October 8, 2008 in Nation/World

Iceland’s financial system on brink of bankruptcy

Total collapse would ripple through Europe
By JANE WARDELL Associated Press
 
Associated Press photo

Prime Minister Geir H. Haarde speaks at a press conference in Reykjavik, Iceland, on Tuesday.
(Full-size photo)

REYKJAVIK, Iceland – This volcanic island near the Arctic Circle is on the brink of becoming the first “national bankruptcy” of the global financial meltdown.

Home to just 320,000 people on a territory the size of Kentucky, Iceland has formidable international reach because of an outsized banking sector that set out with Viking confidence to conquer swaths of the British economy – from fashion retailers to top soccer teams.

The strategy gave Icelanders one of the world’s highest per capita incomes. But now they are watching helplessly as their economy implodes – their currency losing almost half its value, and their heavily exposed banks collapsing under the weight of debts incurred by lending in the boom times.

“Everything is closed. We couldn’t sell our stock or take money from the bank,” Johann Sigurdsson said as he left a branch of Landsbanki in Reykjavik.

The government had earlier announced it had nationalized the bank under emergency laws enacted to deal with the crisis.

“We have been forced to take decisive action to save the country,” Prime Minister Geir H. Haarde said of those sweeping new powers that allow the government to take over companies, limit the authority of boards, and call shareholder meetings.

A full-blown collapse of Iceland’s financial system would send shock waves across Europe, given the heavy investment by Icelandic banks and companies across the continent.

One of Iceland’s biggest companies, retailing investment group Baugur, owns or has stakes in dozens of major European retailers – including enough to make it the largest private company in Britain, where it owns a handful of stores such as the famous toy store Hamley’s.

Kaupthing, Iceland’s largest bank and one of those whose share trading was suspended last week to stop a huge sell-off, has also invested in European retail groups.

To try to wrest control of the spiraling situation, the government also loaned $680 million to Kaupthing to tide it over and said it was negotiating a $5.4 billion loan from Russia to shore up the nation’s finances.

The speed of Iceland’s downfall in the week since it announced it was nationalizing Glitnir bank, the country’s third largest, caught many by surprise despite warnings that it was the “canary in the coal mine” of the global credit squeeze.

Icelanders are beginning to question how a relative few were able to generate the disproportionate wealth – and associated debt – that Haarde has warned puts the entire country at risk of bankruptcy.

Iceland’s reinvention from the poor cousin in Europe to one of the region’s wealthiest countries dates to the deregulation of the banking industry and the creation of the domestic stock market in the mid-1990s.

Those free market reforms turned Iceland from a conservative, inward-looking country to one of a new generation of internationally educated young businessmen and women who were determined to give Iceland a modern profile.

Entrepreneurs became its greatest export, as banks and companies marched across Europe and their acquisition wallets were filled by a stock market boom and a well-funded pension system.

Back home, the average family’s wealth soared 45 percent in half a decade and gross domestic product rose at around 5 percent a year.

But the whole system was built on a shaky foundation of foreign debt. The country’s top four banks now hold foreign liabilities in excess of $100 billion, debts that dwarf Iceland’s gross domestic product of $14 billion.

© Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email