The 2008–2009 Icelandic financial crisis is a major ongoing economic problem that involves the collapse of ALL THREE of the country's major banks, following their difficulties in refinancing their short-term debt and a run on deposits in the United Kingdom. Relative to the size of its economy, Iceland’s banking collapse is the largest suffered by any country in economic history!
In late September 2008, it was announced that the Glitnir Bank would be nationalized. The following week, control of Landsbanki and Glitnir was handed over to receivers appointed by the Financial Supervisory Authority (FME). Soon after that, the same organization placed Iceland's largest bank, Kaupthing, into receivership as well.
At the end of the second quarter 2008, Iceland's external debt was 9.553 trillion Icelandic Krónur, more than 80% of which was held by the banking sector. This value is nearly EIGHT TIMES 2007 Gross Domestic Product (GDP) of 1.293 trillion Krónur! The assets of the three banks taken under the control of the FME totaled 14.437 trillion Krónur at the end of the second quarter, 2008.
The financial crisis has had serious consequences for the Icelandic economy. The national currency has fallen sharply in value, foreign currency transactions were virtually suspended for weeks and the market capitalization of the Icelandic stock exchange has dropped by more than 90%!
The full cost of the crisis cannot yet be determined, but already it exceeds 75% of the country's 2007 GDP. Outside Iceland, more than half a million depositors (far more than the entire population of Iceland!) found their bank accounts frozen amid a diplomatic argument over deposit insurance. German bank BayernLB faces losses of up to €1.5 billion (approximately $2 billion), and has had to seek help from the German federal government. The government of the Isle of Man will pay out half of its reserves, equivalent to 7.5% of the island's GDP, in deposit insurance.
The bulk of Iceland's external debt is owed to Great Britain and the Netherlands. Icelanders rejected a proposed plan to pay back the U.K in a special election conducted yesterday.
Over 93% of voters cast ballots opposing the £3.5 billion deal to compensate the British and the Dutch state, initial results showed. The propsed deal would require each person to pay around £90 a month for eight years and many Icelandic taxpayers say they cannot afford it.
The island is grappling with a 9% unemployment rate, a 7% annual inflation rate and an economy that is still shrinking.
Last-minute talks broke down this week, despite offers by Britain for more favorable terms, including a significant cut on the interest rate in the original deal.
Despite stalled talks and the rejection in the referendum, Iceland's government said it still believed it could strike a deal.
"The government of Iceland is confident that a solution acceptable to all parties can be achieved," it said in a statement.
The global financial meltdown has left nearly no country unscathed. Yesterday, we reviewed the unfortunate situation in tiny Dubai
As this unprecedented crisis continues, the contagion of the inter-connectedness of the global economy will continue to affect more and more nations. Who's next?
Our fourth installment of the new YouTube series is expected to be posted shortly. Episode 4 will de-mystify the ever-so-secretive Federal Reserve. We hope you've enjoyed our first 3 segments which featured the mock "State Of The Union" address and our two videos on "Peak Oil". If you haven't seen them yet, you can access them here: http://www.youtube.com/markostaketv.
In the future, we will cover the Income Tax, Social Security and many others. A definitive schedule will be published in the next several days.