In the comments to the last post a number of points were made that I thought I’d rather address in a separate post rather than try to respond to them in the comments box.
First, I get the sense that some people perceived the whole deal around the currency swap agreement [or currency swap lines, as it's evidently called] as Iceland having made an appeal to the United States to come to its aid. The comments were to the effect that the US is currently dealing with heavy issues of its own and consequently isn’t able to “help small states”.
Just to set the record straight: nobody is talking about the US coming to the aid of Iceland as a small state. The currency swap agreement is about something else entirely. To quote a report on mbl.is from 24 September: “According to Bloomberg, the banks have access to up to USD 30 billion which is intended to relieve pressure on global markets that depend on financing in that currency …. The objective of these measures is to increase trust and flow between financial institutions so that they will once again be prepared to lend money to one another instead of hoarding foreign currencies.”
Iceland has made these sorts of agreements in the past in conjunction with the other Nordic states, who generally apply as a single whole. This time, Iceland was left out because the US Treasury somewhat nebulously declared that there did not seem to be “reason or cause” to include Iceland in the agreement.This evening, after the Icelandic media had requested answers from the US Treasury in light of today’s announcement concerning Russia, another statement came from the Treasury saying it had not felt that Iceland’s need for dollars had been sufficiently well defined.
For the normal person on the street, that does not mean very much and one wonders whether it is intentionally meant to be vague. Whether it had anything to do with the Icelandic króna and its poor performance this year just isn’t clear. If that were the case, I don’t understand why they don’t just come out and say it … there is no reason for them to play coy if that were the case, business is business, and all that. That said, there would have to be some pretty strong reasons for them to refuse Iceland on that basis – after all, political, diplomatic and economic ties between our two nations have been excellent for years, Iceland has been a staunch ally of the US [despite massive demonstrations at times - read: the invasion of Iraq] so to NOT extend this goodwill and particularly when it was being extended to our Nordic partners has to constitute a pretty major snub. In the words of our Minister of Commerce and Industry today, and-I-quote: “The US gave us the finger.”
Secondly.
Despite what some of the foreign media is reporting, Iceland is not going bankrupt. Believe it or not [and this comes as a surprise to some of us here, too, what with all the fear mongering and doomsday predictions that are floating around these days] the Icelandic treasury has NO foreign debt [presumably that will change if they / we accept the loan from the Russians] and is, in fact, solid. In fact, the reason the Icelandic banks were able to borrow so much money overseas – the reason they became so large – is because the state was debt-free and foreign lenders assumed that it would step in and cover the banks’ debts if everything went belly-up [as has now happened, pretty much]. The problem here is that the three commercial banks are much larger than the GDP of the entire nation, so the nation simply cannot save them. Cannot and will not. Because a decision has been made not to take responsibility for the financial mess of a bunch of speculators. From what I understand people’s deposits are safe, but foreign shareholders will lose money if Landsbanki and Kaupthing go under [apparently Landsbanki is very precarious, while Kaupthing's status is risky but it may conceivably make it]. The Icelandic state has decided to do what it needs to do to make sure that it does not go down along with the banks.
What this means is that our financial house of cards as we know it will collapse and will have to be rebuilt. People will lose their jobs, things will be difficult for a while, but the good news is that the foundations of Iceland’s economy are strong. The fishing industry, tourism, aluminium exports – all are solid, plus we are a nation of well-educated and hard-working people who for centuries have had to deal with all kinds of adversities and have always pulled through. After the initial shock of yesterday and news of the banks’ demise, now that acceptance of the situation is setting in there is actually a lot of optimism going around. Every situation has its unique set of opportunities, and I think lots of people see this as an chance to re-think things, and to look for creative opportunities and solutions.
And on that note, I shall get off my soapbox.
{ 41 comments… read them below or add one }
Yep, that’s my view here too.
My sister was reading a book on the Rwandan genocides and was reminded of people that have real trouble. We’ll pull through here – a bit subdued but we were overdue for that anyway!
This is really disheartening. It’s upsetting to see s many economies suffering, but it’s frustrating to, yet again, be on “the dark side” as an American. I’m not sure what all the technicalities were regarding the swap lines, but it seems as though, even if the US had agreed to help, it would have reneged on the agreement due to its own crisis? Either way, once again, it makes us look bad.
That’s good news!
Thanks for your fantastic coverage of these financial events in Iceland, your blog is always so great to read.
Actually, I think there are a whole bunch of us who quite enjoy you and your soapbox.
Thanks for the update, and clarifications, etc. I’m still working on processing much of this information, and your information and perspective are a big help.
And as you know, I’m personally horrified by the US’ actions in this – or lack thereof. You know how I feel about Iceland, and trust me – I’m ashamed of our being seen as (or as having given, to be less nebulous) giving Iceland the finger.
Actually, what is happening in Iceland has had a huge impact in Britain! When Landsbanki was taken over, its UK operation – Icesave – was ordered to freeze all its customer’s accounts (I’ve read about 200,000). The result is panic and the news is often about nothing else, and everyone is wondering how to get their money back. This is part of the reason why bank shares here are in free-fall and the government may buy stakes in every bank according to reports. So, we’re all interconnected. I think all of us need all the luck we can get now.
Alda,
Thank you for the excellent information.
I’m sure it is a very difficult time in Iceland, but I have to agree with the observation that Iceland is a nation of survivors, and somehow you guys will get thru this, and come out even better than before.
I really don’t know what the US Treasury did or did not do with respect to any request from the government in Iceland concerning currency swaps. This entire financial mess is so difficult to understand.
I would like to address a portion of your latest post wherein you stated:
In the words of our Minister of Commerce and Industry today, and-I-quote: “The US gave us the finger.”
While I know you are only quoting what was said by a government official, for you to post those comments make me think you, or others, might believe them.
If a finger was given, it was not by the US, it was by the Bush administration. They are also the ones who decided to close the NATO base on such short notice, with the disruptions it caused for Icelanders.
Perhaps it is difficult to understand, but the Bush administration, while it does head the present government of the US, does not reflect the desires of national will, as reflected in the low approval rating for his administration. Fortunately, we here will have an opportunity to change that in a few weeks.
The point I want to make is that the quote paints the entire US with one broad stroke. The actual problem is with the Bush administration of the US, which will end soon. In my opinon, the US does care about Iceland, but the Bush administration does not. That will change shortly
As always, thanks your great observations about what is going on there.
While it’s more than fair to point out that credit swap lines aren’t foreign aid in the commonly understood sense, and that this isn’t a question of Iceland going bust as a country, I think that you’re underplaying the significance of a shaky banking industry with liabilities larger than the national GDP based on foreign lending and a plummeting currency. Realistically, any credit swap line would be invaluable to maintain liquidity in Icelandic banks if their liabilities exceed what the government can generate, and that’s not a position that suggests outflow of funds from Iceland.
None of which is to say that the US Treasury is in the right. Given the tone of the last 8 years, I can think of at least 3 reasons that they didn’t engage Iceland on this:
1) They forgot you were there.
2) They are still upset about the base (even though it was a unilateral withdrawal)
3) They don’t care
and a bonus 4th reason – because Icelandic banks aren’t holding toxic investments, derivatives, and other poison pills devised on Wall Street, they are not getting assistance in recovering from the effects of same.
I want to thank you for your comprehensive reporting of the events unfolding in Iceland. I just finished reading several articles and got the feeling that the reporters were sensationalizing instead of actually reporting. When I read news I have a crazy habit of wanting to read facts, so being able to turn to your writings and get details is far more helpful and hopeful than reading the news.
Thank you so much for your diligence. I worked on the Icelandic show Lazy Town and loved all of my experiences in Iceland.
In response to a previous post…if it’s only the Bush Administration…then what…as Americans are we doing to pursuade the Bush Administration to act otherwise. I think we need to take responsiblity before we can divide the actions of the US from the American people.
I agree with the Minister of Commerce of Iceland.
Hi Alda,
I have been reading your excellent coverage of the situation in Iceland
for days now. Its been fascinating to read each new installment to see
how things are progressing. We’ve had a bit of coverage in Australia
about it on the news (but only a very brief overview) so it has been
very informative and interesting to hear what you’ve had to say… Thanks again !
Once again, Dubya and his administration screws over the US’s allies in Europe.
I am very happy to hear that Iceland is doing much better than the media claims (and that may explain why Norway’s government hasn’t bothered to try to bail you guys out) and I am definitely pleased to hear that Iceland will not pay for the stupidity of a few gamblers. The Saga Island rocks!
Thanks for the great insight on what’s going on! It really ticked me off to hear the US snubbed Iceland in its moment of need like that today. Glad you cleared it up. Although, it seemed that more than a few Icelanders were glad to see the US finally go back in 2006, if I remember correctly. And then there’s that whole messy incident involving Bobby Fischer…
Alda,
I have been reading your posts with great interest in the last week. I have no doubt that the ‘real’ Icelandic industries like hydropower, tourism and fisheries will help the country pull through.
However, there definitely seems to have been a bubble element to what was going on there. It is always dangerous if people are taking out foreign currency mortgages and from what I have read there were quite some CHF and Yen loans issued which are now way more expensive to service. I find it strange that they want banks and pension funds to sell their overseas assets when there could be no worse time to do this. Anyway, Iceland is dear to my heart so I hope that things will improve quickly.
I’ve been watching the events of the past few days with interest. I’m a random Brit who stumbled on your blog a couple of years ago after falling in love with Iceland.
Its definitely a relief to see that Iceland isn’t going bankrupt – the news here has been full of it. I’ve seen stories of people hoarding food at the supermarket because people are so worried and because the supermarkets don’t know if they are going to be able to pay for produce especially fresh imported goods because they can’t get credit and the krona has suffered so much.
I spent the evening bothering people on facebook, shouting about the virtues of Icelandic Vodka and how everyone should visit the country (especially since because since the Euro is so high against the pound) that it is so much more affordable for us. Silly I know, but with the predictions of doom, panic and general melt down I guess I wanted to just help in some small way….
I’d like to comment on a post by Ronald.
He stated: In response to a previous post…if it’s only the Bush Administration…then what…as Americans are we doing to pursuade the Bush Administration to act otherwise. I think we need to take responsiblity before we can divide the actions of the US from the American people.
My reply would be this:
Ronald, I’m sure you know that that is why our constitution mandates elections on a regular basis. To be rid of those who do not conform with the will of the people.
How the US Treasury deals with Iceland is a matter dealt with by the current (Bush) administration, and we have no say over what they do. That administration was elected, and they will serve until a new election. At that time, we can register our disapproval by replacing the current administration.
That is how government here works.
I, as an American, can only bring change at election time to what a current administration has been doing. Once elected, they do what they want, within lawful bounds.
The point I want to make, and will repeat here, is that any actions by the US Treasury are the actions of the present administration and not the US as a whole. The low popularity of the present administration indicates how many people here do not like what is hapening. Yet, they will run things until the next exection. That is how it works.
The American people will take responsability for what has gone on , and make changes with elected officials in the next exection. Between elections,those elected run the show.
The quote from the Icelandic official was ” The US gave the finger to Iceland”.
Again, the complexities of the financial mess are beyond me, but, as an American citizen, I would never give the finger to Iceland. The Icelandic official was wrong. He should have stated “The US – 1 gave the finger to Iceland”
I do love Iceland
You might like to know that the British Chancellor (Finance Minister) has just announced that Icesave (Landsbanki) customers will be refunded by the British compensation scheme as the Icelanic government has defaulted on it’s obligations.
From your viewpoint, has the government actually run out of money? I hope you have managed to get your money back.
You say that you think people’s deposits are safe – perhaps so for savers in Iceland. But the BBC is reporting that the Icelandic PM has told our Chancellor that Iceland has no intention of honouring the terms of the compensation scehme for deposits in Icesave, the UK arm of Landsbanki. In the event of bank failure, Iceland was supposed to cover the first £16,000 of deposits in these accounts.
Which perhaps suggests that given the huge fall in the krona (and even in spite of your lack of debt), the Icelandic national coffers are closer to empty than is being admitted.
http://news.bbc.co.uk/1/hi/business/7658417.stm
Andrew, there seems to be some misunderstanding here, the Landsbanki has not yet gone bankrupt so the Icelandic government is not obliged to step in yet so they haven´t defaulted (as it stands now).
The bank is being split up (I belive) into two seperate entities, one domestic and one foreign and the foreign part will have all the assets and obligations that Landsbanki has abroad.
If that bank will not be able to keep the Icesave operating then the Icelandic government will have to step in.
Very nice summary.
@Don: Its always the problem, that nations are blamed for their governments.
Again a brilliant, clear and concise picture of what is going on. We all know that the house of cards had to come down at some stage, just would have been less traumatic if they had done it one card at a time… By the way what happened to sjóð 9?
Sigvaldi, didn´t Davíð Oddsson (our National Bank manager) say that the state will not be responsible for the debt of the banks? The number one priority would be to protect the savings of Icelanders and save the housing market. As I understand it, any debt the banks ran up, will just (have to) be written off and we move on. In short, the government is not guaranteeing any foreign debt made by the idiots running the banks, the government is just stepping in to save us over here.
Please correct me if I´m wrong.
Snorri – I believe that what Davíð said is that people’s deposits (innistæður) are safe. All other debts (to lenders, etc.) will not be compensated for by the state.
Don – I think most people take what our Minister of Commerce said to mean the US government – not normal American citizens.
sigga – Fund 9 devalued by 7 percent but I, personally, was able to get my money out last Friday. Fund 1 is still frozen.
First of all thanks for your blog. A really interesting read.
Iceland is facing hard times.
A country can go bankrupt and this possibility gets increasingly likely with every day. A small nation with a current account deficit of 25% is a recipe for disaster. Unfortunately iceland was deluding itself.
This report written barely a year ago describes the delusion pretty well:
To sum it up:
25% current account deficit is no problem, because our investments are doing so well, therefore capital gains – realised or not – should be included.
Yeah right, financial madness of course, but its too late now anyway.
Your government WAS debtfree, but now, with the banks being nationalised, suddenly a lot of debt appears on the balance sheet, and worse this debt is in foreign currency. With the krona in free fall (dont even get me started with this ridiculous currency peg) Iceland has 2 possible options
1. The Asian way
Save, save, save. Go cap in hand to international institutions like the IMF and try to raise loans with friendly and not so friendly (China?, Venezuela?) foreign governments. A deep recession is inevitable anyway, but with competitive export earnings (read: devaluation) the government should be able to pay off the debt to foreign savers. Of course a price will have to be paid, meaning some icelandic assets will end up in the hand of foreigners. In the end – say 5-7 years – membership of the eu might even be a possibility
2. the Argentinian way
If though the government decides to protect icelandic savers and to hell with those foreigners then the situation becomes really nasty.
Of course membership in the eu or the eurozone is out of the question for the next 50 years. Iceland will be probably kicked out of the EWR as well.
The UK and the Netherlands are making already threatening noises, and no country will look away if their small savers get shafted. Icelandic assets in foreign countries will be seized, and trade privileges cut. With no possibility of raising fresh loans, paying for imports will be cash in advance and foreign currency please.
I wish you all the best.
This is great blog. I must say I do not have much sympathy for Iceland’s predicament. Why did such a small country allow it’s banks to over leverage to such an extent? Why were local Icelander’s allowed to take out foreign currency pegged house/car loans?
Even now, Iceland government is not being realistic or honest – it is pegging the currency at an unrealistically high level which is not supported by any fundamentals of the economy/credit-risk.
Also, it seems that the Icelandic government is washing off it’s hand with regard to guarantees for the bank deposits for Landsbanki IceSave in UK – frankly, I think that is quite dishonest, as these have been underwritten by the Icelandic state and they have a legal obligation to honor their insurance product…no wonder Gordon Brown is planning to sue
I know I am being quite blunt and harsh, but I do feel that Icelandic people should have been more vigilant and demanded better economic policies from their government.
I truly hope you are correct but sadly I suspect Iceland is going to default. A few points:
The EUR/ISK peg is unrealistic at best and pure fantasy at worst. The Central Bank does not have the foreign exchange resources to defend the ISK. Actually since I began this post the peg has been given up on, I assume the krona is now in free fall.
“Oct. 8 (Bloomberg) — Iceland’s krona was priced at almost 50 percent below the peg against the euro set by the central bank yesterday to stabilize the currency as regulators said they took control of Glitnir Bank hf, the country’s No. 3 lender. ”
” Oct. 8 (Bloomberg) — Iceland’s government scrapped plans to nationalize Glitnir Bank hf, the country’s No. 3 lender, and put the company into receivership under the control of the state regulator.
The Financial Supervisory Authority’s takeover of the bank comes after the government realized that the “difficulties of the bank were much greater” than previously estimated, central bank Governor David Oddsson told television broadcaster RUV late yesterday. ”
What this means I am not sure. It is obvious that the banking problems are discovered to be more severe than previously thought.
While savings may be protected money in funds is likely gone (as a Fund 1 holder this is not happy for me).
Icesave is likely insolvent, this will bring a flood of litigation from the UK.
The credit agencies will downgrade Iceland debt making money harder to come by and more expensive.
Haarde says today”"Iceland has never defaulted on sovereign debt and won’t,” Admirable thought but it is somewhat clear that no one as yet understands the depth of the banking crisis so the guarantee rings somewhat hollow.
A bleak situation indeed but Iceland will survive. Yes there will be changes, financial pain, weeping and gnashing of teeth. Haarde said the other day:
“Thus with Icelandic optimism, fortitude and solidarity as weapons, we will ride out the storm. God bless Iceland.”
IO believe that to be true.
Thought you might be interested in this commentary from a Norwegian:
http://www.youtube.com/watch?v=gZA_f12t0QE
Thanks for all the great blogging!
BP: “…I do feel that Icelandic people should have been more vigilant and demanded better economic policies from their government.”
I agree. But, sheesh — the same could be said for us Americans! And then some!
Iceland is likely bankrupt right now but no one yet has the information to make a determination. 301 krona to the euro, Central Bank unsure what to do or what it can do, private banks failing and no one will take krona for foreign exchange payments.
The Icelandic government has appeared hapless, disorganized and in way over its head. Private banks with 10x liabilities of GDP? How can a democratically elected government allow such a thing to occur? Hint – the Icelandic people allowed it, not a few speculators were the cause but the Icelandic nation as a whole who benefited for years from the “nordic tiger”.
Now it is time to pay the piper and Dave is right-you have few choices and none of them nice.
Hi, just an answer to Trader here above.
Iceland is a member of the EEZ and the banks (and other companies) of Iceland were able to trade within the EU without consulting Icelandic authorities.
The growth of the banks was thus to a great extent outside the jurisdiction of Icelandic authorities and an attempt at intervention would probably have been in breach of the EEZ agreement.
It was probably more up to the British authorities to step in at an earlier date.
Sigvaldi ,
I would hope that is not true. If in fact Iceland government gave up jurisdiction over Iceland’s banks to operate within the EEZ that would in hindsight seem to be a huge loophole/mistake in the regulation.
I fail to see how British authorities could have acted earlier as they depend on information from private Icelandic institutions.
Kristján, if I understand the EEZ (and EU) agreements correctly they allow people to trade and operate within the EEZ as if they were local companies, and thus under the control of local laws and regulations of the countries they operate in.
If the Icelandic authorities would forbid an Icelandic bank to purchase a UK bank then that would be in violation of EEZ rules (four freedoms and all that).
I think Sigvaldi is referring to the EEA – European Economic Area.
Sig,
That is a plausible explanation which leaves Iceland in difficult spot.
Banks having foreign liabilities at multiples of national GDP are a huge risk to sovereign debt and national currency. If national (governmental) bodies have no ability to control the issue of foreign liabilities within their own countries, yet are likely responsible for some portion of these liabilities, what has now happened to Iceland was almost predestined.
Trader does make some valid points. The Iceland government has appeared not in control and unsure and has made contradictory statements (loan is on – loan is off/in progress) and taken contradictory actions (peg currency – unpeg currency, nationalize banks – send banks to receivership). Better not to speak until you understand the parameters of what you are dealing with.
Hi Alda,
I love your blog and it is with great interest that I read how this crisis is being portrayed in Iceland. Western Europe has already made up its mind about Iceland: bankrupt. I must add that a prime minister saying on national television that his country is at risk of bankruptcy is really the dumbest thing I’ve ever heard of. In case you’re wondering, that has been the headline all over the world, and even if the situation was not rosy before, it certainly is hopeless now.
It saddens me that a small and delicious country like yours has to go through such hard times right now. Especially because only a few happy people made handsome profits during the bubble and everyone will have to pay right now.
I am also sad to have to agree with reader Dave on the possible roads ahead. A crisis like this in the financial system will leak into the normal economy. This is something that cannot be isolated and contained.
A likely outcome will be that the Iceland Crown will continue to decline, and even the fact that the national debt is in crowns will not give you sufficient shelter. Most likely holders of crowns (national and international) will swap it for euros, yens, dollars and swiss francs in an attempt to preserve their wealth. Thus bankrupting Iceland effectively.
Holders of government bonds (at 15% interest! no less) are worse off. If they see back their money, it will not make them whole. Luckily a lot of the despised hedge funds will suffer. I’m hoping not too many old age pensioners in Iceland invested in them.
After all this doom and gloom I would like to point you at a glimmer of hope for your economy. Though it will be at some expense to your splendid culture. Tourism. Iceland should embark on a massive add campaign to promote tourism to Iceland, maybe even (part)-nationalising the airlines, given their own troubles at the moment.
But it should be managed carefully, so as not to create the next bubble.
Sack your PM!
Marc
On the swap issue: it is my opinion that the Bush administration has kept tabs of all countries that resisted their Iraq invasion and has been settling the scores when the opportunities presented themselves. I’m sure they have a kind of cell of vindictive operations.
Alda, EEZ is the European Economic zone, the EEA is probably a more common usage nowadays.
Kristjan, most of the foreign liabilities of the Icelandic banks were outside of Iceland´s borders, only a fraction of the borrowing was for use in Iceland so it is a very difficult situation that Iceland finds itself in now.
Very interesting blog post written in March 2008.
Is Iceland The Canary In The Mineshaft of Global Financial Contagion?
http://my.opera.com/richardinbellingham/blog/show.dml/1856200
Sigvaldi – I know what it is, and yes, EEA is a more common use these days.
Marc – as it happens, Iceland gave Bush their full backing in the Iraq war. Against the will of the majority of the population.
Ok, I stand corrected.
Hey Alda,
just discovered your blog and i love it! (as maybe you can tell from the posts i left here in recent days)
i just read a newspaper article that said that, with all the confusion around the krona being linked with the euro, some credit card companies now trade at 1:350! one euro equals 350(!) krona. Last year arond this time it was 85isk for a euro and for a country that imports more than 80% of its food…. that spell disaster!!! That means that inflation is out of hand. Importing would be near to impossible. Maybe with christmas on the way we should start looking into charity from abroad!
Ino, Iceland imports ca 30% of it´s food (and food is our main export) so this is not quite as disastrous as you think.
Sorry to say Sigvaldi, but it is just not true. Just look at what is being sold in yer local Bonus. Only the dairy, lamb and fish are 100% Icelandic, but even simple things like potatoes and grains for bread are imported. And lets not forget that cows are fed with imported feed and that sheep farming needs foreign fertilizer. True, you will fetch a better price for fish, but import far outweights Icelandic exports. I’m afraid that we might be looking at 25% inflation over the next few months….
Excellent analysis. However, personal bankruptcies are rising esp see http://www.slanderyou2.blogspot.com
Goldman Sacks and the British reserve bank did the nasty to Iceland and our government USA didn’t give a dam and most likely helped the crisis happen. My advice to Iceland is to NOT pay a red cent to those f’ing banks. rebuild it’s country industrial complex and become self sufficient that and most importantly Base it’s money on gold then no bank can devalue it’s money.
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