The party is over for Iceland
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The Icelandic government has been granted control over national banks as the island's famously liberal banking sector tottered on the edge, raising the grim spectre of national bankruptcy.
Raising the spectre of national bankruptcy, the Icelandic Prime Minister Geir Haarde has announced a series of sweeping measures to contain the financial crisis, essentially granting the government control over national banks.
On Tuesday, the government said it had taken control of the country's second largest bank, Landsbanki, as the island's financial sector tottered on the verge of collapse. "The Icelandic Financial Supervisory Authority (IFSA) has, under powers granted by the Icelandic parliament, proceeded to take control of Landsbanki," the government agency said in a statement.
Earlier, the ruling and opposition parties united on a bill that gives the state the ability to intervene at will in the country’s embattled banks, a surprising turn of events in what was once one of Europe’s most liberal economies.
“The Icelandic government is taking extraordinary measures, the most radical in Europe,” says Chris Moore, FRANCE 24 business columnist. “It will be able to fire bank’s board members, block funds, and force mergers”, he adds.
The bill will also allow the government to take over housing loans held by the banks and put them in a government housing fund, in an effort to guarantee the mortgages contracted by individuals threatened by the credit crunch.
Earlier Monday, the government offered an unlimited guarantee for all deposits in domestic banks, and ordered a halt in trading in all of the island’s banks. “I assure you that my government will never stray away from its policy of securing economic stability in every way possible, and will make the sacrifices necessary”, Haarde stated in a speech at the Althingi parliament.
“Sucked into the global banking swell”
In a rare and pessimistic televised address to the nation, Haarde warned that the country was “faced with the very real danger… that the Icelandic economy, in the worse case, could be sucked into the global banking swell and end in national bankruptcy.” “It will take the international and financial community a long time to recover and everything indicates that the situation will worsen until we see the shore”, he predicted.
The islandic krona, a volatile currency at the best of times, has begun a descent that makes its previous slides pale in comparison, losing more than 45% of its value. Inflation in the country, which is heavily dependent of imports, is set to rocket.
Standard and Poor’s rating agency downgraded Iceland’s credit rating by two notches to “BBB” from “A-“, saying that while the government actions will limit risks on the budget, they will also negatively impact economic growth by cutting bank’s access to the international markets.
How did Iceland, an island of just 300,000 inhabitants far flung in the middle of the North Atlantic, find itself in the epicenter of the global financial crisis?
“Iceland is a sort of microcosm of the world crisis”, analyses FRANCE 24’s Chris Moore. The country’s financial stature had ballooned in recent years as banks expanded overseas. Investors took large positions in its high-yielding currency, and foreign firms poured money into local projects. The resulting oversized finance sector – eight times Iceland’s gross domestic product – has made the country particularly vulnerable to the current global turmoil.
“Because Iceland’s economy is built on banking and financial services, when that sector goes wrong things don’t look so rosy any more”, sums up Moore.
Iceland’s minister for social affairs Jòhanna Sigurdardottir blamed the country’s plight on banker’s greed-induced lack of foresight. “The system of stock options increased their risk appetite too greatly”, she said in a speech, adding that “greed controlled their actions, and with their sky-high salaries they lost the moral connection to the nation. They will have to learn from their mistakes.”
The government has asked national pension funds to relocate part of their assets in Iceland to increase the flow of foreign currency in the country. The funds accepted, provided that Icelandic banks, financial institutions and investment companies do the same. “Everyone has to participate in this rescue mission. Otherwise it cannot be done”, Arnar Sigmundsson, chairman of the National Association of pension funds, told the Iceland Review.
Unity and determination seem to be the mots d’ordre of the current crisis, with Prime Minister Haarde urging Icelanders to “stand together and show fortitude”.
“With Icelandic optimism, fortitude and solidarity as weapons, we will ride out the storm”, he said.