The Icelandic Central Bank gets slammed

Tomorrow it will be a week since the takeover of Glitnir bank by the Icelandic state, and as the dust begins to settle, serious contenders are weighing in with some extremely harsh criticism of the Icelandic Central Bank and its governors.

One is Richard Portes, a professor at the London School of Business, who last year studied and wrote a report on the Icelandic banks for the Icelandic Chamber of Commerce. Since then he has been a frequent commenter on Iceland’s banking system in the foreign media. In Fréttablaðið today he calls the takeover of Glitnir by the Central Banka “fateful mistake” that set off an avalanche that needs to be stopped by all possible means. According to Portes, he’s gone over the six-month financial statements of all the Icelandic banks and says their fundamental assets are solid, but they lack liquid funds like most other banks worldwide. Consequently the Central Banks in various countries have funneled funds to their banks against various types of collateral, in keeping with their roles as lenders of last resort, and this is precisely what the Central Bank of Iceland should have done with Glitnir.

According to Portes:

The nationalization was a massive intervention that generates a lot of attention and more questions than answers. In addition, the Executive Director of the Central Bank [one Davíð Oddsson] has said that without nationalization Glitnir would have gone bankrupt. That is an absurd remark about a bank that was wrestling with a temporary lack of liquid funds amidst bizarre circumstances on the global markets but was otherwise well managed and had a good capital position. Those comments might apply to a bank that is on the verge of bankruptcy but I have not heard anyone maintain that Glitnir was in such a dire position.

Portes goes on to say that he is convinced that the government is working on appropriate measures to deal with the current crisis, and that such measures are urgently needed. However, he urges the government and its advisors to ignore the advice dispensed by the Central Bank. The Central Bank has repeatedly made grave mistakes, among other things by not increasing its foreign currency reserve. In fact he says it is incomprehensible how the Central Bank has operated when it comes to foreign currency matters in general.

To me that’s a fairly shocking verdict over the operations of our Central Bank and our government’s fiscal  policy. And Portes is not the only person I have heard slam the Central Bank’s operations today. I watched one of our foremost economic experts, Þorsteinn Gylfason, professor of Economics at the University of Iceland, harshly criticize the CB’s governors on the Silfur Egils talk show this afternoon. He made no secret of his opinion that the Central Bank’s leaders are incompetent buffoons and was adamant that the Icelandic government must dismiss them lot of them [we have three - WHY?] immediately after the weekend if it wanted to maintain any sort of credibility in the global financial markets. He, too, claimed that the Central Bank had made a series of bad mistakes over the last few years and it was vital for it to be put in the hands of professionals who knew what the hell they were doing.

That particular interview was highly enlightening for a commoner like our YT. Here we’ve just been plodding along in our little economy thinking everything was hunky dory while our Central Bank was being run by Huwey, Dewey and Louie and the government’s monetary policy by freaking Donald Duck. Jeezus! The good professor had myriad other fascinating things to say, like that the government needed to release a statement PRONTO that they intended to apply for EU membership, that we needed to adopt the euro so that this sort of crisis did not repeat itself, and that Iceland needed to approach the International Monetary Fund for assistance.

Anyway. Our fearless leaders have been burning the midnight oil all weekend in back-to-back meetings and, indeed, rumours have been circulating that they WILL issue a statement concerning the EU tomorrow. I’m not convinced they’ll go through with the application, though – the Independence Party which despite its talent for royally screwing things up [as per the above] seems to always get its way in the end, and they are notoriously opposed to EU membership [guess the word 'independence' sort of gives it away]. I’m also convinced that they’re too lame to fire Davíð Oddsson’s ass from the Central Bank because he’s their Main Man and they’re too freaking codependent. Still, for once there’s no way for things to go back to the way they have always have been, so let’s see how they intend to proceed. If nothing else, tomorrow will be an ‘interesting’ day.

UPDATE: The government has just announced [at 11 pm] that it has reached an agreement with the Icelandic banks to sell their overseas assets in order to inject capital into the economy here. Presumably the pension funds will do the same, just like the government had been pressing them to do, which our national expert Þorsteinn Gylfason [see above] warned heavily against. In his view, pension funds should not be used to deal with serious crises – you don’t gamble with the future. However, one of the stipulations the pension funds had set was for the banks to do the same, which it appears they have agreed to do.

AND AS ON CUE, A STORM IS BREWING
It has rained buckets all day today compounded by nasty winds. Went out for a run anyway in my rain suit and got soaked to the bone. I’ve made a decision that this winter I’m going to stop this nonsense of running outside all the time. I’m going to join a fitness studio. EPI and I both. Just watch us. It’s a fair bit warmer than it’s been, though, right now 8°C [46F] and sunrise was at 7:49 am, sunset was at 6:41 pm.

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