Economic Crisis In Iceland - An Overview

The collapse of Iceland’s bank system

The morning of September 29th was the beginning of the crisis for the Icelandic public, when it was announced that the 'State and Glitnir', one of the three big banks of Iceland, had come to an agreement that the state would buy 75% share in the bank. Signs of economic crisis have been visible for quite a long time in Iceland; economists and leftists have been warning the Government, but until September 29th, the Government and the Banks have repeatedly ignored these warnings and stated that everything is fine. According to Iceland Review “the state is not planning to be a majority owner in Glitnir long-term; the purpose with these actions is to secure economic stability.” At this time Glitnir had lost around 85% of its share value when the stock market closed Friday September 26th.

This decision led to a series of meetings where the authorities, along with the board of the Central Bank, met with the directors of all the major banks and investment institutions in Iceland. During these meetings, Davíð Oddsson, the Chairman of the Central Bank board, ex-Prime Minister and one of the major heads of the aluminium industry development in Iceland, mentioned several times the possibility of forming a national government. Iceland Review explains national government here:
“A national government (thjódstjórn) is a coalition government comprised of most of all political parties that have representatives in the Althingi parliament. Such a government has only been formed once in Iceland, on April 17, 1939, Fréttabladid reports”
Three days after the nationalization of Glitnir, Prime Minister Geir H. Haarde delivered his keynote speech in the Parliament. Though mentioning the crisis and the nationalization of bank Glitnir, Haarde’s speech contained nothing, as later stated by Steingrímur J. Sigfússon, the leader of the Left Green Party. Instead of admitting the Government’s and the Bank’s mistakes and greed, Haarde, the man who is supposed to lead the nation out of the crisis, talked himself through the problem and went on talking about how Icelandic artists are still doing well abroad.
Jóhanna Sigurðardóttir, Minister of Social Affairs, criticized the banks and their leaders, claiming the internationalization of their operations was characterized by rashness rather than foresight. “The system of stock was likely to have increased their risk appetite too greatly” she said, according to Iceland Review.
The fall of the Icelandic Króna
Discussion of the crisis has been increasing every day in the society and the media. Food shops have been encouraging people to buy and buy, to fill their houses with food. But according to the government, there will not be a lack of goods in the country, at least for the next eight or nine months, because of a special fund that the Central Bank keeps for import of food. Yet, Icelandic shops have had problems with buying food because of their lack of cash. The Icelandic Króna (ISK) has been falling constantly and the currency was locked by the Central Bank, with permission from the prime minister's office.

An Emergency Law was set in Iceland - “the most radical economic measures that have ever been taken in the country’s history” states Iceland Review. The law enables the government to stage an extensive intervention in Iceland’s financial system. At the same time the Icelandic Financial Supervisory Authority (FME) took over the board of Landsbanki Bank and Glitnir Bank.
Icelandic State = Terrorists?
On the 8th of October British Prime Minister Gordon Brown and the Chancellor of the Exchequer Alistair Darling announced that the the British state would sue the Icelandic government to ensure that British customers would get back their deposits from IceSave, a bank owned by the Icelandic bank Landsbankinn. The British authorities invoked anti-terrorism legislation by freezing Landsbankinn’s assets in the UK and Gordon Brown said he believed the Icelandic nation was basically bankrupt.
IceSave was located both in Britain and the Nederlands and had many customers, including British towns and districts who now face major financial problems.
The last bank standing, Kaupthing, was taken over by the state on the 9th October. The bank authorities and the government blamed the British for it and the Icelandic government is now preparing a lawsuit against the British state, mostly because of the damaging effects the downfall of Kaupthing Bank had on the Icelandic State. Iceland Review states:
“Iceland’s largest bank Kaupthing was nationalized following public announcements by British officials that Iceland did not intend to honor its obligations to British account holders, which led to the seizure of Kaupthing’s assets in the UK and subsequently the bank’s collapse, as claimed by Sigurdur Einarsson, Kaupthing’s chairman.”
The Left Green Party has demanded an investigation into what was really the reason for the collapse of the three major Icelandic banks and who is responsible for it.
IMF or Russia?
On 7th October, Victor I. Tatarintsev, the ambassador of Russia, met with the Icelandic government to announce that Russia had granted Iceland a €4 billion loan and representatives from the government went to Russia to discuss the possible loan. The Russian newpaper Rossiiskaya Gazet stated that if the loan were to go ahead, the Russian authorities would receive collateral in various forms including income from fish and aluminium export, tourism and the energy industry.
The International Monetary Fund (IMF) contacted the Icelandic authorities and said that the fund is ready to grant Iceland a loan. The loan would only be possible if the disagreements with the Dutch and British authorities were solved. Prime Minister Geir H. Haarde said the government would look into what prerequisites and terms would be included in the loan and than make a decision. A couple of days later an article by Ingibjörg Sólrún Gísladóttir, Minister of Foreign Affairs, was published in Morgunblaðið newspaper, where she announced her support for the IMF loan.
The fund does not usually grant loans except when strict conditions are agreed upon involving an extensive marketization of the infrastructure of the community in question, Fréttabladid reports. Iceland Review received a letter from a Malaysian person who raised her worries about Iceland accepting a loan from the IMF:
“We know that any ‘help’ from IMF is not without any obligation and our country would surely have been indirectly colonized again if we did that. Malaysia has only been sovereign for 51 years now after being colonized for 450 years. Look at who truly owns IMF.”
Icelandic taxpayers pay for the banks’ dangerous behavior
The government came to an agreement with the Dutch and British government, which means that the British state will loan the Icelandic state “up to usually €3 billion... so that Iceland can honor its obligations to Icesave account holders in the UK” states Iceland Review. Iceland’s Minister of Commerce Björgvin G. Sigurdsson said this solution is unavoidable. “It is a matter of obligation of national rights which Iceland was required to agree on.” A similar agreement has been made with the Dutch state.
The three major banks in Iceland - Glitnir, Landsbankinn and Kaupthing - have been playing dangerous investment games all over the world. Their extremely complex web of investments and loans has become much bigger than Iceland’s national production. At the same time, the owners and directors of the banks have been giving themselves sky-high amounts of money for their work. The banks have encouraged people to use their savings to invest in the banks, different funds and connected companies. Customers have been convinced that this is the best way to use keep their savings, but now, when the banks have collapsed, people have started to see their lifetime savings turn into nothing.
None of the extremely high paid ex- or now working CEO’s and directors is going to pay for their dangerous behavior around the world. That responsibility is put on the shoulders of Icelandic taxpayers.
A wave of protests
Since it became clear that the Icelandic nation would have to pay for this stupidity, people have started protesting against the Icelandic government, the banks and the Central Banks. Following a big protest demanding that Davíð Oddson, Chairman of the Central Bank board, leave his job, people have met every day in front of the parliament. The demands have been different, but it is clear that people are angry.
Of course it is impossible to blame everything on the banks and the government. A lot of Icelandic people jumped straight in to the pool of neo-liberalism, as soon as they could. For the last decade, Iceland has faced more prosperity than one could have imagined. People have spent much more money than they ever had on houses, SUVs, summerhouses, summer holidays etc. etc. But now it is time to pay back and for some people the money never existed.
Still, a lot of people have nothing to do with the current situation and as always the economic crisis will most affect those who have nothing - those who do not deserve it.
A big demonstration took place on Saturday, October the 18th. The main demand was that Davíð Oddsson be released from his job in the Central Bank. Oddsson was the Prime Minister when the banks were privatized and was the individual who pushed the hardest for that to happen. It was also demanded that the government take responsible decisions to solve these crisis, without putting the Icelandic nation into an eternal debt. As well, a lot of people want to take the power from the current government, demand a new election, or/and other radical changes in Iceland’s political and financial systems. Big protests will now take place every Saturday.

This account is adapted from an article on the website Saving Iceland