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?

With events moving so quickly it’s difficult to keep track of critical events.  There’s some interesting stuff on Reuters this morning regarding Icelandic events:

The Swedish central bank said it would grant liquidity assistance to the Swedish arm of Icelandic bank Kaupthing with a loan of up to 5 billion crowns ($702 million). The central bank said it had judged the unit, Kaupthing Bank Sverige, was solvent, but conditions in the Icelandic banking industry made it difficult for it to meet its payment obligations.

“In the situation that has arisen there is an imminent risk that the bank may suffer liquidity problems,” the central bank said in a statement.

So they are suggesting that Kaupthing’s issue is purely liquidity.  Remember that this is in reference to the Swedish arm of Kaupthing.  Bloomberg on the same topic adds:

Kaupthing has put the Swedish subsidiary up for sale, joining other Icelandic banks in scaling back international operations as the credit crisis hits the Atlantic island.

Meanwhile, it is not clear whether or not Glitnir will survive despite last week’s announcement that the government would nationalise it:

Oddsson late on Tuesday raised the prospect that the goverment might not pump money into Glitnir after all.

“The state will not inject new capital into the bank unless there is actually a bank,” Oddsson said, referring to a shareholders’ meeting which is slated for Saturday.

The rest of the Reuters article can be found here.

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?

When the chips are down nations seem to retreat from international schemes and look after their own domestic affairs.  It seems to be our natural instinct and certainly the instinct of politicians who know where the voters are.  Iceland yesterday guaranteed all domestic deposits in Icelandic savings accounts, although UK savers in Icesave and Kaupthing Edge will not be covered.

Of course Kaupthing Edge savers are covered by the £50,000 UK compensation scheme so unless you have over £50,000 you are protected.  Savers with Landsbanki (Icesave) have to use the passport scheme.  That means applying to the Icelandic compensation scheme for the first tranche (around £15,000 or so) of compensation then apply to the UK compensation scheme for the balance.  This system is more complex and has never been tested.  If you have savings in Icesave then you may have been worried yesterday when you couldn’t withdraw your money:

Times readers reported yesterday morning that they could not withdraw their money from Icesave accounts over the internet. But a spokesman for the bank said that Icesave was now operating normally and depositors could withdraw money. He added that the Icelandic Government had ample foreign reserves to cover the £4bn of British deposits in the event of any collapse.

Times Online, 7 October 2008

Perhaps the Icelandic government has sufficient foreign reserves to cover UK customers’ deposits but I wouldn’t want to rely upon that.

If you are worrying about your savings in Icelandic banks – Icesave (Landsbanki), Kaupthing Edge – then you will be interested in this announcement today.  Iceland has suspended share trading in financial companies.

“This decision is made in order to safeguard the equality of investors while awaiting an announcement,” the statement said.

Reuters, 6 October 2008

And Times Online reports:

All the major credit ratings agencies moved today to downgrade Iceland’s four big banks and its sovereign credit rating. Fitch cut Iceland’s long-term foreign-currency IDR rating by two notches to A-, while Standard & Poor’s cut Iceland’s long-term foreign currency sovereign credit rating to A- from A and Moody’s put its Aa1 rating on review.

Read the rest of this very good article on The Times site.

Icelandic banks Landsbanki (IceSave) and Kaupthing Edge have been under real scrutiny since early this year over concerns that they might collapse.  They have always maintained that they are not in difficulty.

But Tryggvi Herbertsson, economic adviser to the Icelandic prime minister, said the government could and would step in.

“Definitely we would come to the rescue of a bank – definitely.

“The banking system in Iceland is very large compared to the economy, but still we think we can maintain the problem because the balance sheet of the bank is very good.”

“They have not been involved in sub-prime or buying housing debts from abroad and we are pretty confident that the balance sheet is healthy and the banks can operate healthily in the future.”

BBC Money Box, 4 October 2008

Both Icesave and Kaupthing are larger than the Icelandic economy.  It seems to me that the Icelandic government is saying is that they would come to the rescue because they believe the banks are well managed and run – their only problem being their inability to raise money on the markets.  Quite an assumption to make.

I mentioned yesterday that people might now be looking at the creditworthiness of countries rather than the banks themselves.  This is after recent moves to bail out banks by several nations – most notably Ireland.  You see the funny thing is that in some cases the banks are now bigger than the gross domestic product (GDP) of their nations.  Here are a few examples:

Kaupthing Edge has total assets of €53bn – that’s 623% of Iceland’s GDP.

Landsbanki (IceSave) has €32bn – 374% of Iceland’s GDP.

They’re not the only banks in Iceland but between them represent around 1,000% of Iceland’s GDP.  With Glitnir having recently drained the Icelandic government’s coffers, would there be anything left to support other banks?  Of course it’s not quite that simple – if a bank goes bust all of it’s cash deposits don’t suddenly disappear.  On the other hand, this market is all about confidence – or rather a lack of it.

How about Ireland’s bank guarantee?

Bank of Ireland – €183bn – 102% of Ireland’s GDP.

Anglo Irish – €97bn – 54% of Ireland’s GDP.

Just two of the guaranteed banks have assets worth around 150% of GDP.  And let’s not forget that Ireland’s economy has been rather bloated recently due to an astonishing property boom that has now become a property crash.  The guarantee was a very shrewd move but essentially backed by thin air.

Now we turn to another bank popular with savers, ING.  It has assets of around €1,370bn which equated to 290% of the Netherlands GDP.

The UK has a number of huge banks.  RBS, HSBC, Barclays, HBOS, Lloyds TSB, Standard Chartered, Alliance & Leicester, Bradford & Bingley between them have assets of €6,900bn which represents 420% of GDP.

There is a nice list of these figures on the FT website here.

Banks declare each other likely to default due to their excessive leveraging then countries take on their bad debts to support them.  We are simply transferring all the bad debt to the countries instead.  Would I loan money to Iceland or Ireland?  Nope.

This is starting to sounds like something from a film.  Banks are falling like dominoes.  

1. We’ve all been worried about Kaupthing Edge and IceSave but here we are witnessing the nationalisation of Glitnir Bank. The Icelandic Government has taken a 75% stake in Glitnir for around £468 million after the company faced funding problems.  

Given that Iceland is a small nation – something like 300,000 people – whose banks rely on getting funding from international money markets, the news that the Icelandic Crown is down even further today will not help.  The remaining banks will effectively have to pay even more for their borrowing than before.  If Kaupthing Edge or IceSave need to borrow any money in the short term where will it come from?  I had some of my savings in IceSave but have transferred them to a UK bank. 

2. Bradford & Bingley nationalised.  The government provided a £14bn loan to protect customers’ deposits but the interest charged on this loan will have to be paid by other UK banks.  In other words the bank that goes bust leaves a mess that the more prudent banks have to pay for.  

3. The Netherlands, Belgium and Luxembourg have all chipped in to prop up Fortis with £8.9bn.  Smaller nations like Belgium and Iceland bailing out huge banks – I wonder how much money they have left to keep doing it if required.  Come to think of it, how will we keep doing it?  More borrowing.

Also in Europe:

Munich, Sep 29, 2008 – Hypo Real Estate Group has secured a major new credit facility which is designed to shield the company from the impact of the current malfunctioning of the international money markets.

Hypo Real Estate Group, Press release, 29.09.08

Did they say “current malfunctioning”?  I think they mean the current rationalisation of an industry that has been malfunctioning for at least a decade.  Also today, Hypo got rid of quite a few of its directors – strange if it’s just a malfunctioning market.  Anyway, the $50bn loan guarantee should keep afloat Germany’s second biggest commercial property lender.

4. Citigroup is rescuing Wachovia, the fourth largest US bank.  Citigroup is in no great shape itself but if it survives this era of financial meltdown it will be another banking giant.  This period of consolidation is likely to result in some truly enormous banks.

5. $620 billion pumped into the market from the Federal reserve but still markets around the world are today in turmoil.  The $700 billion rescue package or criminal misuse of public funds, depending on your opinion, has just been rejected although no doubt it will be back tomorrow in a different form.  Regardless of whatever measures are taken I am certain that more banks will fall.

So, are my savings safe?  They can be with a few different techniques.  Read my earlier posts How to get 100% protection on savings and Are my savings safe to see how.

UPDATE 2 – Iceland suspends trading in financial company shares

UPDATE – In the last few days I have moved my personal cash out of Icelandic banks.  That’s not a recommendation for you, just what I’m doing.  The article below was written about a week ago and this one ‘How to get 100% protection on savings’ was written yesterday.

Lots of people have been asking me recently if it is safe to save with Kaupthing Edge so I thought I’d do a quick post on that single topic.  First, I have no doubt that the reason you are all asking the question is because the interest rates paid by Kaupthing are excellent (at least at the time of writing) and you actively want to save with them – otherwise I would say just put your money in National Savings and Northern Rock (see my previous post Are your savings safe? to see why).

The most important thing to remember is that Kaupthing Edge are fully covered by the UK’s Financial Services Compensation Scheme. Under this, all your savings are guaranteed up to £35,000. However, if you put your account in joint names (assuming your partner won’t run off with your cash) then you are jointly covered for £70,000.  You’re not getting extra protection, just each person’s protection added together.  Also, remember that the compensation scheme is per institution, not per account.

So the fact is that you are covered up to £35,000 by the compensation scheme but what if lot’s of banks go bust – is there enough money in the scheme to protect everybody?  No, there isn’t enough right now but the government has pledged to loan the money to the scheme in order to meet any protection requirement.

So with all this protection in place you may wonder why the fuss?  The original worry over Kaupthing came about partly because earlier this year the credit rating agency Moody’s described the Icelandic banking system as ‘fragile’.  The problem is that Iceland’s banks were hit hard as the credit crunch arrived. Being based in a nation of just 300,000 people with a pretty small economy has led them to rely largely on the troubled money markets rather than customer deposits.  Kaupthing and Landsbanki both opened Internet banks to attract customer deposits and reduce their dependence on capital markets.  The price an institution needs to pay for money on the market is a pretty good way to guage how the city insiders view the risk it represents – there’s a really good article on it at Moneyweek.

IceSave, part of Icelandic bank Landsbanki, operates under the passport system to the Financial Services Compensation Scheme, where they run the equivalent of a UK branch from their home country.  This gives them European Economic Area authority rather than FSCS authority.  If the bank went bust you would have to make a claim to the Icelandic compensation scheme rather than the UK one.  Iceland pays a maximum compensation of around £16,300 (depending on exchange rate with the Euro) then any sum over this up to your £35,000 maximum would have to be claimed through the UK system. In other words, you’re still covered but it’s more complicated.  Oh, and the system’s never been tested.

The long and the short of it is that you will have to decide whether the additional interest earned at Kaupthing Edge is worth the risk.  Personally, I prefer safety.  If you want complete safety just go for National Savings or Northern rock.

With so much uncertainty and panic in the financial sector at the moment even those of us who don’t normally fret over such things are considering where to shelter our savings from the storm.  But let’s not forget that we are protected by the Financial Services Compensation Scheme in this country.

Visit their site for details but essentially if you have your savings in a UK bank or building society then the first £35,000 (set to rise to £50,000 sometime this year) is protected by the scheme.  If you have more than that in a single institution then it may be wise to spread your money across several banks so none holds more than £35,000.  Be aware that some different brand names are actually the same institution and you will only be covered once e.g. Abbey and Cahoot are the same and the whole of HBOS counts as one.  You can check this by looking at the FSA registration number on the website of your bank – if it’s the same on both sites then irrespective of the logo on the page it’s essentially one institution.

Foreign banks are different.  Make sure your bank is registered with the FSA and that it’s compensation scheme will cover you for the whole £35,000.  Of course compensation schemes are a last resort.  I’d rather my bank stayed solvent in the first place.

Do you have money in IceSave or Kaupthing Edge?

Icelandic banks were given a bit of a bashing by Moody’s this year who described them as fragile.  But then again what do the ratings agencies actually know?  Lehmans was rated A2 the day before it went bust! Financial instruments these days are so complicated and there are so many convoluted deals across the globe that even the bankers themselves have no clear idea what they are invested in and what risk they carry.  And that’s before you even mention frauds like Enron where you really have no idea of the risk.

Do you have money in Egg?

They are owned by Citigroup (they bought the poorly performing Egg from Prudential for around £575 million in 2007) who have been downgraded and are currently listed on Fitch ratings system as a negative outlook.  Should you worry more about that than the Icelandic banks?

Northern Rock – a nationalised bank

A year after the run on the bank it seems odd to say it but if any bank is safe it has to be Northern Rock.  We’ve already bailed it out at a cost of billions so the government just could not let it go under now and all deposits are 100% guaranteed.

National Savings – the original nationalised bank!

We tend to forget about boring old National Savings but your money is certainly safe there too.  The ISA rate looks pretty poor (at time of writing) but the index linked savings might be worth a look.