Icelandic banking

Emergency legislation to save country’s economy

07-October-2008, By Becca Talbot becca.talbot@consumerchoices.co.uk

Iceland’s government passed emergency legislation yesterday, to try to salvage the country’s banking system following fears of national bankruptcy.

Addressing the Icelandic nation in a news bulletin aired yesterday, Prime Minister Geir Haarde said the legislation would help the island avoid bankruptcy, and will also offer 100% guarantee for all domestic bank customers’ savings accounts.

The moves come after trading in six of Iceland’s biggest banks and financial firms was temporarily halted, following frantic weekend talks with political, financial and trades union leaders.

“We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy,” Mr Haarde said. “The legislation is necessary to avoid that fate.”

With a very financially orientated economy, dominated by banks, Iceland’s population of 320,000 is heavily exposed to the global credit squeeze, and there are fears of the country being declared bankrupt.

Under the new enforcement, Iceland’s financial regulator will have wide-ranging powers to dictate a bank’s operations, and could even force it to merge with another company or declare bankruptcy. The bill also allows the government to take over housing loans held by the banks and put in a government fund.

The country’s largest banks have been asked to sell off some of their foreign assets to bring capital back to Iceland, in an effort to shore up the economy and prevent the currency, the krona, from sliding any further, which last week, it lost a fifth of its value against the dollar and on Monday it plunged 30% against the euro.

Before the legislation was announced, Iceland’s financial supervisory authority said it had decided to temporarily suspend trading in the three biggest three banks - Kaupthing (www.kaupthingedge.co.uk/), Icesave (www.icesave.com) owner Landsbanki, and Glitnir - and three other financial groups, Straumur-Burdaras, Exista and Spron.

Trading was suspended in an effort to protect investors’ interests while waiting for a government announcement on its rescue plans. But this caused mass panic amongst the Icelandic people, with many hurrying to withdraw their savings.

Icelandic banks and companies have provided financial backing for a number of UK businesses and, as such, problems in the Icelandic banking system could have a knock-on effect in the UK.

Icelandic banks have invested in many British companies, including department store Debenhams, frozen food giant Iceland, and toy shop Hamleys, but banking officials have said these will be save in the event of a collapse.

Chris Eagle, commercial manager at CreditChoices.co.uk said: “The 100% guarantee on customers savings deposited with banks in Iceland, Sweeden and Denmark following yesterdays share crashes is great news for British savers – it means we can still enjoy the high rates of interest the foreign banks offer, while having peace of mind that our savings are protected.”