PDA

View Full Version : Iceland teeters on the brink of bankruptcy



north_malaysian
10-08-2008, 01:52 AM
Iceland teeters on the brink of bankruptcy

By JANE WARDELL, AP Business Writer Tue Oct 7, 3:40 PM ET



REYKJAVIK, Iceland - This volcanic island near the Arctic Circle is on the brink of becoming the first "national bankruptcy" of the global financial meltdown.

Home to just 320,000 people on a territory the size of Kentucky, Iceland has formidable international reach because of an outsized banking sector that set out with Viking confidence to conquer swaths of the British economy — from fashion retailers to top soccer teams.

The strategy gave Icelanders one of the world's highest per capita incomes. But now they are watching helplessly as their economy implodes — their currency losing almost half its value, and their heavily exposed banks collapsing under the weight of debts incurred by lending in the boom times.

"Everything is closed. We couldn't sell our stock or take money from the bank," said Johann Sigurdsson as he left a branch of Landsbanki in downtown Reykjavik.

The government had earlier announced it had nationalized the bank under emergency laws enacted to deal with the crisis.

"We have been forced to take decisive action to save the country," Prime Minister Geir H. Haarde said of those sweeping new powers that allow the government to take over companies, limit the authority of boards, and call shareholder meetings.

A full-blown collapse of Iceland's financial system would send shock waves across Europe, given the heavy investment by Icelandic banks and companies across the continent.

One of Iceland's biggest companies, retailing investment group Baugur, owns or has stakes in dozens of major European retailers — including enough to make it the largest private company in Britain, where it owns a handful of stores such as the famous toy store Hamley's.

Kaupthing, Iceland's largest bank and one of those whose share trading was suspended last week to stop a huge sell-off, has also invested in European retail groups.

Thousands of Britons have accounts with Icesave, the online arm of Landsbanki that regulators said was likely to file for bankruptcy after it stopped permitting customers to withdraw money from their accounts Tuesday.

To try to wrest control of the spiraling situation, the government also loaned $680 million to Kaupthing to tide it over and said it was negotiating a $5.4 billion loan from Russia to shore up the nation's finances.

The speed of Iceland's downfall in the week since it announced it was nationalizing Glitnir bank, the country's third largest, caught many by surprise despite warnings that it was the "canary in the coal mine" of the global credit squeeze.

Famous for its cod fishing industry, geysers, moonscape and the Blue Lagoon, Iceland was the site of the Cold War showdown in which Bobby Fischer of the United States defeated Boris Spassky of the Soviet Union in 1972 for the world chess championship. Last year, Iceland won the U.N.'s "best country to live in" poll, with its residents deemed the most contented in the world.

No more.

Despite sunny skies Tuesday after three days of unseasonably cold weather, Reykjavik's mood remained grim — cafes were half-empty, real estate agents sat idle, and retailers reported few sales.

"I'm really starting to get worried now. Everything is bad news. I don't know what's happening," said retiree Helga Jonsdottir as she headed to a supermarket.

Icelanders are also beginning to question how a relative few were able to generate the disproportionate wealth — and associated debt — that Haarde has warned puts the entire country at risk of bankruptcy.


Iceland's reinvention from the poor cousin in Europe to one of the region's wealthiest countries dates to the deregulation of the banking industry and the creation of the domestic stock market in the mid-1990s.

Those free market reforms turned Iceland from a conservative, inward-looking country to one of a new generation of internationally educated young businessmen and women who were determined to give Iceland a modern profile far beyond its fishing base.

Entrepreneurs become its greatest export, as banks and companies marched across Europe and their acquisition wallets were filled by a stock market boom and a well-funded pension system. Among the purchases were the iconic Hamley's toy store and the West Ham soccer team.

Back home, the average family's wealth soared 45 percent in half a decade and gross domestic product rose at around 5 percent a year.
But the whole system was built on a shaky foundation of foreign debt.

The country's top four banks now hold foreign liabilities in excess of $100 billion, debts that dwarf Iceland's gross domestic product of $14 billion.

Those external liabilities mean the private sector has had great difficulty financing its debts, such as the more than $5.25 billion racked up by Kaupthing in five years to help fund British deals.

Iceland is unique "because the sheer size of its financial sector puts it in a vulnerable situation, and its currency has always been seen as a high risk and high yield," said Venla Sipila, a senior economist at Global Insight in London.

The krona is suffering in part from a withdrawal by a falloff in what are called carry trades — where investors borrow cheaply in a country with low rates, such as Japan, and invest in a country where returns, and often risks, are higher.

After watching the free-fall for several days, the Central Bank of Iceland stepped in Tuesday to fix the exchange rate of the currency at 175 — a level equal to 131 krona against the euro.

Haarde said he believed the measures had renewed confidence in the system. He also was critical of the lack of an Europe-wide response to the crisis, saying Iceland had been forced to adopt an "every-country-for-itself" mentality.

He acknowledged that Iceland's financial reputation was likely to suffer from both the crisis and the response despite strong fundamentals such as the fishing industry and clean and renewable energy resources.

As regular Icelanders begin to blame the government and market regulators, Haarde said the banks had been "victims of external circumstances."

Richard Portes of the London Business School agreed, noting the banks were well-capitalized and had not bought any of the toxic debt that has brought down banks elsewhere.
"I believe it is absolutely wrong to say these banks were reckless," said. "Quite the contrary. They were hugely unlucky."

Source: http://news.yahoo.com/s/ap/20081007/...eland_meltdown
Reply

Login/Register to hide ads. Scroll down for more posts
Mawaddah
10-08-2008, 01:56 AM
I was going to post this. It was the topic of our breakfast discussion today. World-wide recession anyone?
Reply

north_malaysian
10-08-2008, 01:59 AM
Originally Posted by Mawaddah
I was going to post this. It was the topic of our breakfast discussion today. World-wide recession anyone?
and it should be a lil bit worser in Malaysia as we're facing political uncertainty too....
Reply

Mawaddah
10-08-2008, 02:04 AM
:sl:

^ I have a suspicion that alot of Malaysians dont really know the dire state of the economy? whenever I speak about it to someone they give me a blank stare and go on talking about the tens of thousands they intend on borrowing from the bank...not a very smart move at this moment.
Reply

Welcome, Guest!
Hey there! Looks like you're enjoying the discussion, but you're not signed up for an account.

When you create an account, you can participate in the discussions and share your thoughts. You also get notifications, here and via email, whenever new posts are made. And you can like posts and make new friends.
Sign Up
north_malaysian
10-08-2008, 02:12 AM
Originally Posted by Mawaddah
:sl:

^ I have a suspicion that alot of Malaysians dont really know the dire state of the economy? whenever I speak about it to someone they give me a blank stare and go on talking about the tens of thousands they intend on borrowing from the bank...not a very smart move at this moment.
Yes.... Malaysians dont really know about the economics as they're not interested in it. This is the time when we need to have as much cash as we can...not taking loans, starting new business or investing...

Anwar Ibrahim had told in a rally I attended in July that Malaysia would face the harshest economic crisis in October... but how many mainstream news covered that?

Our current government loves to hide many things from the public. :grumbling
Reply

Mawaddah
10-08-2008, 02:16 AM
^ So true about the government hiding things!! I bought The Star newspaper yesterday expecting to see the current crisis making headlines, and I was shocked to see that it was only confined to a couple of pages in the Business section! and not even any detail at that...it's so scary...
Reply

north_malaysian
10-08-2008, 02:25 AM
Originally Posted by Mawaddah
^ So true about the government hiding things!! I bought The Star newspaper yesterday expecting to see the current crisis making headlines, and I was shocked to see that it was only confined to a couple of pages in the Business section! and not even any detail at that...it's so scary...
and you're talking about an English language daily.....how about Malay language dailies.....I'm not surprised if those dailies are still talking about the "developments" and "successes" of the country's economy.
Reply

Nawal89
10-08-2008, 02:28 AM
I'm feeling sorry for all the people who are still paying mortgages on their homes.
Reply

north_malaysian
10-08-2008, 03:21 AM
Originally Posted by Nawal89
I'm feeling sorry for all the people who are still paying mortgages on their homes.
I feel sorry to the Icelanders...the best place to live and one of the highest income in the world who are currently facing this problem.
Reply

Hey there! Looks like you're enjoying the discussion, but you're not signed up for an account.

When you create an account, you can participate in the discussions and share your thoughts. You also get notifications, here and via email, whenever new posts are made. And you can like posts and make new friends.
Sign Up

Similar Threads

  1. Replies: 0
    Last Post: 05-15-2010, 05:10 AM
  2. Replies: 8
    Last Post: 04-17-2010, 05:43 AM
  3. Replies: 14
    Last Post: 02-11-2007, 03:11 PM
  4. Replies: 0
    Last Post: 01-02-2007, 05:18 AM

IslamicBoard

Experience a richer experience on our mobile app!