Archive for the ‘Iceland’ Category

Iceland’s financial crisis is due to a criminal class of bankers that privatized the banking system

October 18, 2008




During a live address to the nation of Iceland, Prime Minister Geir H. Haarde tried to calm the population.

“Dear citizens, both in politics and elsewhere it will be important to sheathe our swords,” he said.  “It is very important that we do not lose courage and  support each other as well as we can. . . . Thus with Icelandic optimism, fortitude and solidarity as weapons, we will ride out the storm.”
And a violent storm it is.
Kaupthing, Glitnir and Landsbanki are seized
Iceland’s three biggest banks — Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf — were seized because they were no longer able to finance about $61 billion in debt.  And $61 billion in debt is a mighty amount for a small island country of about 300,000 persons and a $20 billion economy.
“A few years ago, I used to joke with my foreign friends that the Icelandic economy was built on a house of cards,” wrote Eliza Reid, a columnist for Iceland Review Online.  “No one could have predicted how quickly and how dramatically that house of cards would collapse.”
Iceland’s problems were summarized in an Oct. 10 article in The Wall Street Journal:

Tiny and remote, Iceland  has become a showcase for the worst potential effects of the global credit crunch.  The country’s banks, though not necessarily more leveraged than other troubled banks around the world, had lent aggressively abroad during recent years of cheap money,  growing rapidly until their assets were some 10 times the nation’s gross domestic product.  When the credit crunch hit, markets didn’t believe Iceland’s government had sufficient resources to rescue the banks if they got into trouble — and punished them.

The effect of that lack of confidence, not just in the solvency of the banks but of the country, has been a near-total collapse in the financial system and flight from Iceland’s currency.  The Icelandic krona has plummeted in value, stoking inflation and crippling trade in a country that depends heavily on imports.

“Government, companies, households and people have seldom faced such difficulties,” Mr. Haarde said.
Trouble for the country of 300,000
Iceland’s problems began to attract attention during early October when the government took a 75 percent stake in Glitnir Bank hf, the country’s third largest bank, by making a 600 million euros ($827 million) infusion of capital.  [NOTE — Nobel prize winning economist Paul Krugman noted in The New York Times that the 600 million euros bailout was “the equivalent of an $850 billion bailout” in the United States because Iceland’s population of “only a bit more than 300,000 people [is] about 1/1000th the population of the United States.”] The move was intended to calm the financial markets.  Instead, it caused concern that the government might also need to prop up the country’s other large banks.
The krona, which already lost more than half its value during 2008, dropped another 8 percent against the euro.
But Iceland’s difficulties were just beginning.
“There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks  into the whirlpool and the result could be national bankruptcy,” Mr. Haarde said after Glitnir Bank was effectively nationalized.  He explained that Iceland was having difficulty in obtaining loans from other countries.
Every man for himself, every country for itself
“It’s turning out that it is every man for himself, every country for itself,” he said.
Iceland sought an emergency loan from Russia.  After it was announced that the Icelandic central bank had secured a 4.0 billion euros ($5.4 billion) loan from Russia, the announcement was retracted.
About this same time, Iceland loaned 500 million krona to Kaupthing Bank hf, the country’s biggest bank.  Only a few days earlier, Sigurdur Einarsson, the chairman of Kaupthing, said its liquidity position remained strong and that “[w]e’ve got good asset quality and a highly diversified loan portfolio.”
Sweden then announced that it would lend the Swedish branch of Kaupthing Bank hf up to 5.0 billion kronor ($703 million).  Landsbanki Islands hf went into receivership.  Depositors were prevented from making withdrawals from Landsbanki’s internet savings bank, IceSave, which had about 300,000 British and about 110,000 Dutch depositors.  The U.K. and the Netherlands began trying to assist their citizens in getting their money out of frozen Icelandic bank accounts.
The Icelandic government, which had only recently tried to prop up Glitnir by injecting 600 million euros into the bank, seized Glitnir and put it into receivership.   A few days later, the government seized Kaupthing Bank hf, the country’s largest bank.
“Iceland’s swollen banks are ruined”
“Today, Iceland’s swollen banks are ruined,” wrote Charles Forelle in the October 10 edition of The Wall Street Journal.  “In a space of a few days, practically the entire banking system has been seized by the government. . . . The krona has ceased functioning as a currency outside Iceland.”
It was not many years before that Iceland’s banks were first privatized.
“Icelanders . . . didn’t much mind [the privatization of their banks],” Mr. Forelle wrote.  “To their surprise, they became some of the wealthiest individuals on the planet.  Many became millionaires, a few billionaires.  The standard of living was high and foreign luxuries could be imported cheaply.  They bought expensive cars with loans in yen and Swiss francs with attractively low interest rates, racking up debts exposed to the vagaries of currency exchange.”
Mr. Forelle further explained:

For the banks, growing was easy.  They could borrow at low cost from all over the globe, then turn around and with little oversight lend that money to businesses and entrepreneurs wherever they wanted — in the U.K., Denmark and the U.S.  Over time, the banks’ assets — largely these loans they made — grew and grew.

The money rode a carousel: Iceland banks borrowed, made loans, borrowed some more.  They had to pay their own lenders, of course,  but that wasn’t a problem — there was always someplace to borrow more money with which to make the payments.

Then, last winter, the credit crunch struck.  By this summer,  no one wanted to lend to anyone, really, least of all Icelandic banks.  That was because they had gotten so large. While investors figure the U.S. and large European countries could come up with cash to bail out their banks if need be, what could tiny Iceland, with 2 billion krona in foreign-exchange reserves, do if its banks with 100 billion krona in assets got in trouble?

Just printing more money — something the U.S. can do — wouldn’t help the Iceland banks much, since their debts were largely in foreign currencies.  The creation of more Icelandic krona would just push down the exchange rate.  Fearing this, investors began shunning the krona. . . .

A Kafka novel with everyone guilty by default
“Icelanders have woken up in a new novel by Franz Kafka, where everybody is guilty by default,” wrote Gauti Kristmannsson in an op-ed article in The New York Times.  “One by one, the mighty banks have been seized by the government, and Icelanders, aghast, have been told that each and every one of us owes millions of dollars — to whom, we don’t know.”
The first mistake was privatizing the banks
“When the time comes we will recognize where mistakes were made and make sure they do not happen again,” wrote Eyglo Svala Arnarsdottir, a columist for Iceland Review Online.  “The way I see it, the first mistake was made when the banks were privatized in the beginning of the millennium without any ground rules being laid.  The happy bankers were given a free rein and they took loans and grew out of proportion with merely numbers on paper to support their conglomerates.”
After seizing the country’s three largest bank, the Icelandic government is creating a new state-owned bank called New Landsbanki.  The new bank is build upon the operations of Landsbanki Islands hf, which is in receivership with Glitnir Bank hr.
The government’s Financial Services Authority (FSA) has attempted to prevent panic by reminding Icelanders that Kaupthing and Landsbanki are open for business and that the government will guarantee domestic deposits of the banks.
British Prime Minister Gordon Brown announced that the U.K. would sue Iceland to recover the investments of British citizens with deposits in the IceSave accounts of Landsbanki.
“We will take further action against the Icelandic authorities wherever that is necessary to recover the money,” Mr. Brown said.  “This is a responsibility of the Icelandic government.  They’ve got to take responsibility.”
Iceland’s stock exchange, OMX Group Inc., operated by Nasdaq, was closed on an emergency basis for three days.  Trading continues to be suspended in the shares of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf, and in three other Icelandic financial institutions.  The krona currency dropped 80 percent against the euro during the past week.
“By this time next month, it is betting odds that the Icelandic Kronur will be an historical relic, the IMF [International Monetary Fund] will have bailed them out, and the adoption of the Euro near inevitable,” wrote the Rev. Jose M. Tirado, a Shin Buddhist priest, in Dissident Voice. “Not to mention all those typical bailout conditions the IMF levels to the Third World like stringent ‘austerity measures’ and other cheerful sounding destructors of formerly independent people around the world.”
The crisis was caused by a “criminal class” of bankers
Iceland’s poor financial condition was blamed conditions on a “criminal class” of bankers.  The Rev. Tirado wrote:

It is now becoming clear that Iceland . . . is no more independent in almost any but the most perfunctory ways.  This is because the criminal class who privatized the banking system, creating for the first  time since the Middle Ages a class of ultra-rich who could afford to buy soccer clubs in England, and get Elton John to sing at their birthday parties, are now begging Russia to lend them 4 billion Euros (5.8 billion dollars) to help them weather a crisis they caused. . . .

(Emphasis added.)
“In many ways, we uncritically accepted the capitalist system, which now appears to have been a gigantic casino without an owner,” Mr. Kristmannsson wrote in his op-ed article.  “We did in the end believe that we could get ‘money for nothing’ and now we face the fact that we will get nothing for our money.”
So far, none of the bankers who caused the crisis have been prosecuted.
“So now we watch as the entire economy collapses and, in typical Icelandic fashion, barely a whisper is heard about how their version of neo-liberal IMF Republicans have driven them into uncharacteristic submssion before the financiers of the world,” the Rev. Tirado wrote.  “It’s a sad time to be in Iceland, and my guess is things will only get worse.”
“Icelanders are simply speechless after what has happened to our country in the global financial storms,” wrote Bjarni Brynjolfsson, a columnist for Iceland Review Online.  “Yesterday we had it all.  Now it seems we have been wiped out in a major way and have to call on the International Monetary Fund or even the Russians to help us out of the mess.”
Why Icelanders are angry
Mr. Bjarni discussed why Icelanders are now so angry.

We are angry because we were told that everything was in order in the banks.  More than 50,000 small shareholders had stakes in the banks and their savings were simply wiped out.  These were ordinary people like you and me who had decided to stick with the banks through the financial meltdown and had been assured that everything would be all right in the long run.
We are angry because the banks seem to have organized programs to trick people in Iceland into placing their savings in bond accounts which were claimed to be 99 percent safe instead of keeping them in normal deposit accounts.
. . .
We are angry with the politicians who obviously knew of the difficulties the banks were facing after many warnings from abroad and from skeptics of the Icelandic economic boom who said that the banks had become too large and greedy.
We are angry with the billionaire owners who ran the banks and pretty much everything else in this country and have now disappeared in times of trouble.
. . .
We are angry with ourselves for being foolish and for not having listened to the voices that warned us about the recklessness of the banks.

Rural Icelanders who were not granted easy credit by the country’s three large banks are not as affected by Iceland’s financial problems as the city dwellers of Reykjavik, according to Bjorn Ingimarsson, head of Langanesbyggd municipality in northeast Iceland.  Mr.  Ingimarsson said that a small savings bank, Sparisjodurinn, “has served the economy here well and supported it and it is booming now.”
The bishop of Iceland, the Rev. Karl Sigurbjornsson, leader of the state-sponsored Lutheran Church, said that Icelanders were “led to believe that it was unlimited growth forever,” reported Eric Pfanner in The New York Times.  “What will happen when the dust settles?” he asked.  “A lot of people will be very angry.  It will be a challenge for our society.”

Photo Credit above of Prime Minister Haarde: NATO


Photo Credit: Azamara Club Cruises