Posted by: rbbadger | March 9, 2010

Icelandic banking collapse

This past year, we have seen the collapse of the banks in Iceland.  While things have calmed down a bit, Iceland is still reeling from the effects. 

Iceland is a tiny country.  There are maybe some 320,000 people who live there.  Given its location, it has long been isolated from the rest of Europe.  It is a Scandinavian nation.  Unlike Sweden and Norway, patronymics are still used for last names (if your father is named Hans, your last name will be either Hansson or Hansdottir if you are female).  The language has changed so little that Icelanders are able to comfortably read the old Norse sagas in the original, not in translation as Swedes or Norwegians who don’t speak Old Norse must. 

Because of the small population of the country, Icelandic banks have long been looking for a means to expand their clientele and their liquidity.  Under agreements with The Netherlands and the UK, Landsbankinn and Kaupthing Bank opened up branches in those countries.  Landsbankinn’s on-line bank, operating under the name of Icesave, proved to be quite popular, as the rates of interest were considerably more attractive than those offered by Dutch or British branks.  Kaupthing Bank offered similar accounts under the name of Kaupthing Edge.

Like all banks, Landsbanki and Kaupthing found themselves squeezed by the credit crisis.  Banks found it difficult, if not impossible, to gain the short-term loans all banks use to finance day-to-day operations.  For these Icelandic banks, it was a bitter blow, given that the Central Bank of Iceland was not really in a position to help them.  These Icesave or Kaupthing Edge accounts were based in Iceland, though the depositors were based in the UK or The Netherlands.  Financial authorities in the UK and The Netherlands seized the assets of Lansbankinn and Kaupthing in their countries.  The UK even froze all of Iceland’s assets in the UK, labelling Iceland, a fellow NATO member, as a financial terrorist.  The British and Dutch banking authorities eventually reimbursed the holders of Icesave or Kaupthing Edge accounts.  Quite naturally, the British and the Dutch were then looking for someone to reimburse them.  Thus, they came knocking on the door of the Seðlabanki Íslands, otherwise known as the Central Bank of Iceland.

The debts owed by Landsbankinn and Kaupthing Bank were greater than the gross domestic product of Iceland.  The Icelandic Krónur had just collapsed.  Seðlabanki Íslands was definitely not a position to repay these debts.  The Icelandic government has been trying to come up with a deal between themselves and the British and Dutch governments.  One very controversial proposal, just voted on this weekend, would have basically made it a requirement for each and every Icelandic citizen to pay an extra £90 a month in taxes to reimburse the British and the Dutch for the next eight years.

The Icelandic people were, very understandably, not amused.  These high yield accounts were not available to them in Iceland.  Iceland currently has inflation of about 7% annually and 9% unemployment.  Iceland is a small country with a small population.  As you can see in this news article, over 93% of the Icelandic people voted no on the plan for each and every citizen of Iceland to bear the brunt of the stupidity and greed of Icelandic bankers and politicians.

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