On Thin Ice

Bankruptcy and increased debt deeply shakes Iceland

News | Anna Claessen | November 2008

Oxford Street, London, Oct. 15, a T-shirt on a fair-haired Englishman reads "Bomb Iceland!" The country’s banking system had collapsed and British investors and savers were seeing three million pounds of their money, invested in three Icelandinc banks - Kaupthing Edge, Glitnir and Landsbanki Ìslands HF – devoured before their eyes. No wonder they were angry.

The downfall of the financial system shocked the Icelandic business-men. "I have never experienced anything like this in my whole life," says Dr. Eggert Claessen, managing director of an Icelandic investment fund Frumtak and father of this writer. According to Reuters, the three banks have a combined 46 billion Euro in foreign currency debts. As if that were not enough, Icelandic banks have billions of dollars’ worth of deposits in other countries, including Austria, that need to be repaid.

Austria’s banking sector alone holds a three billion Euros in Iceland bank debt, according to the Austrian daily Kurier, including 300 million Euros for Erste Group Bank, confirmed by the bank’s executive vice president Michael Fortier, in an interview with The Vienna Review. Fortier claimed, however, that he was "not worried" as it was "a small amount." In addition, there is another 100 million euros with Bank Austria and an undisclosed sum with Raiffeisen Zentralbank, who would only say that it had "suffered."

Icelandic students in Austria are suffering as well, especially those getting loans for university from back home, transferring money between the two countries or even taking money out of their accounts on ATM machines in Austria. Eyrun Unnarsdòttir and Larus Heidar Asgeirsson, an Icelandic student couple living in Austria, just had a baby. "We have to watch every cent," said Unnarsdottir on her blog, "because we can’t access any of our money from home."

The situation is worst at home. Many have lost their savings, pensions and jobs and are now facing years of paying back the debts incurred from lost savings, devalued currencies or spiraling mortgages. Some are losing their homes altogether as their payments soar.

"Around 1500 bank employees were let go" said Dr. Claessen in an interview with Oct. 25, "and many others are on their way out." This is a huge upheaval. Just last year Iceland was rated the "best country to live in" according to the UNDP Development Index published Nov. 27, 2007, with the country’s residents rated the most content in the world, with the globe’s highest per capita incomes.

Unbelievable how suddenly things can change. The Icelandic currency, the krona, has lost half its value and is no longer being traded. Companies are not allowed to receive foreign currency unless they can prove they are importing medicine, food or fuel or that they need international airline tickets to bring foreign currency into the country. When the Reykjavik stock exchange reopened on Tuesday Oct. 14, its index had lost 75% of its value.

Furniture store turnover for September is less than 21% of the sales at the same time last year and clothing store sales have contracted by 17.5% recession. Prices for clothes have increased by 13% since August this year. Interest rates were eased from a 15.5% to 12% by the central bank.

Pleas for help from the Red Cross are one measure of the crisis. "Last year we received 16,000 phone calls for the whole year, they are already up to 19,000 this year," said Fjóla Einarsdóttir, Red Cross project leader. Thirty employees are struggling to manage phone calls that are pouring in.

Meanwhile Iceland’s president, Òlafur Ragnar Grìmsson, is calling for unity, and the country seems to be responding. The transportation company Eimskip and the oil company N1 are flying the Icelandic flag daily as a sign of unity. Soup kitchens have been opened up to the public and the Icelandic TV station Skjarinn is running a series of public service advertisements reminding people that "the best things in life are free." Not everything is about money, the ads say; we should be grateful for what we still have, our health, our friends and family.

While that is all good, the main problem in Claessen’s eyes is government inaction. There is still no answer from Central Bank President David Oddson on how they the public will be able to pay for the immense loan Iceland is about to accept.

"Iceland is not doing anything" said Claessen, "that is the problem."

On Oct.25, over 2,000 people demonstrated in front of the parliament as well as the central government building, demanding the resignation of the prime minister and the central bank chief as well as a referendum on Iceland’s membership in the EU.

However, that it is their national reputation that Icelanders believe is suffering the most. Iceland has only 300,000 citizens, people who fell as if they have spent years building a name for themselves and were finally being taken seriously by the rest of the world.

"We encourage an immense PR effort since it is obvious that Iceland`s reputation is damaged," said Erna Hauksdóttir, director of Samtaka ferðaþjónustunnar, or The Icelandic Travel Industry Association encouraging all Icelanders to unite in the mission to get the message across.

Claessen agreed. "Iceland’s reputation is ruined," he said. Iceland had been hoping to get a seat on this year’s UN Security Council but was defeated by Austria and Turkey.

In desperation the Icelandic government has nationalized the three banks and is selling them off to the highest bidder. While some countries are quietly discussing measures with the Icelandic government, the UK has taken the more drastic route of seizing Icelandic assets, amounting to some 4 billion pounds under the Anti-terrorism, Crime and Security Act of 2001, UK Prime Minister Gordon Brown described the borrowing practices of Icelandic banks as "effectively illegal action."

Iceland has since drawn 200 million euros on a swap facility with Norwegian and Danish central banks. It also has a similar deal with Sweden. But it has not been used. The International Monetary Fund is also considering a 2 million dollar loan to the country. To date it is unknown whether Russia will participate.

"This has been a global crisis where you never know from which corner you may be hit," said Shigeo Katsu, vice president of the World Bank, to Reuters on Oct.10. He also noted that Russia and International Monetary Fund should work together to provide loans for Iceland. "Lending a helping hand to Iceland may contribute to calming down some of the crisis that comes from that side."

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