Debt Dynamite Dominoes: The Coming Financial Catastrophe - Assessing the Illusion of Recovery said:
...
The Collapse of Iceland
On October 9th, 2008, the government of Iceland took control of the nation's largest bank, nationalizing it, and halted trading on the Icelandic stock market. Within a single week, "the vast majority of Iceland's once-proud banking sector has been nationalized." In early October, it was reported that:
Iceland, which has transformed itself from one of Europe's poorest countries to one of its wealthiest in the space of a generation, could face bankruptcy. In a televised address to the
nation, Prime Minister Geir Haarde conceded: "There is a very real danger, fellow citizens, that the Icelandic economy in the worst case could be sucked into the whirlpool, and the
result could be national bankruptcy."
An article in BusinessWeek explained:
How did things get so bad so fast? Blame the Icelandic banking system's heavy reliance on external financing. With the privatization of the banking sector, completed in 2000,
Iceland's banks used substantial wholesale funding to finance their entry into the local mortgage market and acquire foreign financial firms, mainly in Britain and Scandinavia.
The banks, in large part, were simply following the international ambitions of a new generation of Icelandic entrepreneurs who forged global empires in industries from retailing
to food production to pharmaceuticals. By the end of 2006, the total assets of the three main banks were $150 billion, eight times the country's GDP.
In just five years, the banks went from being almost entirely domestic lenders to becoming major international financial intermediaries. In 2000, says Richard Portes, a professor
of economics at London Business School, two-thirds of their financing came from domestic sources and one-third from abroad. More recently - until the crisis hit - that ratio was
reversed. But as wholesale funding markets seized up, Iceland's banks started to collapse under a mountain of foreign debt.[25]
This was the grueling situation that faced the government at the time of the global economic crisis. The causes, however, were not Icelandic; they were international. Iceland owed "more than $60 billion overseas, about six times the value of its annual economic output. As a professor at London School of Economics said, 'No Western country in peacetime has crashed so quickly and so badly'."[26]
What went wrong?
Iceland followed the path of neoliberalism, deregulated banking and financial sectors and aided in the spread and ease of flow for international capital. When times got tough, Iceland went into crisis, as the Observer reported in early October 2008:
Iceland is on the brink of collapse. Inflation and interest rates are raging upwards. The krona, Iceland's currency, is in freefall and is rated just above those of Zimbabwe and
Turkmenistan.
[. . . ] The discredited government and officials from the central bank have been huddled behind closed doors for three days with still no sign of a plan. International banks won't send
any more money and supplies of foreign currency are running out.[27]
In 2007, the UN had awarded Iceland the "best country to live in":
The nation's celebrated rags-to-riches story began in the Nineties when free market reforms, fish quota cash and a stock market based on stable pension funds allowed Icelandic
entrepreneurs to go out and sweep up international credit. Britain and Denmark were favourite shopping haunts, and in 2004 alone Icelanders spent £894m on shares in British
companies. In just five years, the average Icelandic family saw its wealth increase by 45 per cent.[28]
As the third of Iceland's large banks was in trouble, following the government takeover of the previous two, the UK responded by freezing Icelandic assets in the UK. Kaupthing, the last of the three banks standing in early October, had many assets in the UK.
On October 7th, Iceland's Central Bank governor told the media, "We will not pay for irresponsible debtors and...not for banks who have behaved irresponsibly." The following day, UK Chancellor of the Exchequer, Alistair Darling, claimed that, "The Icelandic government, believe it or not, have told me yesterday they have no intention of honoring their obligations here," although, Arni Mathiesen, the Icelandic minister of finance, said, "nothing in this telephone conversation can support the conclusion that Iceland would not honor its obligation."[29]
On October 10, 2008, UK Prime Minister Gordon Brown said, "We are freezing the assets of Icelandic companies in the United Kingdom where we can. We will take further action against the Icelandic authorities wherever that is necessary to recover money." Thus:
Many Icelandic companies operating in the U.K., in totally unrelated industries, experienced their assets being frozen by the U.K. government--as well as other acts of seeming
vengeance by U.K. businesses and media.
The immediate effect of the collapse of Kaupthing is that Iceland's financial system is ruined and the foreign exchange market shut down. Retailers are scrambling to secure currency
for food imports and medicine. The IMF is being called in for assistance.[30]
The UK had more than £840m invested in Icelandic banks, and they were moving in to save their investments,[31] which just so happened to help spur on the collapse of the Icelandic economy.
On October 24, 2008, an agreement between Iceland and the IMF was signed. In late November, the IMF approved a loan to Iceland of $2.1 billion, with an additional $3 billion in loans from Denmark, Finland, Norway, Sweden, Russia, and Poland.[32] Why the agreement to the loan took so long, was because the UK pressured the IMF to delay the loan "until a dispute over the compensation Iceland owes savers in Icesave, one of its collapsed banks, is resolved."[33]
In January of 2009, the entire Icelandic government was "formally dissolved" as the government collapsed when the Prime Minister and his entire cabinet resigned. This put the opposition part in charge of an interim government.[34] In July of 2009, the new government formally applied for European Union membership, however, "Icelanders have traditionally been skeptical of the benefits of full EU membership, fearing that they would lose some of their independence as a small state within a larger political entity."[35]
In August of 2009, Iceland's parliament passed a bill "to repay Britain and the Netherlands more than $5 billion lost in Icelandic deposit accounts":
Icelanders, already reeling from a crisis that has left many destitute, have objected to paying for mistakes made by private banks under the watch of other governments.
Their anger in particular is directed at Britain, which used an anti-terrorism law to seize Icelandic assets during the crisis last year, a move which residents said added insult to injury.
The government argued it had little choice but to make good on the debts if it wanted to ensure aid continued to flow. Rejection could have led to Britain or the Netherlands seeking to
block aid from the International Monetary Fund (IMF).[36]
Iceland is now in the service of the IMF and its international creditors. The small independent nation that for so long had prided itself on a strong economy and strong sense of independence had been brought to its knees.
In mid-January of 2010, the IMF and Sweden together delayed their loans to Iceland, due to Iceland's "failure to reach a £2.3bn compensation deal with Britain and the Netherlands over its collapsed Icesave accounts." Sweden, the UK and the IMF were blackmailing Iceland to save UK assets in return for loans.[37]
In February of 2010, it was reported that the EU would begin negotiations with Iceland to secure Icelandic membership in the EU by 2012. However, Iceland's "aspirations are now tied partially to a dispute with the Netherlands and Britain over $5 billion in debts lost in the country's banking collapse in late 2008."[38]
Iceland stood as a sign of what was to come. The sovereign debt crisis that brought Iceland to its knees had new targets on the horizon.
...
