Iceland’s economy on brink as lender falters

ICELAND’S Kaupthing Bank is headquartered in Reykjavik, about 1800 kilometres from the City of London, but the financial volcano threatening to erupt on the island could send shockwaves down every high street in Britain.

The bank, with liabilities several times larger than Iceland’s gross domestic product, runs accounts for 150,000 Britons. It is also a key lender to some of Britain’s biggest entrepreneurs, including the restaurateur Gordon Ramsay and the property tycoon Robert Tchenguiz, and bankrolls big retail chains such as House of Fraser and Debenhams.

At the weekend the Icelandic Government was desperately trying to stitch together a package that would restore confidence in the bank and prop up the ailing economy of Iceland – with a population of 320,000 – which is teetering on the brink after years of over-expansion by its banks.

Most of the British depositors in Kaupthing are safe – savings of up to £50,000 ($114,000) are guaranteed by the British Government. But in Iceland the population is panicking. People are rushing to the banks to check that their savings are still there, and stockpiling provisions in case the country’s rampant inflation heads further out of control.

Iceland’s complicated financial interests are so interconnected – with a small number of investors owning cross-stakes in each other’s institutions – that the worst fear is a domino effect that will lead to the collapse of the country’s economic system, potentially taking with it many prominent British chains.

The country’s financial institutions are now rated as the least creditworthy in Europe.

While the Government moved to placate savers about the safety of their money, a weekend of meetings between politicians, bankers and economists suggests there is deep concern behind the scenes. The Government is said to have asked the unions to repatriate billions of dollars worth of pension fund money that has been invested abroad.

Bjorgvin Gudmundsson, the business editor of the daily newspaper Morgunbladid, said the worst case would be the collapse of Kaupthing, Iceland’s biggest bank. “The situation is critical,” he said. “Kaupthing says it has enough funding to last it through the year, but the main problem is getting the trust and confidence of the market.

“The Government’s move to strengthen the central bank by getting reserves of foreign currency is an attempt to have enough money to back up the banks if they need it.”

Officials in the past few days have been urging the media not to overblow the situation.

On Reykjavik’s main high street, Einar Eidsson was philosophical about the crisis. “People are definitely worried,” he said. “They are panic-buying food to store away, but that is the extreme. I do have faith in the Government that they will sort it out, but we do want clear answers on Monday.”

With inflation at 12 per cent and the Icelandic krona at its lowest level against the big currencies since 1992, small businesses are feeling the cold.

“Yes, it is an absolute disaster,” one shop owner said. “It is totally unexpected and a terrible mess that the Government has got us in. Some people are saying we are going to be like a Third World country.”

Rowena Mason
October 6, 2008

Source: The Sydney Morning Herald

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