Posted on Thu, Oct. 16, 2008
last updated: October 16, 2008 06:23:41 PM
LONDON — The global financial crisis has hit almost every country in the world, but tiny Iceland may have been struck hardest of all. Teetering on the edge of bankruptcy, the island nation in recent weeks has seen its biggest banks collapse, jobs disappear overnight and European nations threaten legal action.
A remote country of 320,000 people in the North Atlantic, a member of NATO and once host to a vital U.S. air base, Iceland seems an unlikely villain in the unfolding international drama. There's no happy ending in sight.
In a grim statement issued Wednesday, the central bank said that a variety of jobs had "disappeared virtually in the blink of an eye, demand has declined precipitously and by all measures, expectations are at a low ebb."
The Icelandic currency, the krona, lost half its value against other currencies this month and no longer is being traded. Citizens have limited use of credit cards abroad. Companies can't obtain foreign currency unless they can prove it's to import fuel, food or medicine. Individuals can't get foreign currency without international airline tickets.
Desperate to stem the damage, the government nationalized three big, failed banks whose liabilities are estimated to be $10 billion in excess of their assets. On Wednesday, the central bank eased interest rates from a counter-inflationary 15.5 percent to 12 percent. With foreign currency reserves now down to nine months' worth of imports, officials are talking with the International Monetary Fund and Russia about possible loans.
Iceland's problems stem in large part from the international expansion of its banks, which offered attractive interest rates to overseas customers. One online banking service, for instance, offered rates of 6 percent on accounts. Now foreign depositors' funds are frozen, however.
Some 300,000 individuals are affected in Britain, as well as charities, local governments and police departments. Individual Britons had deposited some $7 billion in one failed bank alone, and local government bodies had deposited at least $1.49 billion. Oxford University reportedly has $52,000 in Icelandic accounts, while the London subway operator, Transport for London, has $69,000 tied up.
When Iceland said it couldn't guarantee overseas funds on deposit, the British government activated its anti-terror laws to freeze the assets in Britain of Landesbanki, one of the big banks that failed. "Not many governments would have taken that very kindly," said Geir Haarde, Iceland's prime minister.
British Prime Minister Gordon Brown has waded into the mushrooming diplomatic crisis, criticizing the Iceland government's handling of the affair. Brown's aides have pledged to guarantee the funds of private individuals who had money in failed Icelandic banks, but it haven't given such assurances to local governments and other bodies, raising the prospect of severe budget shortfalls and service cuts in communities across Britain.
Britons aren't alone. In the Netherlands, local and provincial governments and other public institutions have lost about $321 million in frozen money in Iceland, according to an estimate Thursday. The Dutch finance minister has guaranteed private deposits, estimated at $2.18 billion to $2.31 billion. Iceland is expected to repay the money, but news reports said it would have to borrow about $1.48 billion from The Hague to meet that commitment.
Geoffrey Wood, an economics professor at Cass Business School in London, said the Icelandic banking crisis highlighted a broader problem for big banks in small countries that expanded internationally: "When they can't meet their liabilities, there is no way the government can help them out." The way to prevent Icelandic-style crises in future, Wood said, is for governments to "pre-commit to injecting capital into cross-border banks."
(Sell is a McClatchy special correspondent.)
MORE FROM MCCLATCHY:
McClatchy Newspapers 2008