Stricken Iceland sends out financial SOS

Economy is in turmoil as currency collapses and inflation soars

Iceland was seeking the financial help of the US and Scandinavian countries last night as politicians and businessmen scrambled to save the country’s economy.

Officials were locked in meetings for most of the weekend, with the Government hoping to come to some sort of resolution before stock markets open this morning. The country’s banking problems led to the nationalisation last week of Glitnir, one of its largest lenders, as depositors pulled out their funds.

Problems for the Icelandic banking system had sparked concerns about the implication for the British high street, with Iceland’s banks providing the backing for groups such as Baugur, which owns Hamleys and House of Fraser. However, Baugur has emphasised that it is unaffected by the present situation in the country.

Iceland’s banks have been under pressure for most of the year, struggling with rampant inflation, the collapsing value of the currency and the general fallout from an overheated economy. In an attempt to curb inflation, the country’s central bank raised interest rates to 15.5 per cent, making it even more difficult for the banks to fund themselves.

The banks expanded rapidly after the deregulation of domestic financial market in the 1990s and now have combined foreign liabilities in excess of $100 billion, dwarfing the country’s gross domestic product of $14 billion.

At this stage it is not clear what form a rescue package would take, although it is also understood that the country’s Pension Fund Association has offered to bring home at least 200 billion kronur (£10 billion) of funds from abroad, in an attempt to prop up Iceland’s banks.

Comings and goings at the Government House, a stately old wooden building by lake Tjörnin in the heart of Reykjavik, were non-stop late into the night, with ministers, bank managers, trade unionists and academics trying frantically to strike a deal.

Further speculation over the health of the country’s banking system will heighten concerns about Iceland’s other two big banks, Kaupthing and Landsbanki. The chief executive of Kaupthing, Iceland’s biggest bank, tried to allay fears, claiming that there was no need for the Government to rescue it. Speaking on state television, Hreidar Mar Sigurdsson said that he had held discussions with Geir Haarde, the Prime Minister, on how the bank could participate in the rescue package.

Mr Sigurdsson said that discussions included the possibility of Icelandic banks selling off foreign assets to strengthen the country’s currency reserves. He also added that there had been no talk of the Government coming to the help of Kaupthing and that there was no need for such a move.

Financial turmoil has led to renewed calls from labour unions for Iceland to join the EU and adopt the European single currency to avoid the huge currency swings of Icelandic krona that have plagued the economy.

One local newspaper published parts of a memorandum from Iceland’s labour unions that said financial stability would not be possible with the Icelandic krona. “Therefore we should aim for EU membership and the adoption of the euro as soon as possible,” the document said.

Although the business community may be keen to adopt the euro, the Government historically has been wary. Membership of the EU remains unlikely given that it has been seen as politically unpalatable because of issues such as fishing catchment areas. However, some political groups are thought to favour membership.

Hildur Helga Sigurdardottir in Reykjavik and Peter Stiff
October 6, 2008

Source: The Times

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