Dear Geir,
I am writing to express my concern about the action taken by the Icelandic authorities in relation to the Icelandic banking system and I hope that this issue can be resolved as quickly as possible.
I am pleased to hear that you had a constructive telephone conversation with Alister Darling yesterday and that officials from Treasury, the Bank of England and the financial services authority and the financial services Compensation Scheme will visit Reykjavik for discussions today.
In view of our strong bilateral relations and the excellent relations among EEA we sincerely hope that it will be possible to resolve this situation rapidly and on a constructive and co-operative basis.
Yours sincerely,
Gordon Brown
CallMeHaddock:
Overall the I would agree with your analysis, except for the following:
>I don’t dislike Gordon Brown. He’s not a great communicator of the touchy-feely
>Blair kind,
Gordon Brown is a bullying Scot who regularly engages in projection (in this case regarding the inequitable seizure of assets – he did that, but said that the Icelandic government was about to).
There is a reason that the spoof column in Private Eye magazine ‘Prime Ministerial Decree’ presents him as exhibiting Stalinist ruthlessness.
>but he’s a heavyweight thinker and appears to have done a hell of a job
>now to alleviate the global crisis.
This massive waste of future tax money is only going to prolong the financial meltdown (much as Japan did during its ‘lost decade’ of ‘zombie banks’) and create massive inflation. Banks still don’t trust each other, and the main effect is going to be that they think they can continue to take big risks, knowing that the taxpayer is going to be be knocked on the head to pay for it.
No, Brown’s actions show him to be a second rater, and cheap opportunist without a conscience.
As GreatDane mentioned in another thread here, the idea for the bail out looks to have come from Swedish ex-Minister of Finance Pär Nuder who explained to Brown the mixed results of such actions in Sweden during that nation’s crisis of 1992-1993. Certainly Brown did not come up with it himself.
>But he did make mistakes with respect to the Icesave debacle, with very serious
>consequences for the Icelandic situation. I think this is understandable in the
>circumstances. The man is beset by all sorts of problems and was in the middle of
>trying to solve a once-in-a-lifetime financial crisis when he committed those
>mistakes. He may have wanted to appear decisive, understandably, for political
>gain, and he may have wanted to make an example of Iceland pre-emptively
>against other countries.
As well as his attempt at a “Falklands moment”, Brown did this consciously to crush the credibility of the Scottish Nationalist Party (SNP) in time for the Scottish Glenrothes by-election, and beyond. Brown is MP for next-door Kirkcaldy & Cowdenbeath, and the SNP now hold a minority government in the Scottish Parliament. This has been a huge thorn in Brown’s side for over a year.
One of the SNP’s planks for Scottish independence is joining the “arc of prosperity”, of which Iceland is a large part. Brown and his attack dogs in Scottish Labour can now attack Salmond and the SNP with vigor after having conveniently demolished Iceland’s economy.
Just Google for any of Brown and Scottish Labour’s recent speeches about the SNP. They are not exactly being subtle about this, primarily because they think they have got away with it.
Kaupthing was closed because it was in default. Both ICESAVE and KAUPTHING were unable to process a huge number of withdrawals made from their accounts over a weekend where Icelands economy was in trouble. Chaps high speed payments were due in Bank Accounts on the 6th Oct and did not arrive. Sadly the speed of the internet was partly to blame for the final collapse.
@CallMeHaddock
I just wanted to say that your comment made a good balanced article!
I heard a man on the news the other day who had been asked by his elderly parents to invest their life savings (£90k) in a good high interest account. Not stocks and shares because they wanted no risk. He invested in an account in Jersey which was owned by the Icelandic bank. All of their money is now gone and he is not covered by the UK garauntee because it was in Jersey. I think that is disgusting.
I don’t think any Icelander in his right mind would try to blame Gordon Brown or the UK for Iceland’s collapse, just for exacerbating it. Of course it’s shameful that an Icelandic bank is unable to honour its obligations (at the moment). If no other Icelander has, I hereby extend my heartfelt apologies on behalf of Landsbanki to all those British Icesavers affected. The UK government is helping us out to meet those obligations and I hope Iceland will eventually repay the total of that debt.
I don’t dislike Gordon Brown. He’s not a great communicator of the touchy-feely Blair kind, but he’s a heavyweight thinker and appears to have done a hell of a job now to alleviate the global crisis. But he did make mistakes with respect to the Icesave debacle, with very serious consequences for the Icelandic situation. I think this is understandable in the circumstances. The man is beset by all sorts of problems and was in the middle of trying to solve a once-in-a-lifetime financial crisis when he committed those mistakes. He may have wanted to appear decisive, understandably, for political gain, and he may have wanted to make an example of Iceland pre-emptively against other countries.
He may have been misinformed. The night before he froze Icelandic assets in the UK and made his aggressive statement about Iceland’s “default”, the governor of the Icelandic Central Bank gave an interview on Iceland’s state TV channel. I think it’s very understandable if, say, staff members of the British Embassy in Iceland interpreted his words as meaning that Iceland wouldn’t pay up the foreign debt of Icelandic companies. Of course, he was talking about creditors, not savers, but he had no mandate to say anything of the sort, even if he is a former prime minister. Such subtle distinctions were even lost on many Icelanders, who were aghast at his suggestions. Iceland has never done such a thing. The Icelandic government never said anything of the sort.
This happened at the worst possible time for Iceland. The Icelandic government had its hands full with other problems and was probably hoping that the Brits would lend a helping hand and provide the funds necessary to address the immediate concerns, as Iceland was apparently, and shamefully, unable to. Brown did the opposite, made very harsh statements about Iceland “defaulting” and taking legal action, and proceeded to freeze Icelandic assets. This may have been partly a PR stunt and a stern message to other countries. At least the move seems to have earned Brown some political goodwill at home. Iceland is an easy target and a relatively unimportant country. Thus, the UK’s retaliation may have been partly politics for home consumption.
The UK government invoked anti-terrorist laws to seize the assets not only of Icesave’s parent company, Landsbanki, but also those of Kaupthing Bank, Iceland’s largest company, which became collateral damage. The UK’s seizure of Kaupthing’s subsidiary Singer and Friedlander activated covenants on loan agreements, which destroyed the parent company. Kaupthing was still viable as it had just secured loans from the Icelandic and Swedish central banks. The Icelandic and UK government are now edging closer to e deal. But it’s just too late for Kaupthing.
That’s basically the sorry saga.
It’s true that Iceland was highly leveraged and was economically like a reasonably large financial sector with a small country attached to it. But so are, basically, the UK and Switzerland. Icelandic businesses may have taken some excessive risks. But the fact of the matter is that the Icelandic banks had been reining in their exposure for years. All of the Icelandic banks were solvent when the credit freeze hit Glitnir. They had all posted good first-half results, they had strong capital ratios. They had diversified their risk profile and funding base. Their dependence on wholesale funding was not greater than that of their overseas peers. They were rather well managed.
But the Icelandic state and the country’s central bank were too small to cope with the burgeoning banking sector. The Central Bank hadn’t built up sufficient currency reserves. When Iceland’s third largest bank, Glitnir, needed the Central Bank’s assistance as a credit line had unexpectedly closed down at an unfortuitous moment, the CB nationalised the bank, a bad move which scared the markets and caused credit to dry up further for Iceland. So Iceland’s meltdown was basically owing to the unexpected severity of the credit squeeze, the Central Bank’s failures, policy errors and mistakes in the Icelandic government’s crisis management and bad PR.
Iceland still has strong institutions, a well-educated workforce and some unique natural resources. The country will rise again but it will probably take a decade to reach our previous level.
Well I think it can clarify some aspects
What the UK did in 1917 is theft of other peoples property.
What happened to icesave clients is a result of a bankrupcy and not theft.
When Gordon Brown confiscated Icesave and sold it to the lowest bidder it is theft and resale of stolen goods.
What makes these situations different is that they happened almost 100 years apart in totally different times. They have nothing to do with each other and you bringing it up does nothing but confuse the situation. Its completely irrelevant.
To James,
Before I shut up, will you clarify and make it patent what makes these situations different? After that “revolution” Russian emigrants were not able to get their money back from their deposits in British banks. You British-Americans and other “Anglo-Saxons” (I doubt there any Anglo-Saxon blood left in your veins)are so arrogant and YOUR problems only matter.
As soon as you you give me an exhastive answer, I shall shut up- I promise.
Magyar knight, events in 1917 have no bearing on what is happening now. Best shut up I think.
paul, how is anything you said relevent to what I said????
I just wonder whether “Great” Britain fullfilled her obligations before Russian savers, which were rather unlucky to have deposits in British Banks before and while the Revolution in 1917 engaged and conducted on the money, provided by the financial circles of rich jewish moguls.
As far as I know, she (GB) DIDN’T.
Paul: “When it becomes clear that Iceland is unable to pay out, who can blame another country for impounding assets.”
This only became clear after the Brown seizure had caused, Landsbanki to collapse. Don’t forget Brown is the cause of the collapse, there are indications that everything would have been fine if Brown hadn’t overreacted.
Thank You Mar for that nice piece from Richard Portes. It highlights the fact that the Icelandic debacle is not due to greed but a couple of bad decisions by the CBI. Politics and banking don’t mix.
I feel sorry for Mike Hicks and his bonds but he will in fact get that back since the “cash” for the bond existed. Our superannuation fund system in Australia means that 50% of my retirement egg has disappeared in 2 weeks. I will never get that back, since it has always been stock money.
Not Icelands fault is it ??
Its normal to want to blame someone when something goes wrong. How about the wankers that run banks like they own them and the politicians who think its important to win votes rather than solve problems.
Email from Mike Hicks:
James obviously has no idea of the true impact of the Icelanders greed. I had my pension fund in a one year bond in Icesave, I am (was) due to retire on the 1st of November. I cannot now retire, I don’t know where my life savings are and I have no idea when I will get any recompense. Also, I will have no job to fall back on after that 1st. The fact that the Icelandic Government reneged on even the basic fallback compensation shows they are not to be trusted. The lies Haarde told leading up to this fiasco make me livid.
Glib statements, completely miss the human cost of this theft.
Paul
Don´t be stupid.
The assets of the banks will cover most of the damage.
The poor regulation you refer to is EU regulation.
Landsbankin never tried to hide the fact EU passport licence it used to penetrate UK markets only guarantees the first 21.000 euros.
You authoroties and advisors should have checked it out before advising those charities and counsils to use Icesave.
Your stupidity our gain.
Another stupid action = closing down Kaupthing SF without a cause (a UK bank, not Icelandic) using Terrorist laws.
= UK owes us 100´s of billions.
The 80.000 sterling you talk about is true if the banks assets are wort nothing, zero.
I do not know how you run your banks but ours are required by law to have assets and liquid cash in porportion of their dept.
The crisis only led to the liquid cash to run out, now the liquidation of assets has begun to repay people.
The shock to Icelandic economy comes mainly from plain stupid declarations from UK PM and CE.
The PM has tried to fix it a little bit but the CE i´sn´t coming to his senses.
James, there are far more UK people affected by the failure of the appalingly poorly regulated banks in Iceland than there are people in Iceland. When it becomes clear that Iceland is unable to pay out, who can blame another country for impounding assets. Currently £1billion is owed to charities and local authorities, £4.6 billion to savers and £18billion to other companies – or about £80,000 per Icelander. Let’s face it, Iceland is not going to be able to bale that lot out, and the UK taxpayer will end up compensating people. If you borrow £1,000 from your neighbour, then say you might not be able to pay it back, you can’t then bleat about them not giving back your lawnmower!
But that is exactly what happened, so how is it absurd?
James, your comment is absurd..
http://www.ft.com/cms/s/0/80f767e4-9882-11dd-ace3-000077b07658.html
The shocking errors of Iceland’s meltdown
By Richard Portes
Published: October 12 2008 18:49 | Last updated: October 12 2008 18:49
The US authorities’ decision to let Lehman fail will be severely criticised by financial historians – the next generation of Bernankes. That precipitated the current acute financial crisis. The Bear Stearns operation had protected counterparties, but after Lehman all remaining trust vanished. Money markets and interbank lending froze completely. Spreads on credit default swaps rose to levels signalling both extreme fear and feverish speculation.
Iceland’s Glitnir Bank was among the first casualties. One of the many vicious circles in this crisis ensnared Iceland’s banks: they were deemed too risky because the country’s central bank seemed not to be a credible lender of last resort, while the government and central bank were deemed not credible because they might have to take over the banks.
The markets hit Glitnir first. Like fellow Icelandic banks Landsbanki and Kaupthing, Glitnir was solvent. All posted good first-half results, all had healthy capital adequacy ratios, and their dependence on market funding was no greater than their peers’. None held any toxic securities. These banks had been managed well since their “mini-crisis” in early 2006.
No matter – when foreign short-run credit lines closed, Glitnir had to request a short-term loan from the Central Bank of Iceland, which refused. Rather than taking Glitnir into administration, the CBI enforced nationalisation on punitive terms. The governor, David Oddsson, was prime minister for 13 years prior to moving to the CBI in 2005. His decision reflected politics, technical incompetence and ignorance of markets, and his comments thereafter were highly destabilising.
This triggered a sovereign debt downgrade and a sharp further fall in the already depreciated krona. Short-run funding for Glitnir and Landsbanki evaporated, margin calls came from the European Central Bank, loan covenants kicked in because of the downgrade. With the banks unable to meet commitments, Iceland’s financial regulators put them into administration.
Kaupthing still seemed viable. But last Tuesday, Mr Oddsson made public remarks that were interpreted to mean that Iceland would not meet its obligations to UK depositors. This was politics for home consumption. So was the UK’s retaliation, with an ill-considered invocation of anti-terror laws to seize the UK assets not only of Landsbanki, but also of Kaupthing. Gordon Brown’s highly aggressive statement was not his best moment of the financial crisis.
Kaupthing was collateral damage. Britain’s seizure of its Singer and Friedlander subsidiary destroyed the larger bank, as covenants on loan agreements were activated. The UK and Iceland appear now to have agreed on dealing with depositors, but too late for Kaupthing. Still, it would be foolish for the UK authorities to impair Kaupthing’s assets further.
Meanwhile the krona fell to ridiculous lows offshore, while domestic trading of the currency ceased. The CBI then made a further egregious error, the prime minister another. The CBI had mishandled its interest rate policy and the foreign exchange markets since early 2008. On Monday, it announced a currency peg at a rate well above the market. Without effective controls, this was unsustainable, and was abandoned by Tuesday. The prime minister prematurely announced a €4bn ($5bn, £3bn) loan from Russia, but it emerged that negotiations would start only this week. What was meant to restore confidence did the opposite.
The Icelandic banks were highly leveraged and large relative to the domestic economy. So are those of the UK and Switzerland. None has been immune to the devastating effects of the crisis. And there may be significant contagion from Iceland to countries vulnerable to capital flow reversals.
There are further lessons. Politicians should not become central bank governors. Mr Oddsson is part of the problem, not of any solution, and should resign immediately. Allowing partial “euroisation” was a recipe for instability. And Iceland was unable or unwilling to arrange early international support, nor did it wish to call in the International Monetary Fund.
Iceland could now negotiate an IMF programme with conditionality and lending from the Fund. But letting the currency float is likely to be disastrous, even with (or because of) much higher interest rates. They could peg the currency with capital controls. Or they could announce they are entering into negotiations to join the European Union, with a commitment to join the euro. If they do, the eurozone authorities should agree to support a reasonable exchange-rate band.
The debacle is due to the unexpected severity of the financial crisis and shocking policy errors. But Iceland has excellent institutions and human capital, as well as sophisticated service enterprises. Its people will have to absorb a temporary fall in their high living standards. Its banks will be revived as much smaller institutions, still with highly capable managers. It will ultimately prosper again.
The writer is Professor of Economics at London Business School
Copyright The Financial Times Limited 2008
Dear Geir,
Hope you dont mind but we are going to steal your bank and sell it to the Dutch.
Yours sincerley
Gordon