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Iceland's chilling story: Total financial collapse

October 9, 2008 | 10:55 am

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.

Iceland 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

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