Wednesday, 8 October 2008

LESSONS IN ICELANDS FINANCIAL DEMISE?

An old friend who has been watching Roarprawn with interest reckons that New Zealand and Iceland economies have a lot in common.

The Sweeper sent this in from the Guardian

The Icelandic government last night presented an emergency bill giving it sweeping powers over the nation's banks, to save the country from financial ruin.In an address broadcast on Icelandic television, prime minister Geir Haarde said the bill, supported by opposition parties, would allow the government to push through mergers between the battered banks or force them into bankruptcy.

The fate of Iceland, which has extensive interests in the UK, has been seen as a warning sign for the rest of the world, after a long boom fuelled by debt, a dependence on its banking industry and a buoyant housing market. Haarde, who had spent the weekend in intensive talks, made it clear how urgent the need for action now was. "As recently as last night, it looked like the banks could continue operations for a while," he said.

"This morning and today, things have totally changed for the worse." Time appeared to be running out for Iceland to deliver a solution to the financial crisis yesterday as its currency, the krona, slumped 30% against the euro.The emergency bill, which parliament was due to adopt last night, would also allow the government to take over housing loans held by the banks. The financial regulator had earlier suspended shares in Iceland's main banks to prevent panic selling.

The government also followed Ireland and Germany by guaranteeing all domestic deposits in Icelandic savings accounts, although UK savers in the popular Icesave and Kaupthing Edge accounts run by the Icelandic banks will not be covered. Concerns about the Icelandic economy grew stronger last week after the government seized control of the third largest bank Glitnir, taking a 75% stake in return for €600m (£466m) - Haarde warning Icelanders at the time of "the inevitable cut in living standards" to come.The falling currency, which closed at a record low of 230 Icelandic krona per euro, is worsening the crisis for the banks, which are shouldering large overseas debts, and for many thousands of individuals in Iceland who were encouraged to take out loans in foreign currencies.

In Iceland, there was widespread fear. Sigridur Dögg Audunsdottir, a local government worker in Reykjavik said everyone in the country was "holding their breath". She yesterday withdrew her cash from the bank, all the way to her overdraft limit, to make sure her family had enough to live on. "It is just unimaginable. It is so dark and gloomy, we have never experienced anything like this. I took out my money just to be safe, because I felt I had to do something. We've all been living ahead of ourselves, so in many ways this was inevitable.

People here have been so obsessed with money. Iceland is like a nouveau riche country."A collapse in Iceland would severely dent confidence in the broader financial markets. But it also has the potential for direct impact in Britain, with the main banks funding a string of companies and high rolling entrepreneurs including Robert Tchenguiz, a large investor in Sainsbury's, chef Gordon Ramsay, the property tycoons Candy brothers and the chairman of West Ham Football Club, Bjorgolfur Gudmundsson......

Richard Portes, an expert on Iceland at the London Business School, said the government had made a mistake by nationalising Glitnir and creating fear in the markets, instead of just providing it with liquidity.

"You have the same law of unintended consequences that you had in the case of Lehman Brothers," he said. "The Iceland problem was immediately vastly exaggerated." He said the Icelandic banks had been unfairly targeted. "The world is a little unjust. They don't hold any toxic papers. The assets they will have to sell are perfectly good assets. They have been prudently managed and haven't been excessively dependent on the wholesale money markets compared to anyone else."

Iceland has undergone a remarkable transformation in the past couple of decades, from an economy largely based on fishing to one of the richest in Europe, driven by its biggest banks after deregulation of the banking system. The banks grew rapidly on borrowing and now have assets eight times Iceland's GDP. But the party has come to an end, with the krona losing more than half its value against the euro in the past 12 months, inflation at 12%, and interest rates of 15.5%.

2 comments:

alex masterley said...

I've been watching Iceland with some concern. It's the first time that we will see a country being put up for mortgagee sale.

alex Masterley said...

Just been reading the UK papers. They are full of Iceland. I think the place has tanked. They have had to go the Russians for a loan! The implications make my head hurt.