Iceland Going Bankrupt?
Economics / Credit Crisis 2008 Oct 06, 2008 - 08:24 AMBy: Nadeem_Walayat
The focus of the financial storm now shifts to the small North Atlantic Island state of Iceland, a country with barely 330,000 inhabitants that saw its banks in recent years expand across Europe as they played and rolled the dice in the global derivatives market, financed on leverage from financial institutions across the globe that were eager to lend on the back of cheap low interest rate carry trade financing which delivered profits for nothing i.e. the difference between the rate borrowed and charged on the interbank market for a near limitless exponentially rising over the counter derivatives bubble that passed $500 trillions, that's trillions NOT billions!
But back to Iceland, barely 4 days have gone by when I wrote that the current credit crisis will in all likelihood claim a number of countries along the way, where bankruptcy will manifest itself through the hyperinflation of governments printing ever larger quantities of money to cover expanding bad debts taken on the back of bailout after bailout as the economies deflate and bankrupt banks are nationalised.
Now Iceland seeks to rescue all of its collapsed banks, Kaupthing, Landsbanki, Glitnir, Straumur-Burdaras, Exista and Spron. The shares have already been suspended whilst the politicians prepare to rescue the banks from potential bankruptcy.
All of the western countries are at risk to some degree, but small sparsely populated Iceland now appears to be the country most at risk at of progressing along the path towards bankruptcy, a;ready inflation has surged to more than 14%, with the currency in meltdown as panicking investor shift their funds out of the collapsing Icelandic Krona into the US Dollar or Euro. The Icelandic government with liabilities in excess of $100 billion against annual GDP of just $14 billion is starting to adopt extreme measures by forcing Icelandic institutions such as pension funds to repatriate funds to bolster countries reserves in defence of the collapsing currency. The Icelandic government states that all depositors savings are secure, however the Icelandic printing presses ensure that the losses will be huge for depositors in terms of other currencies. This is another example of the global deleveraging that is going on as institutions liquidate investments so as to bolster balance sheets riddled with the consequences of the balance sheet loss making derivatives positions.
The usual patriotic and highly independent Icelandic politicians and union leaders are now crying out for EU membership to save them from the impending financial collapse, much as Ireland was able to expand its liabilities many fold through its declaration of a 100% guarantee to all depositors, whilst comfortably sitting under the EURO umbrella and therefore avoiding a currency collapse that would have occurred if Ireland had an independent currency as does Iceland. Still Iceland will be forced to go cap in hand to the European Union to help prevent a total loss of confidence in the Krona which has crashed by 30% against the US Dollar in less than a month.
Iceland is another lesson to depositors in other countries that countries can also go bankrupt too ! The consequence being of a loss of value of savings as currencies collapse and inflation takes off, as experienced by the Germans during the 1920's Weir Mar republic hyperinflation, even if your savings are not in the Icelandic Krona, a financial system in collapse will mean frozen accounts for a period, therefore it is important that savers ensure they stick to the guarantee limits which in the UK is for the first £50k per banking group, unless it is one of the nationalised banks, in which case it ranges up to 100%.
In response to what appears to be a breakdown of the European Union as a consequence of Irish, Greek and now European actions, the global Stock Markets are already lower by 4% this morning, as I stated during the weekend, this crisis is worse than both 1987 and 2000. Therefore this stocks bear market has much further to run and will encompass many crashette's along the way as investors adjust to the risk of countries going bankrupt such as Iceland which is witnessing a currency crash.
For more on the credit crisis see the recent articles below, also the following 10 page report gives valuable insight into the governments actions Visit EWI to download the full report.
- 05 Oct 2008 - Keyser Soze Heists Main Street Out of $700 Billion
- 02 Oct 2008 - Countries Can go Bankrupt Too!
- 29 Sep 2008 - Dow Jones Stock Market 777 Point 7% Crash
- 27 Sep 2008 - Bradford & Bingley Nationalised Another UK Bank Wiped Out by Tulip Backed Securities
- 25 Sep 2008 - Bailout Plan Talks Collapse Overnight as Congress Rebels
- 21 Sep 2008 - Historic Week: US Government Avoids Financial Armageddon
- 17 Sep 2008 - Hedge Funds Crash Halifax, HBOS Rescued by Lloyds TSB
- 14 Sep 2008 - No Bailout for Lehman as Fed Awakens to Bond Market Crash Risk
- 09 Sep 2008 - BANKRUPT Banks Wiped Out by Tulip Backed Securities, Is China Cheap?
- 06 Sep 2008 - Credit Crisis Phase II - The Economic Crunch
By Nadeem Walayat
http://www.marketoracle.co.uk
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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