'Nordic Tiger' Iceland Finds Itself in Meltdown
Friday, October 10, 2008
REYKJAVIK, Iceland, Oct. 9 -- The bad news just keeps coming for Icelanders, who in the last week have seen the international financial empire that they built on this remote North Atlantic island start to crumble, piece by piece.
On Thursday came the worst shock so far: The government seized the country's largest bank, completing the emergency takeover of virtually the entire financial system.
Iceland might be called the first national casualty of the global financial tumult. Its currency, the krona, is in free fall. Foreign exchange markets are effectively closed -- for Icelanders who need to travel abroad, dollars or euros are nowhere to be found. The stock market has shut down until next week. The government has been placed in the role of international beggar, asking Nordic neighbors, the Russians and perhaps the International Monetary Fund for emergency loans.
For an estimated 100,000 Icelanders -- a third of the population -- who owned shares in the nation's three major banks, savings have been wiped out in a single, tumultuous week by uncontrollable events thousands of miles away.
"What can we do? This is not a simple matter -- this is a national tragedy," said Vilhjalmur Bjarnason, a professor of business at the University of Iceland. He owned stock in all three banks. "I was planning to use this money for my daughters, who are handicapped," Bjarnason said. ". . . The fundamental question is, how can this happen in a civilized society?"
In the past decade, banking's rapid expansion helped transform this country founded by 9th-century Vikings into a kind of Switzerland of the North Atlantic. Families in Britain, Norway and the Netherlands sent their savings here. Living standards rose, and Reykjavik became a costly playground for Europe's wealthy.
"The wealth trickled back to many places," said Bjarni Brynjolfsson, editor of the online magazine Iceland Review. "To the arts, to musicians who played at the parties, to the caterers, to the restaurants, to the whole of society. . . . Everything seemed fine."
The banking wealth also bought companies around Europe, including the Hamleys toy-shop chain in London, a British soccer team, property in the Netherlands. Until the spectacular collapse this week, the three banks' assets were more than 10 times the economy of this longtime fishing outpost of 310,000 people.
Economists and business leaders here say that the institutions had been fundamentally strong -- well financed, lots of liquidity and a history of never defaulting on loans. But in the past year, emerging economic troubles overseas started to pressure them and the country's currency. Last week, when the smallest of the three, Glitnir, went for a routine refinancing from a German bank, it confronted the world's frozen credit markets: sorry, no loan. The system began to unravel.
The government announced last week that it was in effect nationalizing Glitnir -- Prime Minister Geir Haarde prefers the phrase "take over." The move got people asking questions about the exposure of the country's two other major banks.
On Monday, Iceland's currency dropped rapidly, and the government gave itself broad new emergency powers to intervene in all the banks' affairs and replace their boards. The second-largest bank, Landsbanki, fell to government control the next day.
Just when it seemed the worst was over, Icelanders awakened Thursday to the news that the largest bank, Kaupthing, had also been seized.