The shocking errors of Iceland's meltdown

Seajays

Some interesting aspects of how the crisis in Iceland came about

The markets hit Glitnir first. Like fellow Icelandic banks Landsbanki and Kaupthing, Glitnir was solvent. All posted good first-half results, all had healthy capital adequacy ratios, and their dependence on market funding was no greater than their peers’. None held any toxic securities. These banks had been managed well since their “mini-crisis” in early 2006.

No matter - when foreign short-run credit lines closed, Glitnir had to request a short-term loan from the Central Bank of Iceland, which refused. Rather than taking Glitnir into administration, the CBI enforced nationalisation on punitive terms. The governor, David Oddsson, was prime minister for 13 years prior to moving to the CBI in 2005. His decision reflected politics, technical incompetence and ignorance of markets, and his comments thereafter were highly destabilising.

This triggered a sovereign debt downgrade and a sharp further fall in the already depreciated krona. Short-run funding for Glitnir and Landsbanki evaporated, margin calls came from the European Central Bank, loan covenants kicked in because of the downgrade. With the banks unable to meet commitments, Iceland’s financial regulators put them into administration.

Kaupthing still seemed viable. But last Tuesday, Mr Oddsson made public remarks that were interpreted to mean that Iceland would not meet its obligations to UK depositors. This was politics for home consumption. So was the UK’s retaliation, with an ill-considered invocation of anti-terror laws to seize the UK assets not only of Landsbanki, but also of Kaupthing. Gordon Brown’s highly aggressive statement was not his best moment of the financial crisis.

Read more:
http://www.icenews.is/index.php/2008/10/13/richard-portes-analyses-the-shocking-errors-of-icelands-meltdown/