2008 October 14 Tuesday
Iceland Short On Foreign Currency And Bankruptcy Looms

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.

The 3 privatized banks went wild taking on assets and caused a disaster.

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.

Iceland's banking bubble started, built up, and popped in a very short period of time.

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

Kenelm Digby said at October 15, 2008 3:46 AM:

We often here the ignorant say 'But countries can't go bankrupt!' as a way of justifying profligate economic policies.
It appears that Iceland, as a nation, 'played the markets' big-time by collectively borrowing from the Asians to buy up from the British.
If nothing, the whole sorry saga is instructive as little lesson in how the finances of an individual differ only in scale from that of a nation - despite claims to the contrary.

Dragon Horse said at October 15, 2008 5:37 AM:

How can such Nordic high IQ types possibly have run their country into the ground? Must be the fault of the "darkies" in America forcing white bankers at gun point to give them crappy mortgages. LOL

Ned said at October 15, 2008 8:15 AM:

I visited Iceland last year. Things were very prosperous. The streets were full of expensive American, European and Japanese SUV's. Reykjavik had lots of trendy bars and restaurants and fancy shops. I wondered where all this prosperity came from -- how could a nation that exports nothing much besides fish afford all the stuff? I guess we know the answer now. They couldn't.

mike said at October 15, 2008 1:56 PM:

"How can such Nordic high IQ types possibly have run their country into the ground? Must be the fault of the "darkies" in America forcing white bankers at gun point to give them crappy mortgages."

They have a long way to fall before they reach third world levels. A recession will make it cheaper for tourists to visit and the country has dirt cheap energy with which it can develop more energy intensive industry and grow more of its own food in greenhouses.

However, it certainly seems likely it will fall in wealth compared with other leading western countries.

Randall Parker said at October 15, 2008 4:55 PM:

Dragon Horse,

Next year Iceland will have living standards an order of magnitude higher than any sub-Saharan African country.


A small number of people can cause a lot of damage put in the right places with enough power.

Stephen said at October 15, 2008 5:44 PM:

Well said Dragon.

black sea said at October 16, 2008 5:38 AM:

"Must be the fault of the "darkies" in America forcing white bankers at gun point to give them crappy mortgages."

By darkies I assume you are referring to Barney Frank an Chris Dodd.

Clogg said at October 16, 2008 7:20 AM:

As usual, Dragon Horse offers a unique and new perspective.

MaryJ said at October 16, 2008 7:35 PM:

You can bet that the Icelanders won't sit on their butts and whine that it's all the fault of colonial oppression by evil Denmark for x hundred years. They'll get off their butts, work hard, and be right as rain within 10 years. (Meanwhile Zimbabwe and South Africa will still be Third World toilets.) Also this is a blessing in disguise for them. When they were rich they were all caught up in the "diversity" crap and were actually inviting Palestinian Muslims to come live with them. This will put a stop to the demographic destruction of their unique thousand-year-old culture.

Bubba said at October 16, 2008 10:57 PM:

"This will put a stop to the demographic destruction of their unique thousand-year-old culture."

Indeed. Just as tight economic times tend to wring a lot of waste out of your spending habits, they also tend to wring a lot of stupid out of your political habits, or at least the political habits of certain voters. That's one reason (besides paying off liberals in MA and CA) I suspect Obama is promising to give loads of money to state governments facing budget shortfalls.

Worried dude said at October 17, 2008 9:14 AM:

"That's one reason (besides paying off liberals in MA and CA) I suspect Obama is promising to give loads of money to state governments facing budget shortfalls."

That may be true, but there is a limit to how much money O can give, and thus, how much stupid he can prop up.

This recession looks like it might be long one.

Randall Parker said at October 17, 2008 6:04 PM:

I do not see how Obama can fulfill most of his campaign pledges. We have a worsening economy and worsening demographic situation. Demands on money will rise even as tax revenues decrease.

Bob Badour said at October 18, 2008 2:35 PM:

If we have some luck, Obama will do a Bob Rae: Win on a socialist platform and be forced by economic realities into acting more Republican than the Republicans by busting some unions and decimating the civil service.

Sadly, I expect that's too much luck to hope for.

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