As recently as last year, Iceland was considered an economic success story. After 16 years of free-market reforms, it was one of the world's 10 richest and freest countries. In the first week of October 2008, it all went wrong. The three main Icelandic banks collapsed and the government took over their domestic branches. It is still unclear what will happen to their foreign operations. The local currency, the krona, went into free fall. Foreign trade came to a standstill, as it became almost impossible to transfer money to and from the country.I wonder why we have heard little in the British press about Brown's conduct over this. Clearly the author is a stakeholder and may have a biased view, but he raises some very serious questions, not least why Iceland was treated very differently to the USA.
At the beginning of the financial crisis in 2007, the Icelandic banks were quite solvent. They had almost no subprime loans. But there was a foreseeable liquidity problem. When the Icelandic Central Bank tried to obtain credit lines from other central banks in the EEA, it was refused almost everywhere. Suddenly, it did matter where the banks had their headquarters. Once the financial markets realized that there was no credible lender of last resort in the Icelandic financial system, a run on the banks became almost inevitable.
One or two of the Icelandic banks might have survived, though, if on Oct. 8 British Prime Minister Gordon Brown had not used the country's antiterrorist law to take over the assets and operations of two Icelandic banks in the U.K., Kaupthing and Landsbanki. The Icelandic Ministry of Finance and Central Bank even found themselves briefly on the list of terrorist organizations published on the Web site of the British Treasury, alongside al Qaeda and the Taliban.
These British measures significantly worsened Iceland's financial crisis. The island's banking system and foreign trade collapsed. Unsurprisingly, banks are reluctant to transfer money to and from "terrorists."
Mr. Brown justified his draconian actions by saying that the Icelandic government was unwilling to honour its legal obligations to British depositors of Icelandic banks. There is no evidence for this charge. To the contrary, the Icelandic government repeatedly asserted that all legal obligations to depositors in the EEA area would be honored. These obligations are covered by the Icelandic Depositors' and Investors' Guarantee Fund set up under EEA rules. The fund is an independent body, guaranteeing all deposits up to about €20,000. However, if the fund is unable to fully meet its obligations, then there is no requirement, under EEA rules, for the Icelandic government to step in.
Prime Minister Brown also talked darkly of last-minute bank transfers from England to Iceland. Whether that is true or false remains to be seen. But interestingly, the last-minute transfer of $8 billion from Lehman Brothers in England to America in September did not land the U.S. Treasury or the Federal Reserve on the British list of terrorist organizations.
Having helped to bring down two of the three Icelandic banks, Mr. Brown, using the position of London as a financial center and his country's influence in the IMF and the European Union, demanded that the Icelandic government go far beyond what the Depositors' and Investors' Guarantee Fund is obliged to do under EEA rules. The prime minister, fearing that the fund does not have sufficient means, insisted that the Icelandic government must guarantee foreign deposits in Icelandic banks. Late Sunday, Reykjavik succumbed to this pressure and agreed to reimburse European savers for up to about €20,000. This might put a debt of perhaps $10 billion on the shoulders of 310,000 people, close to 100% of the country's GDP.
The central banks in the EEA that refused to come to the assistance of the Icelandic Central Bank probably did not anticipate the damage their inaction would cause even beyond Iceland's shores. And Prime Minister Brown probably did not understand that bringing down the Icelandic banks would inflict much higher costs on British depositors than if he had stayed calm and participated in resolving the situation.
Little wonder that Icelanders these days feel rather abandoned by their European friends.
Sunday, January 18, 2009
Brown Made the Icelandic Bank Crisis Worse
A reader has sent me an article from the Wall Street Journal a couple of months ago by Hannes Gissurarson, a board member of Iceland's central bank, which raises serious questions about Gordon Brown's conduct regarding Icelandic banks. If it was covered at the time, apologies, but it's new to me, so I thought it worth posting here. Here's the relevant extract...