" (7th October 2008)] ] A press release by the FME 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 Government had moved quickly to use the sweeping powers granted by the Icelandic parliament, the night before. [cite web |url=http://www.guardian.co.uk/business/2008/oct/07/iceland.banking |title=Iceland government seizes control of Landsbanki |publisher=The Guardian |date=2008-10-07 |accessdate=2008-10-07] The same day, FME took control of Glitnir. [ [http://www.fme.is/?PageID=581&NewsID=337 The Financial Supervisory Authority - Iceland, "News: Based on New Legislation, the Icelandic Financial Supervisory Authority (FME) Proceeds to take Control of Glitnir to ensure Continued Commercial Bank Operations in Iceland" (08.10.2008)] ] [ [http://www.glitnir.is/english/about-glitnir/news/detail/item15927/Glitnir's_Operations_Continued_–_Larus_Welding_to_continue_as_CEO/ Glitnir Bank, "News: Glitnir's Operations Continued – Lárus Welding to continue as CEO" (08.10.2008)] ]

On the same day, it was announced by Russian ambassador to Iceland, Victor I. Tatarintsev, that Iceland will receive a €4 billion loan from Russia. The loan will be given across three or four years, and the interest rates will be 30 to 50 points above LIBOR. [cite web |title=Russia Grants Iceland Giant Loan in Euros |publisher=IcelandReview |accessdate=2008-10-11 |url=http://www.icelandreview.com/icelandreview/daily_news/?cat_id=28304&ew_0_a_id=313200] According to RÚV, prime minister Geir Haarde had been investigating the possibility of a loan since the mid-summer. [cite web |title=Ísland fær risalán frá Rússlandi |publisher=RÚV |accessdate=2008-10-11 |url=http://ruv.is/heim/frettir/frett/store64/item229999/]

On 8 October, the UK's 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 after the FME's takeover of Landsbanki and its online brand, Icesave. [cite web |title=UK govt launching legal action against Iceland |publisher=Citywire |accessdate=2008-10-08 |url=http://www.citywire.co.uk/personal/-/news/markets-companies-and-funds/content.aspx?ID=316803&re=3902&ea=180442] Chancellor of the Exchequer Alistair Darling announced that the UK government would foot the entire bill, estimated at £4 billion, [cite web |title=Darling's pledge to Icesave savers |publisher=The Press Association |accessdate=2008-10-08 |url=http://ukpress.google.com/article/ALeqM5gIrwQn2oxfrbF2Jz4ehKIqmRQJrw] [cite web |title=Britain vows to to protect savers |publisher=Agence France-Presse |accessdate=2008-10-08 |url=http://www.news.com.au/business/story/0,27753,24467268-31037,00.html] and that he was taking steps to freeze the assets of Landsbanki. [BBC news. [http://news.bbc.co.uk/2/hi/uk_news/politics/7658518.stm Rescue plan for UK banks unveiled] . Retrieved 2008-10-08] Under the [http://www.opsi.gov.uk/si/si2008/uksi_20082668_en_1 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. [ [http://www.opsi.gov.uk/si/si2008/uksi_20082668_en_1 The Landsbanki Freezing Order 2008] ] The freezing order took advantage of provisions in sections 4, [ [http://www.opsi.gov.uk/Acts/acts2001/ukpga_20010024_en_2#pt2-pb1-l1g4 http://www.opsi.gov.uk/Acts/acts2001/ukpga_20010024_en_2#pt2-pb1-l1g4] ] 14 [ [http://www.opsi.gov.uk/Acts/acts2001/ukpga_20010024_en_2#pt2-pb3-l1g14 http://www.opsi.gov.uk/Acts/acts2001/ukpga_20010024_en_2#pt2-pb3-l1g14] ] and Schedule 3 [ [http://www.opsi.gov.uk/Acts/acts2001/ukpga_20010024_en_16#sch3 http://www.opsi.gov.uk/Acts/acts2001/ukpga_20010024_en_16#sch3] ] of the Anti-terrorism, Crime and Security Act 2001. Icelandic Prime Minister Geir H. Haarde said at a press conference on the following day that the Icelandic government was displeased and outraged that the UK government applied provisions of anti-terrorism legislation to it in a move they dubbed an “unfriendly act”. [cite web |title=Mjög óvinveitt aðgerð |publisher=mbl.is |accessdate=2008-10-09 |url=http://mbl.is/mm/frettir/innlent/2008/10/09/mjog_ovinveitt_adgerd/]

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 Bank, the largest bank in Iceland. The loan was to pay "depositors and other creditors. [Sveriges Riksbank [http://www.riksbank.com/templates/Page.aspx?id=29213 Press release] , 9 October 2008.]

On 9 October, Kaupthing was taken over by the FME, following the resignation of the entire board of directors. [ [http://www.fme.is/?PageID=581&NewsID=340 The Financial Supervisory Authority - Iceland, "News: Based on New Legislation, the Icelandic Financial Supervisory Authority (FME) Proceeds to take Control of Kaupþing to ensure Continued Commercial Bank Operations in Iceland" (09.10.2008)] ] [ [http://www.kaupthing.com/pages/164?path=K/133944/PR/200810/1258139.xml Kaupthing Bank, "Press release: Kaupthing Bank turns to the Icelandic FSA" (2008.10.09)] ] 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. [cite web|url=http://www.reuters.com/article/innovationNews/idUSTRE4981SV20081009?sp=true|title=Shellshocked Iceland takes control of biggest bank|publisher=Reuters|date=2008-10-09|accessdate=2008-10-08] 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”. [cite web |title=Iceland halts all share trading |publisher=BBC News |accessdate=2008-10-09 |url=http://news.bbc.co.uk/1/hi/business/7660511.stm]

overeign credit ratings

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. [Central Bank of Iceland [http://www.sedlabanki.is/?PageID=789 The Republic of Iceland's sovereign credit rating] .] 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). [Fitch Ratings' [http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=6475 International Credit Update] (6 October 2008).] 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, [Fitch ratings [http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=6487 Press relase] , 8 October 2008.] 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. [Moody's [http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=6483 Press release] , 8 October 2008.]

Causes

The crisis came about gradually as banks became unable to refinance their debts. It is estimated that the three major banks hold foreign debt in excess of €50 billion, or about €160,000 per Icelandic resident, compared with Iceland’s gross domestic product of €8.5 billion. The króna, which was ranked by "The Economist" as the most overvalued currency in the world in early 2007, [cite web | title = The Big Mac index | publisher = The Economist | accessdate = 2008-10-11 | url = http://www.economist.com/markets/indicators/displaystory.cfm?story_id=8649005] has also suffered due to the effects of carry trading, exacerbating the problem.

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). Icelanders also took on a large amount of consumer debt, equivalent to 213 percent of disposable income, which led to inflation. [cite web | title = Kreppanomics | publisher = The Economist | accessdate = 2008-10-10 | url = http://www.economist.com/finance/displaystory.cfm?story_id=12382011]

In response to the rise in prices – 14 percent in the twelve months to September 2008, compared with a target of 2.5 percent – the Central Bank of Iceland has held interest rates high (15.5 percent). [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 [http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=6271 Monetary Bulletin] ] 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 to 5.0 percent GDP growth. 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, [Central Bank of Iceland [http://www.sedlabanki.is/?pageid=552&itemid=29d909f3-c66a-41a3-bc6c-dadb8cac486f&nextday=7&nextmonth=11 International reserves and foreign currency liquidity] ] compared with 350.3 billion krónur of short-term international debt in the Icelandic banking sector.

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 500 employees will lose their jobs as employee numbers were cut from 1,500 to 1,000, due to a radical restructuring of the organisation which will minimise the bank’s international operations. [cite web |title=Roughly 500 Landsbanki Employees Laid Off |publisher=IcelandReview |accessdate=2008-10-11 |url=http://www.icelandreview.com/icelandreview/daily_news/?cat_id=28304&ew_0_a_id=313372] The job losses can be compared with the 2,136 registered unemployed and 495 advertised vacancies in Iceland at the end of August 2008.Central Bank of Iceland [http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=6451 Economic Indicators] ]

Other companies have also been affected, for example 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.cite web |title=Iceland businesses feel sting of financial crisis |publisher=Reuters |accessdate=2008-10-11 |url=http://www.reuters.com/article/rbssIndustryMaterialsUtilitiesNews/idUSLA15877520081010]

"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.

Outside of Iceland

It emerged on 9 October that over £760 million in cash for around 95 UK local authorities is invested in Icelandic banks. [cite web |title=Councils ‘not reckless with cash’ |publisher=BBC News |accessdate=2008-10-09 |url=http://news.bbc.co.uk/1/hi/uk_politics/7660438.stm] Ministers from each council are meeting to try and persuade HM 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. Some charities and other public bodies (such as universities) also have considerable sums invested in the same banks, and the security of their cash is currently unknown. Other UK organisations that are said to have invested heavily include police services, charities and universities.

Icelandic Prime Minister Geir Haarde said that " [his] government was working to repair relations with Britain amid the crisis". [cite web |title=Councils fear for Icelandic cash |publisher=BBC News |accessdate=2008-10-09 |url=http://news.bbc.co.uk/1/hi/uk_politics/7660438.stm]

Gordon Brown condemned what he saw as 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". [cite web |title=Brown: Iceland’s actions illegal |publisher=BBC News |accessdate=2008-10-09 |url=http://news.bbc.co.uk/1/hi/uk_politics/7662027.stm] Geir Haarde replied that the remarks made by Brown were "not a true description" and that he would not be sanctioning any illegal behaviour. [Daily Telegraph http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3175405/Financial-crisis-Gordon-Brown-accused-of-sabotaging-Iceland-economy.html]

On 11 October, an agreement was reached between the Icelandic and Dutch government on the savings of ca. 120,000 Dutch citizens. The Icelandic government will cover the first €20,887 on savings account of Dutch citizens held by Landsbanki subsidary Icesave, using money lent by the Dutch government. The total value of Icesave deposits in the Netherlands is €1.7 billion. [cite web|title=Iceland Reaches Deposit Accord With U.K., Netherlands|publisher=Bloomberg|accessdate=2008-10-11|url=http://www.bloomberg.com/apps/news?pid=20601085&sid=aijgJy15_hJI] 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. [cite news | author = Brett Young | date = 11 October 2008 | title = Britain, Iceland make progress on Icesave deposits | publisher = Reuters | url = http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSLB53875520081011?pageNumber=2&virtualBrandChannel=0&sp=true | accessdate = 2008-10-11] The figure of €20,887 is the amount covered by the Icelandic Depositors' and Investors' Guarantee Fund (IDIGF; "Tryggingarsjóður" in Icelandic): [Art. 10, [http://eng.idnadarraduneyti.is/laws-and-regulations/nr/1165 Act No 98/1999 on Deposit Guarantees and Investor- Compensation Scheme] .] however, the IDIGF had equity of only 8.3 billion krónur at the end of 2007, [Icelandic Depositors' and Investors' Guarantee Fund [http://www.tryggingarsjodur.is/modules/files/file_group_26/arsreikningur%202007_enska.pdf Financial statements 2007] .] €90 million at the exchange rates of the time and far from sufficient to cover the Dutch and British claims.

See also

* Financial crisis of 2007-2008
* List of bankrupt or acquired banks during the financial crisis of 2007–2008

References