How Iceland's meltdown affects you
By
Associate Editor
David Stevenson
Oct 07, 2008
Iceland's corporate raiding days are over
NB: The Chancellor said on 8 October that the government will guarantee the deposits of all UK savers in Icesave accounts.
Plenty of companies have failed in the global credit crisis. As yet, no country has joined them - yet. But that could be about to change. And it could be bad news for British savers.
The 313,000-strong population of Iceland has been called the happiest in the world. At the top of the UN's league table comparing relative living standards, Icelanders recently came out on top. Health care and education are free, inhabitants have amongst the highest life expectancy on the planet – and they own the most mobile telephones per head.
The trouble is, all this has come at a huge cost. The country's banks have been running up debts like there's no tomorrow. The combined size of Icelandic banks' balance sheets has ballooned to more than 11 times the country's GDP of $14bn. Iceland has in effect become "the world's first sovereign hedge fund", as Damian Reece puts it in The Telegraph.
That's great when prices are rising and all that leverage – basically, borrowed money – is paying off. However, when the reverse happens, it's a nightmare. Property and stock values may collapse but those debts still have to be serviced somehow.
And now, in short, Iceland is running out of money. Inflation has leaped to 14% and confidence in the currency has collapsed. Icelandic interest rates have soared to 15.5% in an attempt to control consumer prices, while the krona has plunged over 30% against the dollar in the past 30 days. That's a collapse surpassed only by the disastrous demise of the Zimbabwean currency.
One of the country's three banks, Glitnir, has already been nationalised. Trading in the shares of six major financial institutions was suspended yesterday as the Icelandic government tried to avoid a complete meltdown. Prime Minister Geir Haarde last night tried to restore calm, guaranteeing domestic bank deposits – but note, not overseas ones - and giving regulators the power to take over bank assets.
And today, Iceland's Financial Supervisory Authority took control of Landsbanki, the nation's second-biggest lender, while the country's central bank gave a €500m loan to Kaupthing, Iceland's biggest bank.
The latter is still trying to put on a brave face. "Over the years we have built a strong and well-diversified bank", says Sigurdur Einarsson, Chairman of Kaupthing, "We have some of the strongest capital ratios in the European bank sector, good asset quality and a highly diversified loan portfolio. We ask people to look at the facts, not rumour and innuendo".
Maybe, but in today's markets, risks run full circle. Kaupthing has been lending to Baugur. This Icelandic conglomerate owns vast swathes of the British high street, including large stakes in retailers including Hamleys, House of Fraser, Oasis, Debenhams, Woolworths and, ironically, Iceland the frozen food store. Trouble is, the group's investments over here are now looking rather sickly. Worse still, Kaupthing "was also a big investor in the London property market", says the Telegraph, "which has become another millstone around the bank's neck".
Grim, it clearly is. But is Iceland heading for bankruptcy?
Certainly, Iceland's current account deficit, equal to 34% of GDP, means it's "probably in the worst position in the developed world to cope with the ongoing credit crisis", says Henrik Gullberg at Deutsche Bank. And Prime Minister Haarde himself said last night that the new legislation was needed because Iceland "faced the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy."
Yet an unlikely saviour – of sorts – may just be emerging. As well as announcing future moves to steady the currency, Iceland is in talks to get a €4bn loan from Russia, says Bloomberg, at up to 0.5% more than Libor, the London interbank offered rate at which banks (supposedly) lend to each other. "Negotiations are starting", Iceland's central bank governor David Oddsson told Bloomberg today, "we're optimistic" they'll be successful. Any Russian aid would be "very much welcomed."
That may steady the ship for now, though the country's future must remain very unclear – particularly as Russia has apparently yet to make a decision on the loan. In today's markets, we can't rule anything out.
And what about British money in Icelandic banks?
"Internet bank Icesave has suspended all deposits and withdrawals from customers' accounts after the Icelandic authorities stepped in to rescue its parent company Landsbanki," says The Guardian. The move "hit more than 300,000 UK savers who joined the bank, attracted by its high interest rates on savings accounts and Isas. Although Landsbanki is set to continue trading as normal in Iceland, it is not clear what will happen to Icesave".
Icesave's website said: "We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts. We apologise for any inconvenience this may cause our customers and hope to provide more information shortly."
The Icelandic Financial Supervisory Authority (IFSA) today announced that domestic deposits were fully guaranteed by the government, and that "Landsbanki's domestic branches, call centres, cash machines and internet operations will be open for business as usual".
But this doesn't extend to UK savers as yet. Landsbanki is not bust as yet, so as Mark Atherton points out in The Times, "savers cannot make any claim on either the UK or the Icelandic deposit guarantee scheme."
If Icesave did collapse, savers would have to apply for compensation both in Iceland and the UK, and would only be able to get back up to £50,000. The first €20,000 (£15,500) is protected under the Icelandic government's scheme, and the remainder, up to £50,000, by the UK Financial Services Compensation Scheme (FSCS).
As for Kaupthing, the bank says that "Kaupthing has not been nationalised and is still trading normally. There is no reason to move your money, or to panic". However, in the event that something similar happened, Kaupthing Edge savers are in a better position than those with Icesave. Because of Kaupthing's link to Singer & Friedlander, it qualifies in full for the UK's £50,000 deposit guarantee scheme and doesn't have to get any of the money from Iceland.
Published in Economics
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David Stevenson
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