Iceland's chilling story: Total financial collapse

Now we can see what a total financial system collapse looks like, 21st century style: It has happened in Iceland, a tiny economy (population: 320,000) that borrowed to the hilt in recent years, believing the boom times would never end.

From Bloomberg News:

Iceland's government seized control of Kaupthing Bank, the nation's biggest bank, completing the takeover of a financial industry that collapsed under the weight of foreign debt. Iceland is guaranteeing Kaupthing's domestic deposits and helping manage the bank to provide a "functioning domestic banking system," the country's Financial Supervisory Authority said in a statement on its website today.

Glitnir Bank, Landsbanki Island and Kaupthing are unable to finance about $61 billion of debt, 12 times the size of the economy, according to data compiled by Bloomberg. Their collapse has affected 420,000 British and Dutch customers, and frozen assets held by universities, hospitals, councils and even London's police force. The government is seeking a loan from Russia and may ask for aid from the International Monetary Fund to help guarantee deposits.

"This looks like a total collapse," said Thomas Haugaard Jensen, an economist at Svenska Handelsbanken AB in Copenhagen. "It'll take several years before the economy can start to return to growth."

All trading in Iceland's equity markets is suspended until Monday due to "unusual market conditions," the country's exchange said today. The FSA said it planned to form a new bank with Landsbanki's domestic operations, keeping open branches, call centers and cash machines.

Read the full report here.

Photo: A view of Reykavik, Iceland's capital. Olivier Morin / AFP Getty Images

Comments

[The Dark Ages]

Now we know that "Globalization" has revealed itself as the Ponzi scheme it really is--a fiction used by the few to suck the wealth from the many. 50 years from now we'll wonder at the charade of excess and false wealth we lived through, as we till our small farms, live humbly, support our local communities and care for our children. The times they are a changin.

[linda]

And the first domino falls ...

[amelia]

Now we know that "Globalization" has revealed itself as the Ponzi scheme it really is....
So glad to find others of like minded thinking.
We are all paying for our own part of this ponzi scheme...like it or not!
We knew there was no free lunch but we weren't in enough of a majority to make a difference when a difference would have mattered.
I like the family farm concept-don't you?
Service to ones community is ever so much more meaningful than the Born-To-Shop way of life.

[ScienceDude]

Globalization is hardly the same as trying to make piles of money hoping that a financial bubble would last long enough to make the gamble work. It's not quite a Ponzi scheme either--because in Ponzi, there is no mathematical way for successive stages of investors to capitalize the system. Iceland did what too many individuals have done. Borrow too much hoping that future increased valuation would make it pay. Like many people (and Iceland) you might be sitting in a house (or nation) that is now worth less than your loan. The problem for Iceland is that it is actually more of large city in terms of population, but can act like a nation in terms of international finance. Bankrupt cities of 310,000 are not unheard of. However, when cities of 310,000 fail, their shortfalls are usually less that 1/1000th of Iceland's debt.

[MoeCain]

Hey guys, I just got done swimming in the olympic-sized swimming pool of one of my seven houses. I just thought I would drop in, check up on what's going.

Just wanted to send my condolences to the financial sector of Iceland. I'm so glad we as Americans, with the nation's most productive workers in the world (who else can do what we do in a 40-hr work week?!), the world's most prudent financial sector, and a nation of savers, will be the light for the rest of the world. Country First! (Yeah I know, but this America exists in my mind, count it!)

[KT]

@ScienceDude: Amelia's talking about the "globlalization of capital flows." You're not paying attention, because just as happened with LTCM in 1998, even if fundamentals are OK, investors can crush a foreign currency, as happend with the Thai Bhat, and has been happening with the Icelandic Krona.

Here's a what a Fed Reserve economist said in 2006: "...report titled Financial Stability in Iceland, "If a significant fraction of traders in international financial markets think that Iceland will be undergoing financial meltdown—even if fundamentals don't warrant it—they could create a self-fulfilling prophecy by massively pulling out of Icelandic assets." Mishkin's prophecy just came true.
http://www.businessweek.com/globalbiz/content/oct2008/gb2008109_947306_page_2.htm

Foreign reserve flows, not bombs, the new WMD. (And we haven't even discussed, NAKED short-selling yet.)

[Seanboy]

Let's buy Iceland, cheap, yes?

[martscan]

Tip of the (international) iceberg.

[Kenley Davis]

I don't know about the family farm fantasy, Amelia. My grabdfathr and my father both worked the small family farms. Neither liked it very much and I did all I could to get the h@ll out of the business. Some may romanticise the smell of dirt and feeding barnyard animals. I've done it and I didn't find it appealing at all. I fought hard to get to the point where I don't have to do that and I'll happily wave to you and yours as you till the soil and tote heavy bales of hay.

Me, I'll stick to more non-manual labor intensive endeavors.