Iceland is worst hit of any nation by the financial crisis. Unless Iceland can line up some big loans from other governments it might go bankrupt.
Central bank guidelines give priority to essential imports like food, medicines and oil, in effect leaving importers of other goods starved of foreign currency.
Based on central bank figures, it can supply enough foreign currency to local firms to cover imports for just less than nine months.
Icelanders are buying store shelves empty. Since the threat of imports cut-off is very real I hesitate to label this panic-buying. These buyers are being rational, not panicky.
Iceland's rugged, treeless terrain, a barren stretch of volcanic rock, geysers and moss, means the country imports most food, other than meat, fish and dairy products.
Magnusson said last week that one of Iceland's largest supermarket chains was unable to get any foreign currency to make purchases abroad and another retailer's electronic payment didn't go through. Iceland will begin to see shortages of ``regular goods'' by the end of the week if nothing changes, he said.
Imagine yourself living in a country where the stores can no longer buy abroad and most goods come from abroad. The fishermen will still eat. They'll also be able to buy up distressed assets. But winter will be cold and hungry for so many people who are losing their jobs.
Iceland is now the ex-richest country per capita in the world. Easy come, easy go.
Separately on Sunday, industry minister Oessur Skarphedinsson said that Iceland, until days ago the richest country per capita in the world, must request aid from the International Monetary Fund.
The banking losses are so much bigger than the real economy of Iceland that the Icelandic government can't replace the losses in a bailout. The nationalized banks put limits on how much people can withdraw from their deposits.
The ramifications of Iceland's misery are probably more serious than people realize. The country's bank assets are more than 10 times greater than its gross domestic product, so the government clearly cannot afford a bailout. This is going to be a large default, affecting many parties. In the United Kingdom alone, 300,000 account holders face sudden loss of access to their funds, and the process for claiming deposit insurance is not entirely clear.
How did things get so bad so fast? Blame the Icelandic banking system's heavy reliance on external financing. With the privatization of the banking sector, completed in 2000, Iceland's banks used substantial wholesale funding to finance their entry into the local mortgage market and acquire foreign financial firms, mainly in Britain and Scandinavia. The banks, in large part, were simply following the international ambitions of a new generation of Icelandic entrepreneurs who forged global empires in industries from retailing to food production to pharmaceuticals. By the end of 2006, the total assets of the three main banks were $150 billion, eight times the country's GDP.
Fishing sustained the rugged and remote island of Iceland for centuries. But just a half-dozen years ago, Icelanders discovered that vast fortunes could be made in high finance. They took to the new business with all the zeal and fearlessness of their seagoing past, lending abroad with speculative fervor. The banks quickly swelled to a size that dwarfed the economy of some 300,000 Icelanders back home.
Within a few years, Iceland's three big banks -- Kaupthing Bank hf, Landsbanki Islands hf and Glitnir became highly leveraged, like other now-troubled banks. The banks' assets reached €100 billion, about 10 times the country's gross domestic product last year, and their foreign depositors have come to far outnumber the island's population.
Governments should place limits on the size of liabilities that banks can build up as compared to the size of deposits.
|Share |||By Randall Parker at 2008 October 14 10:45 PM Economics Disasters|