Why icelandic banks failed

Iceland's krona struggles to survive. Iceland's 'tenacity' lifts economy out of crisis. Image source, Getty Images. Gudrun Johnsen: The reckoning. Olafur Hauksson: See you in court. Iceland's ex-prime minister Geir Haarde was put on trial in over his role in the crisis. Asgeir Jonsson: A new economy. Image source, AFP.

Visitor numbers to sites such as Jokulsarlon, the largest glacier lagoon in Iceland, have grown sharply since the financial crisis. Dr Jay Cullen: Watch and don't learn? The UK economy is more reliant on its financial sector than Iceland was. Related Topics. Published 3 July Published 8 June Iceland profile. Published 28 May Published 19 June Published 7 January The third largest bank in Iceland was the first to collapse.

At that time, Glitnir had been having trouble rolling over debts with 1. The bank operated both domestically and internationally.

On September 29, , the government announced its plan to take over Glitnir. The bank was privatized in the early s. Landsbanki was most well-known for its Icesave account, which offered foreigners high interest rates for their deposits.

Its UK branch, in mid, had more than 5. Hence, when the Icelandic government refused to repay the foreign depositors after taking control of the bank on October 7 th , , the UK government activated the Anti-terrorism, Crime and Security An instrument representing financial value.

Stocks, Bonds, Futures, Options, and Swaps are all examples of securities. Securities are usually tied to the price of some underlying product, such as commodities, a corporation, or another security or basket of securities. This evoked an ongoing political dispute and legal trials in the international court. When the crisis hit the economy, Kaupthing was struggling.

The decision by the British government to put KSF under cessation of payment was the last straw. In December , the Althingi the Icelandic Parliament established the Special Investigation Commission to investigate and analyze the cause of the crisis. Its report was delivered in December It is important to understand the history and traditions of Iceland as they heavily influence entrepreneurship in this country.

After regaining independence in , the fishing and export sectors were the driving force of the economy. The government owned most of the banks and imposed strict controls on businesses and imports. They owned most of the businesses, influenced domestic and foreign policy, formed their own political parties, and ran the state for almost 60 years.

The level of bureaucracy and inequality was high. The trade unions, on the other hand, were growing stronger and more organized to protect real wages Wade and Sigurgeirsdottir.

In the early s, a group of students established The Locomotive journal to promote free trade and weaken the power of The Octopus Wade and Sigurgeirsdottir. They gained public attention and support over the next decades. His strategy for Iceland to become an international financial center heavily influenced the vision of a new Icelandic economy, which in turn created the onset of the crisis.

As part of the agreement, trade barriers were mostly eliminated. It is worth noting the government did not sell ownership to foreigners but to selected individuals and groups Sigurjonsson. Good may be used to refer to anything — it is a general term that expresses positive value about something or assigns positive value to something.

Nevertheless, in philosophy the term takes on special meaning and that meaning is particularly related to ethics. With a small population, Icelandic banks turned to the international market and expanded rapidly. The government slashed taxes and deregulated the labor force Wade and Sigurgeirsdottir. Bankers and the management class spent their new found wealth lavishly on overvalued investments.

In a short period, Icelandic individuals were behind countless purchases of multi-million dollar businesses. The entire country was transformed dramatically when its citizens were offered cheap financing. In , the total external debt of Iceland stood at ISK , million.

In , household debts ranged between ISK and million. In , household debt reached million Wade and Sigurgeirsdottir. Banks competed against each other for customers with attractive credit rates Wade and Sigurgeirsdottir.

Examples include the American housing bubble of the early s; the Dutch Tulipmania, sometimes considered the first bubble, when investors in the Netherlands began paying absurdly high sums for tulip bulbs; and the South Seas Bubble of This behaviour illustrated a dominant characteristic of the political environment in Iceland, where those who had economic power could impose their opinion on government policy.

This unstable and seemingly unstoppable growth did not escape the eyes of international watchdogs. In , Fitch changed its outlook for Iceland to negative. The Krona slumped immediately. Since Icelandic banks borrowed substantially in foreign currency, their liabilities rose. With the immediate intervention of the Central Bank and the government, the Big Three did not face an emergency. Nevertheless, the banks were finding it harder to obtain funds.

Landsbanki then created Icesave, a saving account with an attractive interest rate for foreigners. The bank issued Bonds A type of debt investment in which an organization borrows money from investors with the agreement to pay back the money at a certain date with a certain interest rate. Thus, the interest rate on the bond rises. In addition, the longer the bond They even used this dubious transaction in the foreign market, borrowing from the Luxembourg Central Bank and the European Central Bank Wade and Sigurgeirsdottir.

In the year leading to the crisis, Icelandic investment firms met with continuous losses. Prices on the stock market took a dip as did the value of collateral. Icelandic firms faced margin calls from their foreign lenders. They were required to provide more collateral, in the form of securities issued by the banks, which they successfully obtained.

This created more liquidity risk for the banks as they were dependent on high risk debtors. The international view on the Icelandic banking sector worsened due to its engagement in the money markets , high exposure risk and the negative global financial outlook.

The Krona depreciated substantially. Interest rate differentials decreased. Foreign deposits evaporated. Between February 10 and April 22 in , one billion pounds were withdrawn from Landsbanki. Haarde asked that Gisladottir take the post. Protesters took to the streets in response to soaring unemployment and rising prices caused by the bankruptcy. Iceland's economic collapse affected the rest of Europe.

That's because Iceland's banks had expanded their retail services in Europe. They had also invested in foreign companies. Iceland's Baugur was the largest private company in Great Britain. IceSave, the online arm of Landsbanki, froze withdrawals during the crisis. That affected depositors throughout Europe. Since the government was unable to maintain the value of the krona, many suggested Iceland join the European Union and adopt the euro as its currency. Iceland is already a member of the European Economic Area, a trade association that follows many EU rules.

But Iceland's fishing industry is opposed. It clashed with European countries over fishing rights. She barred capital from leaving the country. She raised taxes. But she also kept social services and provided debt relief to mortgage holders. She prohibited citizens from buying foreign currency or foreign stocks.

As a result, people invested in local businesses, including real estate and private equity. Tourism boomed when local prices fell thanks to the low currency exchange rate. It increased further after both the and volcanic eruptions. The World Bank. Statistics Iceland. Download PDF. They borrowed in dollars, converted them into krona and then made a sizeable profit from bond acquisitions.

This was further exacerbated by poor-quality lending books, which included large shares of zero coupon loans that were extended to holding companies. The banks had insufficient equity buffers to meet inevitable losses, and their liabilities had risen to more than 20 times the budget of the Icelandic state.

To make matters worse, liabilities were mainly denominated in foreign currency. A luxury complex comprising shops and restaurants, which was due to be constructed around the hall, never came to fruition. Drastic measures As the banks had become too big to save, the authorities decided to let them fail. Within days, the krona collapsed. Over 80 percent of the Icelandic financial system buckled and almost all businesses on the island were bankrupted.

The stock market fell by around 95 percent, interest payments on loans soared to more than percent, over 60 percent of bank assets were written off within a few months after the banks collapsed, and interest rates were hiked up to 18 percent in order to curb inflation rates.

In the years that have followed, the Icelandic Government has gradually reduced interest rates, progressively falling to 4. Although the banks themselves were not being bailed out, the government needed an injection of capital in order to stay afloat. With this, the government was able to protect domestic deposits and also keep the currency from devaluing even further. In a testament to its impressive economic growth within such a relatively short timeframe, Iceland began repayments to the IMF earlier than scheduled, beginning in with 20 percent of the loan.

Government officials recently announced that they expect the remainder to be paid before the end of this year. The financial sector has made substantial reformation efforts by adopting more sustainable models and introducing a more effective regulatory framework.