Iceland: a Metaphor for the Crisis

It is shaping up as the disaster of all the financial disasters we have seen so far. Iceland, a country of perhaps 320,000 people, stuck at the top of the world, has become a sort of single point of reference for the credit binge and freeze.

It could very well be the first company to go into bankruptcy as a result of its credit binge being killed off by the crunch, now freeze.

Only some help from neighbours willing to risk billions and perhaps never see the money again will see the country avoid being bankrupted. Talks start with Russia on a 3 billion euro loan next Tuesday.

No repeat of Argentina or Russia defaulting on debts: in those cases default was a last option for desperate and at times venal politicians and businesses leaders.

Iceland has no option: bankruptcy for the entire country is the only option: the Government has sporadic discussions with the International Monetary Fund which could help, but seemingly is resisting the obvious cost.

But the entire financial system is rotten, too much debt, too little equity and just no prospects for recovery in Iceland, and in Europe, especially Britain.

Three major banks all seized by the government: Number 3 Glitnir was put into administration yesterday after the Government abandoned attempts to keep it alive, Landsbanki seized earlier this week, setting off a major row with Britain over billions of pounds of UK savers money and yesterday the largest bank, Kaupthing was seized by the Government which ended an attempt to maintain it as a ‘national champion’.

The trio of banks had debts of $US61 billion, 12 times the Icelandic economy: with a total of $11 billion euros of debt (around $US15 billion) falling due this year and in 2009.

The banking system has all but collapsed and the Government will try and build a new bank from the ruins of the trio.

The Government shoved up interest rates to try and stabilise the situation and the krona, but to no avail. Trading on the country’s stockmarket has been shut down until Monday.

Instead a sharp slowdown emerged with gross domestic product contracting by almost 4% in the March quarter of this year, compared with the December 2007 quarter.

The size of the accumulated imbalances is astounding: the external deficit was 25% of GDP in 2006 and 17% in 2007. Gross short-term foreign debt amounted to 15 times the value of the central bank’s foreign exchange reserves at the end of 2007, or roughly 200% of GDP. Gross long-term foreign debt amounted to another 350% of GDP.

Bank assets were running at 10 times GDP by the end of last year. All this to buy stakes in companies, soccer clubs and other assets in Britain, Denmark, the US and elsewhere.

And even now some commentators hold out hope for it. If you were a creditor, what would you do, invest more in the US or throw good money after bad in Iceland. Some of its offshore investments (such as the UK retail chain, The House of Fraser) will make juicy and bargain buys for people with money.

But there won’t be any favours and the price will be low and the losses high for Icelandic banks, entrepreneurs and the country as a whole. There is no way the country can meet the private debts of its banks.

Iceland is nothing more than the impending collapse of the most over-geared country in the world. It is a combination of Lehman Brothers, Bear Stearns, AIG and any other basket case we have seen, rolled up into one snowballing disaster. A financial black hole in the making.

The banks are stuffed, investment companies are stuffed, the central bank is powerless, the government stranded: if you have no reserves or money, nothing can be done.

Pension funds have billions of dollars of investments in overseas accounts, but they have been badly damaged by the slump ($US11.8 billion a few months ago, according to reports this week).

The Government is looking for a loan from Russia of around $US5 billion perhaps; Sweden’s central bank has extended a $US700 million loan to a wobbly bank’s Swedish subsidiary to protect Swedish depositors. That bank has now collapsed.

So bad were the affairs of Glitnir, the third largest, that the Government washed its hands of it, 10 days after rescuing it in a $US1 billion deal, handed it over to the country’s financial regulator and sacked the board and senior managers.

But there is now an unholy row now with Britain as that was the country of choice for the banks to finance Icelandic businesses to invest in: many of whom had shareholding or board associations with the very banks now failing.

The toll is going to be extensive and the UK Government will probably have to find well over $US7 billion to bailout individuals, companies, charities, local and regional government bodies who had billions of dollars invested in the two main banking arms of Iceland’s two biggest banks, Icesave (owned by the tottering Landsbanki) and Kaupthing Edge. These were mainly online banking operations run out of Iceland which harvested deposits in the UK.

UK reports said the Government expected Iceland’s depositor compensation scheme to cover about £2.2 billion of the £4.6 billion owed to about 300,000 Landsbanki depositors, with £1.4 billion coming from the UK industry financial services compensation scheme and the remainder from the government. That of course presupposes that Iceland has the money to meet the cost of the guarantees.

The Treasury said the Government would have to cover much of the compensation scheme’s contribution because it didn’t enough money. The Government would look to recoup the taxpayers’ contribution from the proceeds of the sale of Landsbanki’s estimated £7 billion of UK assets. But even their some losses will be taken because asset values are falling for many of the investments in the UK.

Kaupthing Singer Friedlander, the UK arm of the weakened Kaupthing bank of Iceland, was put into administration on Wednesday night by the UK Government to protect investors.

That was after Singer had inflicted huge losses, estimated at $US2 billion on London entrepreneur, Robert Tchenguiz (His brother Vincent earlier this year tried to takeover a fund managed by Challenger and built a $320 million stake through a company called Arkmile. The assault was called off in August when Arkmile and Challenger reached some sort of agreement).

London media reports said Mr Tchenguize property entrepreneur, lost £1 billion in 24 hours when Singer Friedlander forced him to sell his shareholdings in leading retailer, J Sainsbury and pubs group, Mitchells & Butlers.

The Financial Times said Mr Tchenguiz had lost up to £600 million on the sale of a 10% stake in Sainsbury’s (Britain’s third-biggest supermarket chain) and about another £400 million on being sold out of his 25% of M&B (as it is known in London).

Kaupthing Singer & Friedlander is reported to have forced the sales as it sought to generate cash by selling assets and cutting its loan and other exposures, raise cash and scale back its loan exposures. It went into administration after the sales went through.

The London Times reports that dozens of local councils risk losing hundreds of millions of pounds of taxpayers’ money held in Iceland’s stricken banks.

Town halls across the country may have to raise council tax and cut services as the repercussions of the collapse of the Icelandic economy broadened into a diplomatic row with Britain.

“Alistair Darling, the Chancellor, pledged yesterday to make good all losses suffered by the 300,000 British savers caught by the collapse of Icesave, the online bank that went into receivership on Tuesday,” the paper reported yesterday.

“The move will cost the Treasury about £4.5 billion — and carried an implicit pledge from Mr Darling that he would do the same if other banks collapsed. The Government also seized control of the British arm of Iceland’s Kaupthing bank because it could not honour its obligations to customers.

The Times and other papers said the UK Government used anti-terrorism powers to freeze an estimated £4 billion of British financial assets in Landsbanki, Icesave’s parent bank.

“Authorities in London are believed to have about £200 million in Icelandic banks. They include Westminster, which said it had £17 million split between Landsbanki and Heritable; Sutton — £5.5 million — and Havering, which has investments totalling £12.5 million. Outside the capital, Kent County Council said that it had £50 million deposited in Icelandic banks — £15 million with Glitnir Bank, £17 million with Landsbanki and just over £18 million in its British subsidiary, Heritable.”

The Government flicked Glitnir, the third biggest bank, to the financial regulator, using emergency nationalisation powers that were used on Tuesday to drive the nationalisation of Landsbanki. Of the three big banks that powered Iceland’s financial services boom, only Kaupthing remains independent.

An Icelandic businessman, Jon Asgeir Johannesson, controlled the biggest stake in Glitnir and also chaired Baugur, the retail company that owns several British retail chains (House of Fraser)

He has been now wiped out, leaving the fate of those UK retailers up in the air at a time when the sector is slowly going backwards as the recession rolls over the country. Bagur owns a string of stakes in listed retailers here and unlisted groups in the UK, US and Europe.

Kaupthing bank received just on $US1 billion from Iceland’s central bank and has said it was “helping” the government with the restructuring of Glitnir. That ended with yesterday’s seizure.

Dutch banking and insurance group, ING said its UK online and phone banking subsidiary had agreed to buy £3 billion in UK deposits at two Icelandic banks for an undisclosed sum.

The Dutch group said its ING Direct unit (which operates in Australia) was taking on £2.5 billion in deposits from customers at Kaupthing Edge, the UK online arm of Kaupthing, the Icelandic lender, and £538million in savings deposits at Heritable Bank, which is owned by Landsbanki, the Icelandic lender that failed and went into receivership on Tuesday.

And Iceland had ended attempts to strengthen the krona by pegging it to a rate of 131 to the euro.

The answer is simple: the market doesn’t believe that rate, or any other. Investors are looking at one very important ratio:

Iceland’s banking system is collapsing under the weight of debts equal to 12 times the size of the economy.

The market has been looking at a value of over 200 krona to the euro and more. In fact the last quote was 340 to the euro. It wasn’t traded Thursday in the spot market.

If something isn’t done soon to stabilise the situation the country faces the prospect of a post World War 1 hyper inflation and economic implosion.

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Australasian Investment Review

Filed under: Abandoned Property

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