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There but for the grace of god....Iceland nears bankruptcy

Posted in News

Iceland's government was forced overnight to seize control of the tiny island nation's biggest banks and declare the nation virtually bankrupt after years of running big current account deficits and allowing its banks to borrow heavily overseas. (Updated to include Russian loan and currency peg)

Overseas banks have stopped dealing with Icelandic banks and the nation is now unable to pay for imports or transact across its borders. Later on Tuesday Iceland approached Russia for a US$5.4 billion loan and defloated its currency, pegging it to a basket of currencies. 

"There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy," Prime Minister Geir Haarde said in a televised address.

"Queues formed at petrol stations as Icelanders rushed to fill up before reported fuel shortages, while savers who tried to withdraw money from banks or sell bank shares on the internet found websites were not working," The Times reported.

Here's what Fitch said about Iceland's 15% current account deficit in 2006 and why it needed to downgrade the outlook for its AA credit rating.

"Fitch believes that other highly rated countries like Australia and New Zealand display similar, albeit less extreme external financial constraints to Iceland, but the agency argues that the structure and hedging characteristics of these countries external indebtedness is much better documented than in Iceland," Fitch said.

"Moreover, whereas Australia and New Zealand's economies have been successfully stress tested over a long period of time, Iceland has yet to establish a similar track record in more indebted circumstances. Such uncertainty accounts in large measure for the agency's decision to revise the outlook on Iceland's sovereign rating to Negative from Stable. "

Iceland's currency, the krona, has fallen 30% in the last week.

New Zealand's credit rating is AA plus and its current account deficit peaked at 9.3% in 2006. It is currently 8.4%..

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12 Comments

Wow... How bizzare... Large Current

Wow... How bizzare... Large Current Acct deficits..??? Heavy overseas borrowing..??

A First world country almost bankrupt..??

What a wake up call for New Zealand and our wise leaders.. ... Are any politicians that concerned about current acct. deficits.??

I think Icelands' one was about 15% of GDP.

I wonder did they deliberately

I wonder did they deliberately run down their economy as Cullen and co have done here?We should not be surprised,it is just DEJA VU or a mirror image to what happened in 1990.

I remember Bob Jones saying

I remember Bob Jones saying he doesn't get into anything unless he understands it. More of our leaders should follow that advice (or at least be honest when they are in uncharted waters).

Yeah - but folks, Iceland

Yeah - but folks, Iceland is so far away and they only export ice, milk, cattle and sheep.

Oh, heck - not necessarily

Oh, heck - not necessarily good that they use NZ and AUS as the comparator - even if to say we compare favourably. What they're really saying is - we'll be watching you guys down-under closely!

So we have to stop

So we have to stop running deficits, what does that mean for the economy?

I think they should get

I think they should get a grip, Iceland scores all the points, productivity, development etc but in reality its 300k people on a frozen rock albeit close to Europe, if Bill Gates visited the GDP would double.

In some things stats dont tell the full story, on bad government move and the place is bankrupt

Neven

Andrewj..... Well to balance the

Andrewj..... Well to balance the Current account deficit we could have a tariff system on imports.... and offset that with lower domestic taxes....???? That would at least strenghten the domestic economy...????
(I suppose...in a way...GST could be viewed as a ,kind of ,import tariff...???)
We could put a small tax on foriegn investors who choose to take their dividends offshore..???
We could charge banks a small tax any money they borrow offshore..
AND a big tax if they choose to send their own profits offshore.

BUT this is all very unfashionable... The words "protectionism".... "free trade"..... "subsidies"... etc conjur up some twisted old economic system from the past.

It seems strange to embrace things like "free trade".... and then burden our own businesses with Compliance costs , environmental constraints, high PAYE tax, ..etc...etc .. You could almost view these as "export Tariffs"..??

I'm not into protectionism but I'm into having a reasonably balanced Current Account .

In a normal economic model the exchange rate should move in order to balance a Current acct deficit...
In a traditional economic model big increases in money supply increased aggregate demand which lead to increasing prices and inflation.. With Globalization ,increased aggregate demand leads to Big Current Account Deficits.... especially when the growth in money supply is the result of borrowing. ( we just import more from China)

The point I'm trying to make is that I think there are ways to address the Current Account deficit without to much damage to the economy..

BUT I think to make some really good decisions we have to revist and inquire into things that we hold as the "truth" ( to the point that it has become dogma)..... eg,,.. free trade, no-tariffs... direct foriegn investment, Globalization... etc

( I have never managed to figure out how a "direct foreign investment" that buys an existing company in NZ actually benefits the NZ economy, that much )

so, what about our cash

so, what about our cash in our bank? if bank close down.

Roelof - it's a point

Roelof - it's a point worth making. Have you heard the ditty by the Canadian development economist with respect to globalisation (borrowed from a Noam Chomsky speech on globalisation) ...

The poor complain, they always do;
but that's just idle chatter.
Our system brings rewards to all;
at least to all that matter.

:-)

LOL - A good laugh

LOL - A good laugh in this crisis...

"Yeah - but folks, Iceland is so far away and they only export ice, milk, cattle and sheep."

"Icelands export is 70% fish..."

I´m not sure if I´m 100% correct but I think we export more aluminium these days than fish. We do not export milk, cattle, ice or sheep that I know of...

A fast growing part of our export is EVE-online, healtcare IT products, artificial limbs (www.ossur.is), meat production machinery and of course fish.

But the only energy we import is petrol for cars, all electricity in Iceland = homemade hydroplants or geothermal. All heating = we drill down to extract hot water from the earth (up to 400degrees celsius).

There are more sheep in Iceland than people and we love their meat, fish is very healthy so we also eat a lot, beef is my fav (tastes imported fron NZ = very nice, loved it) Much better than any other imported meat I´ve tasted (of course I love IS meat most).

But I can´t emphasize this fact enaugh...

News about Iceland becoming bankrupt = total bull, our government/treasury didn´t owe a dime if any, then very little.

Our banks were strong but our central bank was the smallest of them all and "in a credit crunch" even the central bank couldn´t get a loan, even if it had the "right credit rating" and backed up by the gov. ( we find it strange noone could lend us).

The commercial banks 12 times bigger than our GDP were to big for the CB to back up so the only way possible = going into volenteered administration before defaulting on any obligation or loan.

But the UK didn´t like that idea and forze the assets of the banks, has even sold some of them cheap.

Under these circumstanses, if we had an army we woulæd be at war.

p.s. come to Iceland with your rugby team and show us the HAKA. I remeber the girls at collage showing me videos on youtube, saying "we would like you men to show some masculinity in comparison" ...

Respect from Iceland, lots and lots of love (it´s so cheap and good) and our new "Icelandic anthem" is " Don´t worry, be happy"

They will probably show it on the comedyshow "spaugstofan" you´ll find it on youtube...

Thank's 4 The Good Post!

Thank's 4 The Good Post! I've heard Credit Score is a excellent place to check my credit report and see the score for free. Has Someone else used them?