2008–2011 Icelandic financial crisis

Former headquarters of Landsbanki in Reykjavik and current headquarters of New Landsbanki, founded by FME on the ruins of Landsbanki.

The 2008 Icelandic financial crisis is an ongoing series of problems in Iceland, which are having effects on the country’s economy and banking system, in the context of a 2008 world economic crisis. All three of the major banks in Iceland have been affected by the crisis, 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.” Prime Minister Geir Haarde has stated that the actions taken by the government have ensured that the Icelandic state will not go bankrupt. At the end of the second quarter 2008, Iceland's external debt was 9553 billion Icelandic krónur, more than 80% of which was held by the banking sector: this compares with Iceland's gross domestic product of 1279 billion krónur (2007).

The effects are being felt in various other European countries. In the United Kingdom, customers of Icesave (a subsidiary of Landsbanki) found on 7 October that they were unable to withdraw their funds. 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

Economic growth in Iceland, Denmark, Norway and Sweden in 2007. Iceland is highlighted red.

The Icelandic króna has declined nearly 50% against the euro during 2008. Inflation of prices in the economy is running at 14%. Iceland’s interest rates have been raised to 15.5% to deal with the high inflation and the króna’s decline is reportedly only beaten by that of the Zimbabwean dollar. This depreciation in currency value has put pressure on banks in Iceland, which are largely dependent on foreign debt.

On Wednesday night, 8th 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, 6th October. By Thursday 9th 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’.

Banks

File:Iceland-Reykjavik-Skolavordustigur-SPRON.jpg

A branch of local Icelandic savings bank SPRON.

On 29th September 2008 a plan was announced for the bank Glitnir to be nationalised by the Icelandic government with the purchase of a 75% stake for €600 million. 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. 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% stake in the bank had been approved by the bank.

The Financial Supervisory Authority (FME) took control of Landsbanki on 7th October. 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. The same day, FME took control of Glitnir.

On 8th 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. Chancellor of the Exchequer Alistair Darling announced that the UK government would foot the entire bill, estimated at £4 billion, and that he was taking steps to freeze the assets of Landsbanki. Under the Landsbanki Freezing Order 2008, passed on 8th 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. The freezing order took advantage of provisions in sections 4, 14 and Schedule 3 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”.

On 9th October the largest bank in Iceland, Kaupthing, was taken over by the FME, following the resignation of the entire board of directors. 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. 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”.

Effects outside Iceland

United Kingdom

It emerged on 9th October that over £760 million in cash for around 95 UK local authorities is invested in Icelandic banks. 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”.

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”. Geir Haarde replied that the remarks made by Brown were "not a true description" and that he would not be sanctioning any illegal behaviour.

Other countries

Other European countries have also been affected (though the New York Times described Britain as being "the biggest and noisiest complainant"). Austrian, Finnish and German banks each have some hundreds of millions of euros' exposure to the Icelandic banks.

Causes

The crisis came about gradually as banks became unable to refinance their debts. It is estimated that the four major banks hold foreign debt in excess of $100 billion, or about $300,000 per Icelandic resident, compared with Iceland’s gross domestic product of $14 billion. The króna, which was ranked by The Economist as the most overvalued currency in the world in early 2007, 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% of disposable income, which led to inflation.

In response to the rise in prices – 14% in the twelve months to September 2008, compared with a target of 2.5% – the Central Bank of Iceland has held interest rates high (15.5%). Such high interest rates, compared with 5.5% in the United Kingdom or 4% 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% in the twelve months to August 2008, compared to 5.0% GDP growth. The money supply in August 2008 was nearly four times the gross domestic product.

eBay

Online auction and shopping website eBay has reported that one seller has put up Iceland for sale. Auction started with 99 pence but had reached 10 million pounds (US $17.28 million). However, singer Bjork was "not included" in the sale. The notice read Located in the mid-Atlantic ridge in the North Atlantic Ocean, Iceland will provide the winning bidder with — a habitable environment, Icelandic Horses and admittedly a somewhat sketchy financial situation. Bidders' questions included: "Do you offer volcano/earthquake insurance?"

See also

• Financial crisis of 2007-2008
• List of bankrupt or acquired banks during the subprime mortgage crisis