The Icelandic government today announced further details of the country’s financial rescue package. Following the new law passed yesterday giving the Ministry of Finance wide ranging powers over all Icelandic financial institutions, the country’s second largest bank, Landsbanki has been put under administrative control and its board dismissed.
The Icelandic economy has been extremely volatile since the government took a majority stake in Glitnir Bank last week. Richard Portes, an expert on Iceland at the London Business School, said the government had made a mistake by nationalising Glitnir last week, creating fear in the markets instead of just providing it with liquidity.
“You have the same law of unintended consequences that you had in the case of Lehman Brothers,” he said to The Guardian. “The Iceland problem was immediately vastly exaggerated.”
Glitnir Bank and the Icelandic government repeatedly stress, however, that Glitnir has not been nationalised at all, and that the government is nothing more than a short or medium term investor like any other. The Bank’s board and leaders remain unchanged. Final confirmation of the government intervention will come at this Saturday’s Extraordinary General Meeting of shareholders.
Richard Portes continued that the Icelandic banks had been unfairly targeted. “The world is a little unjust. They don’t hold any toxic papers. The assets they will have to sell are perfectly good assets. They have been prudently managed and haven’t been excessively dependent on the wholesale money markets compared to anyone else,” he said.
Prime Minister Geir H. Haarde said in a press conference today that to avoid the catastrophic weakness of the Icelandic krona damaging the workings of the economy outside of the banking sector, the Prime Minister has given the Central Bank permission to pin the foreign exchange rate at 175 points; meaning a euro now costs 151 kronur instead of yesterday’s record high of 230, and all other major currencies have been similarly affected. It is widely agreed that the swift collapse of the currency was a danger to the whole economy and was gravely under valued.
It is hoped the krona will retain its higher value when trading resumes. Meanwhile, stock market trading in the country’s six largest banks remains suspended today to avoid panic selling. The government believes the reform package should be allowed to have an effect before allowing investors to pass judgement with their cash. “This is an action to save the entire banking system, so it is not a cost, it is a benefit.” Haarde said when asked how much recent government actions are going to cost the treasury.
The other major news is the revelation that Iceland is in the process of negotiating a large euro loan from Russia and will send a delegation to Moscow today or tomorrow to finalise the details. Prime Minister Haarde said in his press conference that the money from Russia will be used only to support the economy and ensure stability, and will not be loaned onward to commercial banks.
When asked why Russia, and not a closer ally, was coming to Iceland’s aid, Haarde said: “We have not received the kind of support that we were requesting from our friends. So in a situation like that, one has to look for new friends.”
The Prime Minister went on to stress that he remains happy with the support Iceland has received from its Nordic neighbours, but would not be drawn on which countries and central banks he was disappointed with. It is perhaps fair to assume that the United States, Canada, the United Kingdom and the European Central Bank are the targets of his anger.
As it stands, Glitnir bank remains a functioning and independent commercial bank with the government as probable 75 percent stakeholder. Landsbanki is not owned by the government, but as of this morning it is under government control for an unspecified period of time, and its board has been dismissed. While the government has insured all savings in Iceland and remains optimistic on Landsbanki’s domestic operations, the fate of its British savings bank, IceSave remains in doubt.
IceSave is not allowing deposits or withdrawals for the time being – but whatever happens, UK savers’ money is insured up to the value of GBP 50,000 even if IceSave folds.
Kaupthing remains entirely independent, but is working in close cooperation with the government and other banks to ensure the whole country is pulling in the same direction. The bank did however receive a EUR 500 million loan from the government today. The Kaupthing-Spron merger announced early in the summer was approved by the Competition Authority yesterday.
Kaupthing spokesman Jonas Sigurgeirsson said today the loan showed his bank was in “an entirely different situation” from the other two banks, as it was granted without any talk of government intervention in the Bank’s operations.
Sigurdur Einarsson, Chairman of Kaupthing Bank, warned against people being too alarmist.
“Over the years we have built a strong and well-diversified bank. We have some of the strongest capital ratios in the European bank sector. We’ve got good asset quality and a highly diversified loan portfolio.
Kaupthing has and continues to manage its business prudently and, with our strong fundamentals, we are naturally concerned when we hear malicious rumours and sensationalism about Kaupthing being reflected irresponsibly. We ask people to look at the facts, not rumour and innuendo.”