After the disgraceful behaviour of Iceland, will there now be a credit crunch of national banks? The only reason to loan money to Iceland is for geopolitical gain – they are not a good credit risk. In the terms of the industry they are deep sub-prime borrowers trying to mortgage their home. Are there other countries in the same position?

The fact is that only very large or very wealthy countries can afford to guarantee their banks. And of course all countries will look after their own in times of trouble.  There is no international rescue plan in place, neither does one seem possible to me. As a UK saver, I do not trust any other country’s bank guarantee.

Iceland’s biggest bank, Kaupthing, was today the last of the big three to go under.  Well, the UK arm you and I know and love as Kaupthing Edge anyway.  

Kaupthing earlier agreed to sell its own Kaupthing Edge deposit business to ING, the Dutch bank, and had been approached with offers for Kaupthing Singer & Friedlander Capital Markets, which is 30 per cent owned by staff. The Treasury emphasised that “savers’ money is safe and secure”.

The bank had earlier told the Financial Times that its London operations were “a superb business, with an excellent franchise and is core to our long-term future”.

The Financial Times, 8 OCtober 2008

The details hardly matter – it’s been on the cards for months.  UK customers are protected by the Financial Services Compensation Scheme but of course we know the UK government would have stepped in as they did with Icesave anyway.  

The event is significant though as it is the last nail in the coffin for Iceland which looks set for bankruptcy with debts 12 times GDP. I have a lot of sympathy for the everyday people of Iceland but their government has conducted itself with a distinct lack of honour. 

Iceland tried to nationalise it’s banking system without the resources to back it up.  They knew that their compensation scheme was useless and that their reserves couldn’t cover it either but did they come clean?  No, they let their banks carry on soliciting for business.  Kaupthing Edge were still advertising online (the sort of campaign that can be turned on or off instantly with no penalty) the day before they were shut down.  If our money was safe then I wouldn’t mind but clearly they put customers at risk.

The Chairman claimed that they were doing well until Glitnir hit the news and people panicked.  The Icelandic compensation scheme was still a joke though and Kaupthing were still frantically trying to reduce their leverage.  They were hardly healthy so I’m not sure how he was measuring success.  It is unfair to call it panic when people withdraw their hard-earned money from irresponsible banks.

And what about Glitnir?  Nationalised and then put into receivership when they realised that they couldn’t afford it.  Surely they knew their reserves were low when they nationalised it – looks like a hollow show of strength to me.  They fooled nobody and from that moment on their behaviour just went downhill. 

A pathetic attempt to peg their currency, now in freefall and about as valuable as the paper its printed on. It was like trying to turn back the tide.

Iceland may be able to save itself with a loan from Russia.  Even then they announced a deal which was actually only in the pipeline and not agreed!  A junior PR executive could have told them not to do that! Russia can now, for a very modest sum, acquire a fantastic base in the north atlantic.  Hey, is there oil in the Arctic?

REYKJAVIK, Oct 7 (Reuters) – Iceland has dismissed the board of directors of Landsbanki and has put the Icelandic bank in receivership, a minister told state radio on Tuesday. Commerce and banking minister Bjorgvin Sigurdsson said the move was made in cooperation with Landsbanki and the bank would be open and run as normal while the changes were taking place. Sigurdsson said Iceland’s Financial Supervisory Authority had put its own people in place of the bank’s board. Late Monday, Iceland adopted sweeping powers over its battered banks as its financial system tottered and its currency plunged.

The Icesave website states:

We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts. We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly.

Remember that nobody has lost any money yet.  Or at least we don’t know the full situation yet.  What is clear is that Iceland as a nation is pretty much bankrupt.

The global credit crunch has crippled Iceland’s biggest banks, which racked up foreign debts equivalent to as much as 12 times the size of the economy. The nation’s current account gap swelled to the equivalent of 34 percent of gross domestic product in the second quarter, mainly because of the cost of debt payments.

Bloomberg, 7 October 2008

The Icelandic government has apparently approached Russia for a €4bn loan.  It looks like they have received a warm welcome from the Russians who will no doubt bask in the good PR for many months to come.  Not to mention the geopolitical advances – didn’t the americans have a base there until a few years ago?

Icesave is Iceland’s second biggest bank.  I wonder how many people are trying to take their money out of Kaupthing Edge right now?