Iceland goes bankrupt

[rudywoofs (Pam)]

Iceland goes bankrupt

It's been about 3 1/2 months since the country of Iceland has gone bankrupt. Last month, January 2009, many government officials of the country resigned. Other than that, I can't find much recent news about the situation, though it has been reported that unemployment had more than tripled by late November 2008, with over 7000 registered jobseekers in this small country of 304,000. ( "Interest in jobs abroad". IceNews. 22 November 2008.)

Quote:

Posted by: Michael Mandel on October 10, 2008, Economics Unbound (story here: business week 10/08 )

That’s an amazing sentence: Iceland goes bankrupt. But that’s exactly what happened yesterday (see BW piece here BW . See NY Times piece here NYT ). That’s a clear sign that the global financial crisis is entering a new and vastly more dangerous phase, where we are paying the price of the lack of a global financial regulator and global central bank.

What ‘bankrupt’ means is just that: The country cannot pay back its external debts, and the Icelandic currency, the krona, has become essentially valueless in the rest of the world. That means the country can no longer pay for imports.

The Icelandic problems have nothing to do directly with American real estate. As Kerry Capell of [business Week] writes:

With the privatization of the banking sector, completed in 2000, Iceland’s banks used substantial wholesale funding to finance their entry into the local mortgage market and acquire foreign financial firms, mainly in Britain and Scandinavia…In just five years, the banks went from being almost entirely domestic lenders to becoming major international financial intermediaries. In 2000, says Richard Portes, a professor of economics at London Business School, two-thirds of their financing came from domestic sources and one-third from abroad. More recently—until the crisis hit—that ratio was reversed. But as wholesale funding markets seized up, Iceland’s banks started to collapse under a mountain of foreign debt.

What’s worse, with Iceland sitting outside the major currency trading blocs, there may be no one with the incentive or ability to save it. The country is looking for loans from the IMF and from Russia. But the United Kingdom is actually threatening to sue Iceland to get back money.

Where does the crisis go next? Most exposed are countries with large amounts of external debt relative to the size of their economy. A quick calculation suggests that by this measure, the U.S. is relatively well off, with external debt about equal to GDP. Japan’s external debt is about 40-50% of GDP, as is Canada’s (these numbers may change as I refine my calculations). Italy is at about 100%, and Germany and France are in the 140-150% range.

From this perspective, the U.S.—with its external debt mostly in dollars—looks like a bastion of stability. The euro zone has some weaknesses—Belgium and the Netherlands have uncomfortably high debt levels, and Ireland is extremely high. But there is a political framework in place which should allow political leaders to take effective action if they want.

The biggest dangers are for the UK and Switzerland. These countries, although much bigger than Iceland, are major financial intermediaries with big external debts. What’s more, they are outside the major currency blocs, with debt denominated in foreign currencies. That means if their currency starts to devalue, their debts will become more and more onerous.

And now we are in very tricky waters, which are looking uncomfortably like the Great Depression. The major players are the U.S., the Eurozone, Japan, and China. The question is: Will they act collectively, or will they engage beggar-thy neighbor policies?

[Gail]

Interesting!

[rudywoofs (Pam)]

Bankruptcy looms for Icelandic tycoon 2009/02/04

In Iceland, they call it "moratorium"; in Britain, "administration." Both schemes offer protection from creditors, and on Wednesday the once-mighty retail empire of Icelandic millionaire Jon Asgeir Johannesson had to take refuge in both.

Johannesson's flagship investment company, Baugur, said on Wednesday it had filed for "moratorium" in a district court in the Icelandic capital of Reykjavik. This is not quite bankruptcy, but it's getting there: The company will get three weeks' reprieve from all due payments, and will attempt to restructure itself with the help of a court-appointed advisor. If there is no positive end in sight, the creditors will take over.

rest of the story

[fccool]

The last I've heard... they will be joining EU.