Iceland is all but officially bankrupt

[sullivan]

From the International Herald Tribune

People go bankrupt all the time. Companies do, too. But countries?

Iceland was on the verge of doing exactly that on Thursday as the government shut down the stock market and seized control of its last major independent bank. That brought trading in the country's currency to a halt, with foreign banks no longer willing to take Icelandic krona, even at fire-sale rates.

As the meltdown in the Icelandic financial system quickened, with the government seemingly powerless to do anything about it, analysts said there was probably only one realistic option left: for Iceland to be bailed out by the International Monetary Fund.

"Iceland is bankrupt," said Arsaell Valfells, a professor at the University of Iceland. "The Icelandic krona is history. The IMF has to come and rescue us."

Prime Minister Geir Haarde, who had warned this week of the threat of "national bankruptcy," said Thursday that Iceland's finance minister, Arni Mathiesen, would be in Washington this weekend for the autumn IMF/World Bank meetings. He declined to say whether Iceland was seeking a rescue package from the international lender.

"We will certainly keep this option open, but we have not yet made a decision," Haarde said Thursday at a news conference.

The IMF managing director, Dominique Strauss-Kahn, said in Washington that he had activated an emergency funding system, last used during the Asian financial crisis of the late 1990's, to help countries in crisis. Though not mentioning Iceland by name, he said: "We are ready to answer any demand by countries facing problems."

Iceland has approached Russia about a loan of €4 billion, or $5.5 billion, to help see it through the crisis, but Haarde said no agreement had been reached.

An IMF intervention in Iceland, which would necessarily involve accepting a series of harsh measures to restore fiscal and monetary stability, would underline the extraordinary reversal in the country's fortunes after a decade-long, debt-fueled binge by the country's banks, businesses and some private citizens. The banks, while avoiding the toxic mortgage securities that have humbled Wall Street, expanded aggressively at home and abroad. When credit tightened and the krona fell this year, they were unable to finance their debts.

In these circumstances, going to the IMF "is probably the only thing Iceland can do," said Richard Portes, an economist at the London Business School.

Events have moved so fast that the full import of national bankruptcy has yet to sink in here. It's happened before, of course, but in places like Argentina and Thailand, not a country that likes to think of itself as close to Europe.

And on an island raked by icy North Atlantic winds and dotted with volcanoes and geysers, where people live with the threat of earthquakes and maritime disasters, few residents seem to be losing their cool over the financial crisis - yet. But some have suffered deep losses, and others are simply bewildered at how things could have gone so wrong so quickly.

"There is a lot of fear in society and there are people who are losing everything," Bubbi Morthens, an Icelandic rock favorite, said Wednesday after singing at an impromptu midday concert in central Reykjavik intended to lift people's spirits.

Like many of his compatriots, Morthens did well when Iceland was riding high, accumulating considerable wealth. But when the government seized control of Iceland's third-largest bank, Glitnir, last month, Morthens said he lost his life savings, which he had invested in the bank's stock.

On Thursday, the government seized Kaupthing Bank, the country's largest lender, effectively completing the nationalization of the banking system after the previous takeover of Glitnir and the No.2 lender, Landsbanki.

Meanwhile trading in the currency froze up Thursday, according to Bloomberg News, citing dealers at Nordea, a big Scandinavian bank. The last trade was made at 340 krona to the euro, Nordea said - less than half what the Icelandic currency was worth at the start of the week.

Haarde said the Central Bank of Iceland had set up a special system to handle currency transactions, so that Icelandic companies could conduct international business.

"We are gradually moving through this crisis," he said, sounding surprisingly unworried for the leader of a country facing economic and financial disaster. "There are still a few issues to resolve but that is the nature of these kinds of things."

Problems with the krona have been at the core of the government's inability to control the crisis. Without a viable currency, there is no way to support the banks, which have done the bulk of their business in foreign markets. There is also no way to bring down inflation or interest rates, both already in double digits before the crisis intensified in recent days.

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