Reykjavík Grapevine - 10.10.2008, Page 14

14 | REYKJAVÍK GRAPEVINE | ISSUE 16—2008
ARTIClE BY BeRguR eBBI BeneDIKTSSon AnD SveInn BIRKIR BJöRnSSon
Sunday September 21, the CEO of Glitnir Bank, Lárus
Welding was a guest on the political talk show Silfur
Egils, where he was asked to elaborate on the inter-
national financial crisis that was hitting financial in-
stitutions hard on both sides of the Atlantic, and how
it would affect the Icelandic banking industry, his
own bank included. "We can see now that the flex-
ibility in our structure and the way we have prepared
ourselves has landed us a very secure position," he
boasted. Today, it seems obvious that he was lying, or
at best being delusional, but at least he looked good
while doing it.
A week later, on Monday, September 29, the
Icelandic government announced its decision to
nationalise Glitnir in the face of the bank’s imminent
bankruptcy. Stoðir, the largest shareholder of Glitnir
and one of Iceland's biggest investment companies,
declared insolvency, and the exchange rate of the
Icelandic Króna continued to plummet.
People were concerned when markets closed
on Friday October 3. News that trickled out during
the weekend suggested that the crisis was getting
worse, although Prime Minister, Geir H. Haarde stat-
ed that he believed there was no cause for further
intervention from the Icelandic government at the
time. It was difficult to decipher the situation when
markets opened on Monday morning. Despite Prime
Minister Haarde's optimism, shares of all major Ice-
landic banks were not being traded in the Iceland
Stock Exchange.
That afternoon, Prime Minister Geir H. Haarde,
addressed the nation and cryptically stated that
the Icelandic banks were all on the verge of bank-
ruptcy and emergency legislation would be pushed
through the parliament, allowing the government to
take full control of their operations. The following
days gave us news of a total governmental seizure
of Landsbanki and Glitnir Bank and that Kaupthing
was granted a loan of 500 million Euros to continue
its operations, and at the time of print, it looks like it
may fall into the hands of the government, too. In a
matter of two weeks, the Icelandic financial system
went from A-OK to total ruins.
WhAT ThE hEll hAPPENED?
Only a week passed from the seizure of Glitnir Bank
until an emergency legislation was passed in Par-
liament, allowing the state to overtake all the. This
was perhaps the most dramatic week in the history
of Icelandic economy. But this eventful period had
a long prologue and it will certainly leave us with a
bitter aftermath. Although the meltdown was caused
by a complex interplay of various economic factors,
both at home and abroad, the deciding factors can
be traced to a relatively simple cause.
It may have started with the privatization of the
state-owned Icelandic banks and the deregulation
of the banking industry that began around 2000 and
the simultaneous financial influx from foreign invest-
ment in the energy and aluminum sectors. Compet-
ing with the state-run Housing Financing Fund, the
newly privatized banks offered real estate mortgages
to individuals at lower interest rates and financed
a higher percentage the real estate prices than the
Housing Financing Fund offered. This created real
estate boom, and caused a rapid increase in the
value of the banks. The 40-year real estate mortgages
provided by the banks were financed mostly with
short-term loans from international banks and finan-
cial institutions, leaving the banks dependent on
frequent re-financing to keep the ball rolling. During
the economic boom of the last few years, this was an
easy cycle to maintain.
Encouraged by their rapid growth of the banks,
Icelandic investment bankers and companies soon
started to expand to other countries, acquiring
banks, retail companies, airlines, fashion stores, and
professional football teams - more or less (mostly
more) financed by short-term loans. New acquisition
were used as collateral for further loans to bankroll
further acquisition. Before the crisis, the Icelandic
banks had accumulated foreign assets worth about
10 times the Icelandic gross domestic product (GDP),
80% of which was financed by foreign loans. When
the credit crunch hit, following the sub-prime mort-
gage collapse in the US, and the cash flow to Icelan-
dic banks dried up, investment companies found it
increasingly more difficult to re-finance. Due to the
disproportionate size of the banking industry, their
collapse would have spelled bankruptcy for the
whole country as the government was no longer
able to guarantee their operation. Faced with that
prospect, Icelandic authorities had little choice but
to force the banks into receivership.
Who’S To BlAME?
The collapse of the Icelandic economy is a highly
complicated issue that involves many technical eco-
nomical terms, only a part of which are even intel-
ligible to John Q. Public. The collapse will have far-
reaching effects for the foreseeable future. Although
everyone involved, from bankers to government
officials, have tirelessly repeated the mantra that
now is not the time to assign blame, and there will
be plenty of time to review the situation and find cul-
prits sometime in the future, someone must be held
responsible.
Economists in Iceland have gainfully pointed to
technical errors made by the Icelandic Central Bank
in dealing with inflation and the currency exchange
rate of the Icelandic Króna, which may have encour-
aged Icelandic bankers to seek short term loans in
foreign currency to re-loan in Iceland where the inter-
est rates have been much higher than in most of the
civilized world, and for failing to maintain the foreign
currency reserve at a point that would suggest that
the Central Bank could step in to assist the banks in a
time of need.
The government should receive it’s share for
deregulating the financial sector to the point that they
had little or no say in any matters regarding the finan-
cial market, and for failing to keep taps on inflation,
expansion and maintaining a proper supervision au-
thority on the economy. It has also been a political
decision to stash away old and defunct politicians as
Governors of the Central Bank, a highly suspectible
decision, given thte Central Bank's role in Icelandic
economic policy.
The Icelandic people obviously deserve a
share of the blame. Their blatant consumerism was
fueled by the easy access to cold, hard cash and
the misconception that the party would last forever.
Well, it was fun while it lasted, but now we will need
to clean up and get our house in order.
And last, but not least, there are the adventur-
ous investment bankers who were even more delu-
sional than the general public when they joined the
party. Greed seems to have been their guiding princi-
ple and eventually, they bit off more than they could
chew.
WhAT WIll hAPPEN NExT?
Despite watching our economy collapse in two
weeks, the worst may be yet to come. A wave of
bankruptcies is on the horizon, likely followed by un-
employment, recession and general hardship.
It is a damn shame, really. We all thought
we could work in big money-making factories
and throw stress-balls around and make silly
jokes about David Duchovny's sex addiction, but
now it seems that the Icelandic voyage, as Presi-
dent Ólafur Ragnar Grímsson, called the foreign
acquisitions adventure, has stranded.
The Icelandic economy has
crashed. The government has
nationalized all three of the major
banks in Iceland and most Icelan-
dic financial institutions overseas
are bankrupt. The global credit
crisis that has left banks in Europe
and the US bankrupt has hit Ice-
land like a natural disaster. During
a two-week period our economy
was wiped out and left in ruins