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Icelandic government battles to save the economy
Time appeared to be running out for Iceland to deliver a solution to the financial crisis as the currency slumped 30% against the euro
The Icelandic government tonight presented an emergency bill giving it sweeping powers over the nation's banks as it battled to save the country from financial ruin.
In an address broadcast on Icelandic television, prime minister Geir Haarde said the bill, supported by opposition parties, would allow the government to push through mergers between the battered Icelandic banks or force them to declare bankruptcy.
Haarde, who had spent the weekend in intensive talks, made it clear how urgent the need for action now was. "As recently as last night, it looked like the banks could continue operations for a while," he said. "This morning and today, things have totally changed for the worse." Time appeared to be running out for Iceland to deliver a solution to the financial crisis today as its currency, the krona, slumped 30% against the euro.
The emergency bill, which parliament was due to adopt last night, would also allow the government to take over housing loans held by the banks and put them in a government housing fund.
The financial regulator had earlier suspended shares in Iceland's main banks to prevent panic selling. The government also followed the likes of Ireland and Germany by guaranteeing all of the domestic deposits in Icelandic savings accounts, although UK savers in the popular Icesave and Kaupthing Edge accounts run by the Icelandic banks will not be covered.
Concerns about the Icelandic economy grew stronger last week after the government seized control of the third largest bank Glitnir, taking a 75% stake in return for €600m - Haarde warning Icelanders at the time of "the inevitable cut in living standards" to come.
The falling currency, which closed at a record low of 230 Icelandic krona to the euro, is worsening the crisis for the banks, which are shouldering large overseas debts, and for many thousands of individuals in Iceland who were encouraged to take out car loans and mortgages in foreign currencies in recent years.
In Iceland, there was widespread fear. Sigridur Dögg Audunsdottir, a local government worker in Reykjavik said everyone in the country was "holding their breath". She today withdrew her cash from the bank, all the way to her overdraft limit, to make sure her family had enough to live on. "It is just unimaginable. It is so dark and gloomy, we have never experienced anything like this. I took out my money just to be safe, because I felt I had to do something. We've all been living ahead of ourselves, so in many ways this was inevitable. People here have been so obssessed with money. Iceland is like a nouveau riche country."
A collapse in Iceland would severely dent confidence in the broader financial markets. But it also has the potential for direct impact in Britain, with the main banks funding a string of companies and high rolling entrepreneurs including Robert Tchenguiz, a large investor in Sainsbury's, chef Gordon Ramsay, the property tycoon Candy brothers and the chairman of West Ham Football Club, Bjorgolfur Gudmundsson.
One of Iceland's biggest companies, Baugur, has stakes in a swathe of the British high street, including House of Fraser, Karen Millen, Oasis and Whittard of Chelsea. One of the biggest credit insurance firms has stopped covering suppliers to Baugur controlled stores and the company has been furiously fighting rumours that it could be in trouble. In a statement over the weekend, it reiterated that most of the funding of its businesses comes from international banks and that it has little exposure to the disaster struck Icelandic economy.
Haarde is said to have approached other Nordic governments to see if their central banks might be prepared to inject liquidity into the Icelandic system. Haarde said the the banks had agreed at the weekend to sell some overseas assets and bring the cash back to Iceland. The nation's pension funds, which have assets of €12bn, are also being encouraged to repatriate cash.
The two biggest banks, Kaupthing and Landsbanki, which runs Icesave, have thousands of UK savers' deposits, attracted by their competitive rates. The Kaupthing Edge account is covered by the UK government guarantee on deposits up to £50,000, while in the case of Icesave, the first €22,000 (roughly £17,000) is covered by the Icelandic compensation scheme and the remainder up to the £50,000 limit by Britain. A spokeswoman for Kaupthing said there had been no rush to close accounts.
Richard Portes, an expert on Iceland at the London Business School, said the government had made a mistake by nationalising Glitnir and creating fear in the markets, instead of just providing it with liquidity. "You have the same law of unintended consequences that you had in the case of Lehman Brothers," he said. "The Iceland problem was immediately vastly exaggerated." He said the Icelandic banks had been unfairly targeted. "The world is a little unjust. They don't hold any toxic papers. The assets they will have to sell are prefectly good assets. They have been prudently managed and haven't been exessively dependent on the wholesale money markets compared to anyone else."
Iceland has undergone a remarkable transformation in the past couple of decades, from an economy largely based on fishing to one of the richest in Europe, driven by its biggest three banks following deregulation of the banking system. The banks grew rapidly on borrowing and now have assets eight times Iceland's GDP. But the party has come to an end, with the krona losing more than half its value against the euro in the past 12 months, inflation running at 12%, and interest rates at 15.5%.
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