October 8th, 2008
12:23 AM GMT
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REYKJAVIK, Iceland - I arrived in Iceland a few hours ago to find a country in shock. Two of its big banks are in state control, its currency has collapsed, and it is asking Russia for more then $5 billion to prop up the island's financial sector. Its prime minister was the first leader of any country to confess that the global credit crisis could bankrupt the country.

Glitnir, one of Iceland’s biggest banks, has needed a government rescue.
Glitnir, one of Iceland’s biggest banks, has needed a government rescue.

As happens in any country when you parachute in, the driver who took me to my hotel was all too happy to fill me in on where it all went wrong.

Iceland went on a lending binge - sound familiar? Cheap credit, rising house prices and bank shares soaring. Iceland's population of less than 300,000 never had it so good. Until now.

Why should the rest of the world care?

First, Iceland could be a sign of things to come. When the first bank to collapse, Glitnir, was taken over by the government, banks outside Iceland cut back on loaning to the country's other banks. The credit crunch became a credit freeze.

The prime minister admitted on national television Monday night that the banks had grown to about 10 times the country's GNP. There is no way the country can bail them out. What if that happens elsewhere? Governments will surely see how Iceland's economy reacts.

Second, Iceland's super-wealthy families went on a buying spree. From Debenhams to House of Fraser to Hamleys to the West Ham Football Club, the wealth of this once fish-exporting nation was invested in Britain. Thousands of employees and hundreds of shops across Britain are tied into Iceland's economy. Bank lending or strong bank shares were behind it all.

Third, Iceland's banks had higher than normal interest rates, which attracted thousands in Britain to stick their money in places such as Icesave, an Internet bank. As of Monday night, their accounts were frozen.

We will spend the next few days talking to people here. At first blush, the blame is being put on those who spent the past few years building up portfolios on the back of rising property prices, driving around in super luxury cars (something apparently unheard of even five years ago in this very Nordic nation which prides itself on egalitarian principles) and taking money off shore.

With the currency so weak, and with so many mortgages taken out in foreign currencies, the fall in house prices has really hit hard.

Some people are at least hoping that the weak kronur will bring in more tourists. Maybe consumers from the Nordic and Scandinavian countries that used to benefit from Icelandic shoppers with a strong currency will instead come this way for and help out this nation.

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soundoff (9 Responses)
  1. blake minton

    Why am I paying the price for bankers that get £million + pound bonuses and goverments with no clue.IceSave has my life savings which are quickly going down the tube and in 2-3 years time they will still be paying bankers/traders £million+ bonuses.Why is there no recourse? This should not be possible.It is theft on a grand scale and should not be allowed.They have stolen my money and it is time that all the savers like myself ,who have been told in their lifetime that banks are safe to be able to bring the banks to account.All banks should be accountable at the end of the day, they are playing with OUR money, not theirs and we should be entitled to get ALL our money back not just part there of ...we are not gamblers.

    October 8, 2008 at 1:09 am |
  2. Russell John

    Blake Minton, Sorry to have to point this out to you, but you ARE a gambler, All investors are gamblers as gambling involves taking a risk witj no certainty or guarantee. That's what investing is. You cannot expect all the highs without the lows. It's sad to see you lost all you money, but had it been different and you had gained 100% of your money, I somehow doubt that you'd be here writing to boast of your fine luck and great gains and offer to give half your good fortune to those less lucky than you in their own gambling. Wake up, smell the roses and please realise that this is the real world, not a game. You lost, now take your bat and ball and go home. quietly like a good little boy.

    October 8, 2008 at 10:22 pm |
  3. John Matthews

    Russell John, I beg to differ, putting money into a bank should NOT constitute a gamble. The banks concerned were fully approved by the UK authorities with appropriate guarantee, therefore many people (including UK local government) trusted them with their savings. Do you keep your money under your bed?

    October 9, 2008 at 12:18 pm |
  4. George Yap

    Please, please excuse me. Common sense and some simple mathematics will tell you that how could a country with such small population can accumulate such massive wealth, having controlling business in UK and able to lend money to other nations? Living luxuriously............? .By rule of thumb, such small population should be living meagrely, probably deriving their income from fishing? What else do Iceland possess. Oil, technology, inventor? All those wealth accumulated are too artificial, don't you think so. A wealthy nation must possess rich natural resources, sufficient population, good geographical location, minimal natural calamities, hard working citizens and living within their means, low exposure on borrowings and stable government. Human beings in this world especially the highly educated with high mentality are always blinded by greed.

    October 9, 2008 at 4:48 pm |
  5. IFM

    I have studied the human race for decades. All civilized men (I am excluding women because "noblesse oblige" and in honor to my beloved mother), with rare exceptions, want just two things in life: sex and easy money, not necessarily in this order.
    So, this crisis is explained "tout court".

    October 9, 2008 at 8:52 pm |
  6. Lars M

    The problem is not that Iceland has a very big banking sector, other very small countrys have that (luxenburg?) the problem is the way they are run!

    October 10, 2008 at 5:30 am |
  7. David

    Whilst trying to be setpamhytic to the plight of ordinary Icelanders, I am getting sick of this innocent child act. Gordon Brown bullying little Iceland.Iceland is little, which is all the more reason why it should not have allowed it's banks to leverage and waltz into others' economies financing buying sprees of half the High St. Nor to heavily market high interest deposit accounts without the finance in place to honour guarantees.Iceland thought it could fight with the big boys. That was it's decision, and now things have imploded it has to meet it's obligations and stop whimpering like a scolded puppy. All this rubbish about Brown destroying the Icelandic economy you had done a very good job of this yourselves, without need of help from Brown. There's no way Kaupthing would have made it to the end of the year and given the apparent lack of guarantee for Icesave, and the mixed messages coming from Iceland's government, the UK did absolutely the right thing in freezes all Icelandic bank assets. Elsewhere I have read reports of how steady flows of Icelanders were walking out of electric shops on Saturday carrying large plasma screen TVs. Shops were buzzing, apparently.A big contrast to the UK, where everyone is batoning down the hatches and belatedly becoming frugal and realistic. I suggest Icelanders do likewise, as it's going to take some taxation in the coming years to pay off a debt 5 times your GDP. And that is GDP measured in the good times, by the way.

    March 28, 2012 at 11:56 pm |
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