No country has yet gone bust in the global credit crisis – but Iceland is on the brink. Prime Minister Geir Haarde has admitted his country “faced the real possibility of being sucked into the global banking swell and ending in national bankruptcy”. It’s a far cry from last November, when Iceland was judged the best place to live in the world, ousting Norway from the top of the UN league table, noted the Telegraph’s Andrew Pierce. But with the country “presiding over the fastest banking system expansion anywhere in the world, the party’s now coming to a messy end”.
How Iceland got into trouble
Icelandic companies had used cheap loans to snap up large stakes in, for example, British retailers, “acting more like a private equity fund than a country”, said Danske Bank’s Lars Christensen, and so became “the most exposed when the credit crunch finally arrived”. Iceland’s bank debts are now around nine times higher than the country’s economic output GDP, and they will now have to sell off their investments – and they’ll have to sell them “fast and cheap, at a time when mounting fears of global recession will seriously reduce their market value”, said Peter Apps in The Guardian. The krona has collapsed and inflation has hit 14%, which has forced interest rates up to 15.5%; this has already sent the economy into recession, as Lex noted in the FT. The second-largest bank, Landsbanki, was nationalised this week, while the third-largest, Glitnir, which was expected to be nationalised, will now be put into receivership as its problems “were much greater” than previously thought, said central bank governor David Oddsson. The biggest lender, Kaupthing, survives for now with a e500m central bank loan.
There may be short-term salvation from an unlikely source – a $4bn loan offer from Russia. The danger is that Iceland could end up “a pawn in a geopolitical power play”, said Breakingviews.com’s George Hay. The IMF would be a better bet. Meanwhile, the government has been trying to peg the krona to the euro, but on Wednesday massive downward pressure on the currency – which makes foreign-denominated debt even larger – forced it to scrap the move. The ice is getting thinner.