[LINK] "Financial crisis: Iceland's dreams go up in smoke"

[rfmcdonald]

Andrew Pierce's article in The Telegraph propvides an interesting explanation of why Iceland is so badly affected y the global financial crisis.

Yesterday, trading in the shares of six major financial institutions was suspended as the government sought to avert meltdown.

Sigurdur Einarsson, Chairman, Kaupthing Bank, warned against people being too alarmist.

"Over the years we have built a strong and well-diversified bank. We have some of the strongest capital ratios in the European bank sector. We've got good asset quality and a highly diversified loan portfolio.

Kaupthing has and continues to manage its business prudently and, with our strong fundamentals, we are naturally concerned when we hear malicious rumours and sensationalism about Kaupthing being reflected irresponsibly. We ask people to look at the facts, not rumour and inuendo."

Meanwhile, Icelandic interest rates have been catapulted to 15.5 per cent, peaks not seen in Britain since Black Wednesday, in an attempt to rein in inflation. The krona's freefall on the international currency markets is surpassed only by the catastrophic failure of Zimbabwean currency.

One of the country's three banks, Glitnir, has been nationalised; another wants money from its customers. Foreign currency is running out as international banks refuse pleas to lend money.

[. . .]

The dramatic change in Iceland, from the poor relation of Europe to one of its wealthiest and apparently most successful, and now back again, dates from the mid-1990s with the privatisation of the banks and the founding of the country's Stock Exchange.

The free market reforms unleashed a new generation of thrusting, young businessmen, many of whom picked up their banking trade in the United States. They were determined that their country would no longer have to rely on fishing for its principal source of wealth; they loathed the international perception of Iceland as a parochial nation of farmers and fishermen who could not hold their own on the world business stage.

They had learnt at school all about the last Cod War with Britain, in 1976, when Iceland unilaterally extended its territorial waters, desperate to increase the financial yield from its trawler fleet. So, in keeping with the traditions of their Viking ancestors, the new army of corporate raiders went overseas to seek their fortune.

[. . .]

It was almost inevitable that when the international credit crisis unleashed the worst financial tsunami the world had seen since 1929, there was little that Iceland, which disbanded its armed forces 700 years ago, could do to repel the shock waves. Iceland has guaranteed all its savers deposits, but could not extend this guarantee to the hundreds of thousands of British savers who have invested money in their internet savings banks.

The mood of crisis was heightened further when the Government suspended all public service broadcasting, a measure usually reserved for volcano warnings. The chairman of the opposition left-green party, Steingrimur Sigfusson, has called for a coalition government to lead Iceland through its financial emergency.

The trade unions, meanwhile, are pressing for Iceland to begin talks about becoming part of the European Union, which the government has been reluctant to join for years. The pension funds have now also agreed to help the Government by selling assets.

It took a while, though, for the penny to drop. As recently as this spring, when questions were being asked about the economy, the country was in denial.

Dagur Eggertsson, a former mayor of Reykjavik, said: "Someone called it 'bumblebee economics' because it is hard to figure out how it flies, but it does, and very nicely, too." The bumblebee, though, like the billionaires who thought they could buy up the British high street, is no longer flying high.