2008–2011 Icelandic financial crisis
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The Icelandic financial crisis was a major
economic An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...
and political event in
Iceland Iceland ( is, Ísland; ) is a Nordic island country in the North Atlantic Ocean and in the Arctic Ocean. Iceland is the most sparsely populated country in Europe. Iceland's capital and largest city is Reykjavík, which (along with its ...
that involved the default of all three of the country's major privately owned
commercial bank A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with ...
s in late 2008, following their difficulties in refinancing their
short-term debt The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity, the money market became a compon ...
and a run on deposits in the
Netherlands ) , anthem = ( en, "William of Nassau") , image_map = , map_caption = , subdivision_type = Sovereign state , subdivision_name = Kingdom of the Netherlands , established_title = Before independence , established_date = Spanish Netherl ...
and the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
. Relative to the size of its economy, Iceland's systemic banking collapse was the largest experienced by any country in economic history. The crisis led to a severe economic slump in 2008–2010 and significant political unrest. In the years preceding the crisis, three Icelandic banks,
Kaupthing Kaupthing Bank ( is, Kaupþing banki; ) was a major international Icelandic bank, headquartered in Reykjavík, Iceland. It was taken over by the Icelandic government during the 2008–2011 Icelandic financial crisis and the domestic Icelandic ...
,
Landsbanki Landsbanki (literally "national bank"), also commonly known as Landsbankinn (literally "the national bank") which is now the name of the current rebuilt bank (here called "New Landsbanki"), was one of the largest Icelandic commercial banks that f ...
and Glitnir, multiplied in size. This expansion was driven by ready access to credit in international financial markets, in particular
money market The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity, the money market became a compon ...
s. As the
financial crisis of 2007–2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of ...
unfolded, investors perceived the Icelandic banks to be increasingly risky. Trust in the banks gradually faded, leading to a sharp depreciation of the Icelandic króna in 2008 and increased difficulties for the banks in rolling over their short-term debt. At the end of the second quarter of 2008, Iceland's
external debt A country's gross external debt (or foreign debt) is the liabilities that are owed to nonresidents by residents. The debtors can be governments, corporations or citizens. External debt may be denominated in domestic or foreign currency. It inclu ...
was 9.553 trillion Icelandic krónur (€50 billion), more than 7 times the GDP of Iceland in 2007. The assets of the three banks totaled 14.437 trillion krónur at the end of the second quarter 2008, equal to more than 11 times the national GDP. Due to the huge size of the Icelandic financial system in comparison with the Icelandic economy, the Central Bank of Iceland found itself unable to act as a
lender of last resort A lender of last resort (LOLR) is the institution in a financial system that acts as the provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank lending market when other faci ...
during the crisis, further aggravating the mistrust in the banking system. On 29 September 2008, it was announced that Glitnir would be nationalised. However, subsequent efforts to restore faith in the banking system failed. On 6 October, the Icelandic legislature instituted an emergency law which enabled the Financial Supervisory Authority (FME) to take control over financial institutions and made domestic deposits in the banks priority claims. In the following days, new banks were founded to take over the domestic operations of Kaupthing, Landsbanki and Glitnir. The old banks were put into
receivership In law, receivership is a situation in which an institution or enterprise is held by a receiver—a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights"—especially in c ...
and liquidation, resulting in losses for their
shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal o ...
s and foreign
creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...
s. Outside Iceland, more than half a million depositors lost access to their accounts in foreign branches of Icelandic banks. This led to the 2008–2013
Icesave dispute The Icesave dispute was a diplomatic dispute between Iceland, and the Netherlands and the United Kingdom that began after the privately owned Icelandic bank Landsbanki was placed in receivership on 7 October 2008. As ''Landsbanki'' was one o ...
, that ended with an EFTA Court ruling that Iceland was not obliged to repay Dutch and British depositors minimum deposit guarantees. In an effort to stabilize the situation, the Icelandic government stated that all domestic deposits in Icelandic banks would be guaranteed, imposed strict
capital controls Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measures ...
to stabilize the value of the Icelandic króna, and secured a US$5.1bn sovereign debt package from the
IMF The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glob ...
and the
Nordic countries The Nordic countries (also known as the Nordics or ''Norden''; lit. 'the North') are a geographical and cultural region in Northern Europe and the North Atlantic. It includes the sovereign states of Denmark, Finland, Iceland, Norway and Sw ...
in order to finance a
budget deficit Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
and the restoration of the banking system. The international bailout support programme led by IMF officially ended on 31 August 2011, while the capital controls which were imposed in November 2008 were lifted on 14 March 2017. The financial crisis had a serious negative impact on the Icelandic economy. The national currency fell sharply in value, foreign currency transactions were virtually suspended for weeks, and the
market capitalisation Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...
of the Icelandic stock exchange fell by more than 90%. As a result of the crisis, Iceland underwent a severe economic depression; the country's
gross domestic product Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...
dropped by 10% in real terms between the third quarter of 2007 and the third quarter of 2010. A new era with positive GDP growth started in 2011, and has helped foster a gradually declining trend for the unemployment rate. The
government budget deficit The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a ''g ...
has declined from 9.7% of GDP in 2009 and 2010 to 0.2% of GDP in 2014; the central government gross
debt-to-GDP ratio In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). While it is a "ratio", it is technically measured ...
was expected to decline to less than 60% in 2018 from a maximum of 85% in 2011.


Development


Currency

The Icelandic króna had declined more than 35% against the euro from January to September 2008. Inflation of consumer prices was running at 14%, and Iceland's interest rates had been raised to 15.5% to deal with the high inflation.The policy rate was raised from 13.75 percent to 15 percent on 25 March 2008, and to 15.5 percent on 10 April 2008: On the night of Wednesday, 8 October 2008, the Central Bank of Iceland abandoned its attempt to peg the Icelandic króna at 131 krónur to the euro after trying to set this peg on 6 October. By 9 October, the Icelandic króna was trading at 340 to the euro when trading in the currency collapsed due to the FME's takeover of the last major Icelandic bank, and thus the loss of all króna trade ' clearing houses'. The next day, the central bank introduced restrictions on the purchase of foreign currency within Iceland. From 9 October to 5 November, the
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
quoted a reference rate of 305 krónur to the euro. The Central Bank of Iceland set up a temporary system of daily currency auctions on 15 October to facilitate international trade. The value of the króna is determined by supply and demand in these auctions. The first auction sold €25 million at a rate of 150 krónur to the euro. Commercial króna trading outside Iceland restarted on 28 October, at an exchange rate of 240 krónur to the euro, after Icelandic interest rates had been raised to 18%. The foreign exchange reserves of the Central Bank of Iceland fell by US$289 million during October 2008. During November, the real exchange rate (discounting inflation) of the Icelandic króna, as quoted by the Central Bank of Iceland, was roughly one-third lower than the average rate from 1980 to 2008, and 20% lower than the historical lows during the same period. The external rate as quoted by the European Central Bank was lower still. On the last trading day of the month, 28 November, the Central Bank of Iceland was quoting 182.5 krónur to the euro, while the European Central Bank was quoting 280 krónur to the euro. On 28 November, the Central Bank of Iceland and the Minister for Business Affairs agreed on a new set of currency regulations, replacing the central bank's restrictions imposed early on in the crisis. Movements of capital to and from Iceland were banned without a license from central bank. It is estimated that foreign investors hold some €2.9 billion in króna-denominated securities, popularly known as "glacier bonds". The foreign exchange rules also oblige Icelandic residents to deposit any new foreign currency they receive with an Icelandic bank. There is anecdotal evidence that some Icelandic exporters had been operating an informal offshore foreign exchange market, trading pounds and euros for krónur outside the control of any regulator and starving the onshore market of foreign currency. Hence the Central Bank had to sell €124 million of currency reserves in November 2008 to make up the difference, compared with an estimated trade surplus of €13.9 million. The last currency auction was held on 3 December. The domestic interbank foreign exchange market reopened the following day with three
market maker A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the '' bid–ask spread'', or ''turn.'' The benefit to the firm is that ...
s, all of them government-owned. On the first two days of domestic trading, the króna climbed to 153.3 to the euro, up 22% against the last currency auction rate. In January 2009, the exchange rate of Icelandic króna against Euro seemed to be more stabilized compared with the situation in October 2008, with the lowest rate at 177.5 krónur per EUR on 1, 3 and 4 January 2009, and the highest at 146.8 on 30 January 2009. In the meantime, however, Iceland's 12-month inflation in January 2009 climbed to a record high of 18.6%.


Banks

In September 2008, internal documents from
Kaupthing Kaupthing Bank ( is, Kaupþing banki; ) was a major international Icelandic bank, headquartered in Reykjavík, Iceland. It was taken over by the Icelandic government during the 2008–2011 Icelandic financial crisis and the domestic Icelandic ...
, the largest bank in Iceland, were leaked to
WikiLeaks WikiLeaks () is an international non-profit organisation that published news leaks and classified media provided by anonymous sources. Julian Assange, an Australian Internet activist, is generally described as its founder and director and ...
. On 29 September 2008, a plan was announced for the bank Glitnir to be nationalised by the Icelandic government with the purchase of a 75% stake for €600 million. The government stated that it did not intend to hold ownership of the bank for a long period, and that the bank was expected to carry on operating as normal. According to the government, the bank "would have ceased to exist" within a few weeks if there had not been intervention. It later turned out that Glitnir had US$750 million of debt due to mature on 15 October. However, the nationalization of Glitnir never went through, as it was placed in
receivership In law, receivership is a situation in which an institution or enterprise is held by a receiver—a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights"—especially in c ...
by the FME before the initial plan of the Icelandic government to purchase a 75% stake had been approved by shareholders. The announced nationalisation of Glitnir came just as the
United Kingdom government ga, Rialtas a Shoilse gd, Riaghaltas a Mhòrachd , image = HM Government logo.svg , image_size = 220px , image2 = Royal Coat of Arms of the United Kingdom (HM Government).svg , image_size2 = 180px , caption = Royal Arms , date_est ...
was forced to nationalise
Bradford & Bingley Bradford & Bingley plc was a British bank with headquarters in the West Yorkshire town of Bingley. The bank was formed in December 2000 by demutualisation of the Bradford & Bingley Building Society following a vote of the building society's mem ...
and to sell its retail operations and branch network to
Grupo Santander Banco Santander, S.A., doing business as Santander Group (, , Spanish: ), is a Spanish multinational financial services company based in Madrid and Santander in Spain. Additionally, Santander maintains a presence in all global financial centre ...
. Over the weekend of 4–5 October, British newspapers carried many articles detailing the nationalisation of Glitnir and the high leverage of Iceland's other banks. Influential BBC business editor Robert Peston published an opinion piece on the banks, stating that debt insurance for Kaupthing required a premium of £625,000 to guarantee the return of £1 million: "the worst case of financial BO I've encountered in some time" was his graphic description. ''
The Guardian ''The Guardian'' is a British daily newspaper. It was founded in 1821 as ''The Manchester Guardian'', and changed its name in 1959. Along with its sister papers '' The Observer'' and '' The Guardian Weekly'', ''The Guardian'' is part of the ...
'' said "Iceland is on the brink of collapse. Inflation and interest rates are raging upwards. The krona, Iceland's currency, is in freefall." These articles spooked investors discussing Icesave (the brand name of Landsbanki in the UK and the Netherlands) in online forums and many started moving their savings out of the Internet bank. Problems with access to the site hinted at a run on savings. On 6 October, a number of private interbank credit facilities to Icelandic banks were shut down. Prime Minister
Geir Haarde Geir Hilmar Haarde (; born 8 April 1951) is an Icelandic politician, who served as prime minister of Iceland from 15 June 2006 to 1 February 2009 and as president of the Nordic Council in 1995. Geir was chairman of the Icelandic Independence Pa ...
addressed the nation in a speech that became infamous for its portentous closing words: ' God bless Iceland'. He announced a package of new regulatory measures which were to be put to the
Althing The Alþingi (''general meeting'' in Icelandic, , anglicised as ' or ') is the supreme national parliament of Iceland. It is one of the oldest surviving parliaments in the world. The Althing was founded in 930 at (" thing fields" or "assemb ...
, Iceland's parliament, immediately, with the cooperation of the opposition parties. These included the power of the FME to take over the running of Icelandic banks without nationalising them, and preferential treatment for depositors in the event that a bank had to be
liquidated Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are re ...
. In a separate measure, retail deposits in Icelandic branches of Icelandic banks were guaranteed in full. The emergency measures had been deemed unnecessary by the Icelandic government less than 24 hours earlier. That evening, the
Guernsey Guernsey (; Guernésiais: ''Guernési''; french: Guernesey) is an island in the English Channel off the coast of Normandy that is part of the Bailiwick of Guernsey, a British Crown Dependency. It is the second largest of the Channel Islands ...
subsidiary of Landsbanki went into voluntary
administration Administration may refer to: Management of organizations * Management, the act of directing people towards accomplishing a goal ** Administrative Assistant, traditionally known as a Secretary, or also known as an administrative officer, admini ...
with the approval of the
Guernsey Financial Services Commission The Guernsey Financial Services Commission is the regulatory body for the finance sector in the Bailiwick of Guernsey. It supervises and regulates over 2,000 licensees from within the banking, fiduciary, investment and insurance sectors in accorda ...
. The administrators would later say that "The main reason for the Bank's difficulties has been the placing of funds with its UK fellow subsidiary, Heritable Bank." Guernsey's Chief Minister stated "the directors of Landsbanki Guernsey took appropriate steps by putting the bank into administration." The FME placed Landsbanki in receivership early on 7 October. A press release from the FME stated that all of Landsbanki's domestic branches, call centres, ATMs and internet operations will be open for business as usual, and that all "domestic deposits" were fully guaranteed. The UK government used the
Banking (Special Provisions) Act 2008 The Banking (Special Provisions) Act 2008 (c 2) is an Act of the Parliament of the United Kingdom that entered into force on the 21 February 2008 in order to enable the UK government to nationalise high-street banks under emergency circumstances ...
first to transfer retail deposits from Heritable Bank to a
Treasury A treasury is either *A government department related to finance and taxation, a finance ministry. *A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or i ...
holding company, then to sell them to Dutch bank
ING Direct The ING Group ( nl, ING Groep) is a Dutch multinational banking and financial services corporation headquartered in Amsterdam. Its primary businesses are retail banking, direct banking, commercial banking, investment banking, wholesale banki ...
for £1 million. The same day, the FME also placed Glitnir into receivership. That afternoon, there was a telephone conversation between Icelandic Finance Minister Árni Mathiesen and UK
Chancellor of the Exchequer The chancellor of the Exchequer, often abbreviated to chancellor, is a senior minister of the Crown within the Government of the United Kingdom, and head of HM Treasury, His Majesty's Treasury. As one of the four Great Offices of State, the Ch ...
Alistair Darling Alistair Maclean Darling, Baron Darling of Roulanish, (born 28 November 1953) is a British politician who served as Chancellor of the Exchequer under Prime Minister Gordon Brown from 2007 to 2010. A member of the Labour Party, he was a Member ...
. That evening, one of the governors of the Central Bank of Iceland, Davíð Oddsson, was interviewed on Icelandic public service broadcaster
RÚV Ríkisútvarpið (RÚV) (pronounced or ) ( en, 'The Icelandic National Broadcasting Service') is Iceland's national public-service broadcasting organization. Operating from studios in the country's capital, Reykjavík, as well as regional ce ...
and stated that "we he Icelandic Statedo not intend to pay the debts of the banks that have been a little heedless". He compared the government's measures to the U.S. intervention at
Washington Mutual Washington Mutual (often abbreviated to WaMu) was the United States' largest savings and loan association until its collapse in 2008. A savings bank holding company is defined in United States Code: Title 12: Banks and Banking; Section 1842: Def ...
, and suggested that foreign creditors would "unfortunately only get 5–10–15% of their claims". Darling announced that he was taking steps to freeze the assets of Landsbanki in the UK. The Landsbanki Freezing Order 2008 was passed at 10 am on 8 October 2008 and came into force ten minutes later. Under the order the UK Treasury froze the assets of Landsbanki within the UK, and introduced provisions to prevent the sale or movement of Landsbanki assets within the UK, even if held by the Central Bank of Iceland or the Government of Iceland. The freezing order took advantage of provisions in sections 4 and 14 and Schedule 3 of the Anti-terrorism, Crime and Security Act 2001, and was made "because the Treasury believed that action to the detriment of the UK's economy (or part of it) had been or was likely to be taken by certain persons who are the government of or resident of a country or territory outside the UK". The UK Prime Minister, Gordon Brown, announced that the UK government would launch legal action against Iceland over concerns with compensation for the estimated 300,000 UK savers. Geir Haarde said at a press conference on the following day that the Icelandic government was outraged that the UK government applied provisions of anti-terrorism legislation to it in a move they dubbed an "unfriendly act". The Chancellor of the
Exchequer In the civil service of the United Kingdom, His Majesty’s Exchequer, or just the Exchequer, is the accounting process of central government and the government's '' current account'' (i.e., money held from taxation and other government revenu ...
also said that the UK government would foot the entire bill to compensate UK retail depositors, estimated at £4 billion. It is reported that more than £4 billion in Icelandic assets in the UK have been frozen by the UK government. The UK
Financial Services Authority The Financial Services Authority (FSA) was a quasi-judicial body accountable for the regulation of the financial services industry in the United Kingdom between 2001 and 2013. It was founded as the Securities and Investments Board (SIB) in 19 ...
(FSA) also declared Kaupthing Singer & Friedlander, the UK subsidiary of
Kaupthing Bank Kaupthing Bank ( is, Kaupþing banki; ) was a major international Icelandic bank, headquartered in Reykjavík, Iceland. It was taken over by the Icelandic government during the 2008–2011 Icelandic financial crisis and the domestic Icelandic ...
, in default on its obligations, sold
Kaupthing Edge Kaupthing Bank ( is, Kaupþing banki; ) was a major international Icelandic bank, headquartered in Reykjavík, Iceland. It was taken over by the Icelandic government during the 2008–2011 Icelandic financial crisis and the domestic Icelandic ...
, its Internet bank, to ING Direct, and put Kaupthing Singer & Friedlander into administration. Over £2.5 billion of deposits for 160,000 customers were sold to ING Direct. The scale of the run on Kaupthing Edge deposits had been such that many transactions were not completed until 17 October. Although Geir Haarde has described the UK government's actions over Kaupthing Singer & Friedlander as an "abuse of power" and "unprecedented", they were the third such actions taken under the Banking (Special Provisions) Act 2008 in less than ten days, after interventions in Bradford & Bingley and Heritable Bank. On the same day, the
Sveriges Riksbank Sveriges Riksbank, or simply the ''Riksbank'', is the central bank of Sweden. It is the world's oldest central bank and the fourth oldest bank in operation. Etymology The first part of the word ''riksbank'', ''riks'', stems from the Swedish w ...
, Sweden's central bank, made a credit facility of 5 billion
Swedish krona The krona (; plural: ''kronor''; sign: kr; code: SEK) is the official currency of the Kingdom of Sweden. Both the ISO code "SEK" and currency sign "kr" are in common use; the former precedes or follows the value, the latter usually follows it ...
(€520 million) available to
Kaupthing Bank Kaupthing Bank ( is, Kaupþing banki; ) was a major international Icelandic bank, headquartered in Reykjavík, Iceland. It was taken over by the Icelandic government during the 2008–2011 Icelandic financial crisis and the domestic Icelandic ...
Sverige AB, the Swedish subsidiary of Kaupthing. The loan was to pay "depositors and other creditors". On 9 October, Kaupthing was placed into receivership by the FME, following the resignation of the entire board of directors. The bank said that it was in technical default on its loan agreements after its UK subsidiary had been placed into administration. Kaupthing's
Luxembourg Luxembourg ( ; lb, Lëtzebuerg ; french: link=no, Luxembourg; german: link=no, Luxemburg), officially the Grand Duchy of Luxembourg, ; french: link=no, Grand-Duché de Luxembourg ; german: link=no, Großherzogtum Luxemburg is a small lan ...
subsidiary asked for, and obtained, a suspension of payments (similar to chapter 11 protection) in the Luxembourg District Court. Kaupthing's
Geneva Geneva ( ; french: Genève ) frp, Genèva ; german: link=no, Genf ; it, Ginevra ; rm, Genevra is the second-most populous city in Switzerland (after Zürich) and the most populous city of Romandy, the French-speaking part of Switzerland. Situa ...
office, which was a branch of its Luxembourg subsidiary, was prevented from making any payments of more than 5000
Swiss franc The Swiss franc is the currency and legal tender of Switzerland and Liechtenstein. It is also legal tender in the Italian exclave of Campione d'Italia which is surrounded by Swiss territory. The Swiss National Bank (SNB) issues banknotes and the ...
s by the Swiss Federal Banking Commission. The directors of Kaupthing's subsidiary on the
Isle of Man ) , anthem = " O Land of Our Birth" , image = Isle of Man by Sentinel-2.jpg , image_map = Europe-Isle_of_Man.svg , mapsize = , map_alt = Location of the Isle of Man in Europe , map_caption = Location of the Isle of Man (green) in Europ ...
decided to wind up the company after consultation with the Manx authorities. The Finnish Financial Supervision Authority, ''Rahoitustarkastus'', announced having taken control of Kaupthing's Helsinki branch already on 6th, to prevent money from being sent back to Iceland. On the same day, the UK Treasury issued a licence under the Landsbanki Freezing Order 2008 to allow the London branch of Landsbanki to continue some business. A second licence was issued on 13 October, when the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government o ...
provided a £100 million
secured loan A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral, an ...
to Landsbanki "to help maximise the returns to UK creditors". On 12 October the Norwegian government took control of Kaupthing's Norwegian operations, including "all of the bank's assets and liabilities in Norway". On 21 October, the Central Bank of Iceland asked the remaining independent financial institutions for new
collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...
against their loans. This was to replace the shares in Glitnir, Landsbanki and Kaupthing which had been pledged as collateral previously and which were now of much lower value, if not worthless. The value of the collateral was estimated at 300 billion krónur (€2 billion). One of the banks, Sparisjóðabanki (SPB, also known as Icebank), stated the next day that it could not provide new collateral for its 68 billion krónur (€451 million) loan, and would have to turn to the government for help. "This problem won't be solved in any other way," said CEO Agnar Hansson. On 24 October, it emerged that a Norwegian export credit company ( Eksportfinans) had made a complaint to Norwegian police concerning the alleged
embezzlement Embezzlement is a crime that consists of withholding assets for the purpose of conversion of such assets, by one or more persons to whom the assets were entrusted, either to be held or to be used for specific purposes. Embezzlement is a type ...
of 415 million
Norwegian krone The krone (, abbreviation: kr (also NKr for distinction); code: NOK), plural ''kroner'', is currency of the Kingdom of Norway (including Svalbard). Traditionally known as the Norwegian crown in English. It is nominally subdivided into 100 ...
r (€47 million) by Glitnir since 2006. The Icelandic bank had acted as an agent for Eksportfinans, administering loans to several companies: however Eksportfinans alleges that, when the loans were paid off early by borrowers, Glitnir kept the cash and merely continued with the regular payments to Eksportfinans, effectively taking an unauthorized loan itself.


Stock market

Trading in shares of six financial companies on the
OMX Nasdaq Nordic is the common name for the subsidiaries of Nasdaq, Inc. that provide financial services and operate marketplaces for securities in the Nordic and Baltic regions of Europe. Historically, the operations were known by the company ...
Nordic Iceland Exchange was suspended on 6 October by order of the FME. On Thursday 9 October, all trading on the exchange was frozen for two days by the government "in an attempt to prevent further panic spreading throughout the country's financial markets". The decision was made to do so due to "unusual market conditions", with share prices having fallen 30% since the start of the month. The closure was extended through Monday 13 October due to continuing "unusual market conditions". The market reopened on 14 October with the main index, the
OMX Iceland 15 The OMX Iceland 15 (formerly the ICEX15) is a defunct stock market index which consisted of a maximum of 15 companies listed on the OMX Iceland Stock Exchange with the highest market capitalization. At the final official review of the index effect ...
, at 678.4, which corresponds to a plunge of about 77% compared with 3,004.6 before the closure. This reflects the fact that the value of the three big banks, which form 73.2% of the value of the OMX Iceland 15, had been set to zero. The values of other equities varied from +8% to −15%. Trading in shares of
Exista Klakki (known as Exista until 2011) is an Icelandic financial services group formerly listed on the Iceland Stock Exchange. Its activities are based primarily on insurance underwriting and other financial services, although it is also active in ...
, SPRON and Straumur-Burðarás (13.66% of the OMX Iceland 15) remains suspended. After a week of very thin trading, the OMX Iceland 15 closed on 17 October at 643.1, down 93% in króna terms and 96% in euro terms from its historic high of 9016 (18 July 2007). Trading in the shares of two financial services companies, Straumur–Burðarás and Exista, resumed on 9 December: together the companies account for 12.04% of the OMX Iceland 15. The values of the shares in both companies dropped sharply, and the index closed at 394.88, down by 40.17% on the day. Trading in shares in SPRON and Kaupthing remains suspended, at prices of 1.90 krónur and 694.00 krónur respectively.


Sovereign debt

The four credit rating agencies which monitor Iceland's
sovereign debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
all lowered their ratings during the crisis, and their outlook for future ratings changes became negative. The Icelandic government had a relatively healthy balance, with sovereign debt of 28% of GDP and a
budget surplus A balanced budget (particularly that of a government) is a budget in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts "balance"). More generally, it is a budget that has no budget ...
of 6% of GDP (2007). More recently, the estimated 2011 debt was 130% of GDP with a budget deficit of 6% of GDP. In addition, the value of foreign currency bonds which matured in the remainder of 2008 was only $600 million, and foreign currency debt service in 2009 was only $215 million, well within the government's ability to pay. However the agencies believed that the government would have to issue more foreign currency bonds, both to cover losses as the banks' overseas operations are liquidation and also to stimulate demand in the domestic economy as Iceland goes into recession. A team of experts from the International Monetary Fund (IMF) arrived in Iceland at the start of October 2008 for talks with the government.
Industry Minister The industry minister is a cabinet position in a government. The title may refer to the head of the governmental department that specializes in industry. This position may also be responsible for trade and employment, areas that fall under the mi ...
Össur Skarphéðinsson was said to be "favourable" to help from the IMF to stabilise the króna and to allow interest rates to be lowered. On 7 October, the central bank of Iceland announced that they had been in talks with the Russian ambassador to Iceland, Victor I. Tatarintsev, over a €4 billion loan from Russia. The loan would be given across three or four years, with an interest rate of 30 to 50
basis point A basis point (often abbreviated as bp, often pronounced as "bip" or "beep") is one hundredth of 1 percentage point. The related term ''permyriad'' means one hundredth of 1 percent. Changes of interest rates are often stated in basis points. If ...
s (0.3% to 0.5%) above
LIBOR The London Inter-Bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in London. Each bank estimates what it would be charged were it to borrow from other banks. The resulting average rate is u ...
. Central Bank of Iceland governor Davíð Oddsson later clarified that the loan was still being negotiated. According to RÚV, prime minister Geir Haarde had been investigating the possibility of a Russian loan since the mid-summer. When questioned on the matter in a press conference, Geir Haarde said: "We have not received the kind of support that we were requesting from our friends. So in a situation like that one has to look for new friends." A team of Icelandic negotiators arrived in Moscow on 14 October to discuss the possible loan. Russian deputy finance minister Dmitri Pankin said that "The meeting took place in a friendly atmosphere.... We are working thoroughly on the issue to take a final decision". On the same day, the Central Bank of Iceland drew on its swap facilities with the central banks of Denmark and Norway for €200 million each. Iceland has swap facilities with the other Nordic countries for a total of €1.5 billion. Iceland is also seeking assistance from the European Central Bank (ECB): there is some precedent for the move, as the ECB already has currency swap arrangements with Switzerland, another non-member of the
European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are located primarily in Europe, Europe. The union has a total area of ...
. On 24 October, the
IMF The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glob ...
tentatively agreed to lend €1.58 billion. However the loan had still not been approved by the executive board of the IMF on 13 November. Due to the delay Iceland found itself caught in a classic catch-22 situation, loans from other countries could not be secured until the IMF program had been approved. The Icelandic government spoke of a $500M (€376M) gap in the funding plans. Dutch finance minister
Wouter Bos Wouter Jacob Bos (; (born 14 July 1963) is a retired Dutch politician of the Labour Party (PvdA) and businessman. Bos attended the Christian Gymnasium in Zeist from June 1975 until July 1980 and applied at the Vrije Universiteit Amsterdam i ...
stated that the Netherlands would oppose the loan unless agreement was reached over deposit insurance for Landsbanki customers in the Netherlands. The IMF-led package of $4.6bn was finally agreed on 19 November, with the IMF loaning $2.1bn and another $2.5bn of loans and currency swaps from Norway, Sweden, Finland and Denmark. In addition, Poland has offered to lend $200M and the
Faroe Islands The Faroe Islands ( ), or simply the Faroes ( fo, Føroyar ; da, Færøerne ), are a North Atlantic island group and an autonomous territory of the Kingdom of Denmark. They are located north-northwest of Scotland, and about halfway bet ...
have offered $50M, about 3% of Faroese GDP. The Icelandic government reported that Russia offered to lend $500M, and Poland, $200M. The next day, Germany, the Netherlands and the United Kingdom announced a joint loan of $6.3bn (€5bn), related to the deposit insurance dispute.


Causes

In 2001, banks were deregulated in Iceland. This set the stage for banks to upload debts when foreign companies were accumulated. The crisis unfolded when banks became unable to refinance their debts. It is estimated that the three major banks held foreign debt in excess of €50 billion, or about €160,000 per Icelandic resident, compared with Iceland's gross domestic product of €8.5 billion. As early as March 2008, the cost of private deposit insurance for deposits in Landsbanki and Kaupthing was already far higher (6–% of the sum deposited) than for other European banks. The króna, which was ranked by ''
The Economist ''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Eco ...
'' in early 2007 as the most overvalued currency in the world (based on the
Big Mac Index The Big Mac Index is a price index published since 1986 by ''The Economist'' as an informal way of measuring the purchasing power parity (PPP) between two currencies and providing a test of the extent to which market exchange rates result ...
), has further suffered from the effects of carry trading. Coming from a small domestic market, Iceland's banks have financed their expansion with loans on the
interbank lending market The interbank lending market is a market in which banks lend funds to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being over day. Such loans are made at the interbank rate (also call ...
and, more recently, by deposits from outside Iceland (which are also a form of external debt). Households also took on a large amount of debt, equivalent to 213% of
disposable income Disposable income is total personal income minus current income taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major ...
, which led to inflation. This inflation was exacerbated by the practice of the Central Bank of Iceland issuing liquidity loans to banks on the basis of newly issued, uncovered bonds – effectively, printing money on demand. In response to the rise in prices – 14% in the twelve months to September 2008, compared with a target of 2.5% – the Central Bank of Iceland held
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...
s high (15.5%). Such high interest rates, compared with 5.5% in the United Kingdom or 4% in the
eurozone The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU pol ...
for example, encouraged overseas investors to hold deposits in Icelandic krónur, leading to
monetary inflation Monetary inflation is a sustained increase in the money supply of a country (or currency area). Depending on many factors, especially public expectations, the fundamental state and development of the economy, and the transmission mechanism, it ...
: the Icelandic
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
(M3) grew 56.5% in the twelve months to September 2008, compared with 5.0% GDP growth. The situation was effectively an
economic bubble An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be c ...
, with investors overestimating the true value of the króna. As with many banks around the world, the Icelandic banks found it increasingly difficult or impossible to roll over their loans in the
interbank market The interbank market is the top-level foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly, or through electronic brokering platforms. The Electronic Broking Services (EBS) and Thom ...
, their creditors insisting on payment while no other banks were willing to make fresh loans. In such a situation, a bank would normally have to ask for a loan from the
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
as the
lender of last resort A lender of last resort (LOLR) is the institution in a financial system that acts as the provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank lending market when other faci ...
. However, in Iceland the banks were so much larger than the national economy that the Central Bank of Iceland and the Icelandic government could not guarantee the payment of the banks' debts, leading to the collapse of the banks. The official reserves of the Central Bank of Iceland stood at 374.8 billion krónur at the end of September 2008, compared with 350.3 billion krónur of short-term international debt in the Icelandic banking sector, and at least £6.5 billion (1,250 billion krónur) of retail deposits in the UK. The situation was made worse by the fact that Icesave was operating as a branch of Landsbanki, rather than as a legally independent subsidiary. As such, it was completely dependent on the Central Bank of Iceland for emergency loans of
liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liq ...
, and could not turn to the Bank of England for help. The UK Financial Services Authority (FSA) was aware of the risk, and was considering imposing special liquidity requirements on Icelandic deposit-taking banks in the weeks before the crisis. However the plan – which was never implemented – would have forced the Icelandic banks to cut interest rates or stop taking new deposits, and might even have sparked the sort of bank run it was designed to prevent. The Guernsey authorities were also planning on bringing in restrictions on foreign banks operating as branches and on transfers of funds between Guernsey subsidiaries and parent banks ("parental upstreaming"). Landsbanki operated in Guernsey through a legally independent subsidiary. The existence of a bank run on Landsbanki accounts in the UK in the period up to 7 October seems confirmed by a statement from the bank on 10 October, which said "Landsbanki Íslands hf. transferred substantial funds to its UK branch during this time to fulfil its Icesave commitments." The transfer of funds from Landsbanki Guernsey to Heritable Bank, a Landsbanki subsidiary in the UK, also suggests a bank run in the UK. A transfer of "substantial funds" from Iceland to the UK would have been a significant downward push on the value of the króna, even before the effects of any speculation.


Bank restructuring

Wholesale funding disappeared in September 2008 leading to the collapse of Glitnir, Kaupthing and Landsbanki. Due to the size of the combined balance sheet of those banks the government of Iceland did not have the means to save those banks. They were put into receivership instead with their boards replaced. Nevertheless, the failed banks were restructured by dividing them into a new and an old bank in order to avoid a
credit crunch A credit crunch (also known as a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit cr ...
. BRUEGEL policy contribution Dezember 2011, Zsolt Darvas, ''A Tale of Three Countries: Recovery after Banking Crises'', p. 6-7 The new state-owned banks took over the domestic activities and have been recapitalised by government with a capital ratio of 16% of all assets. The Financial Supervisory Authority (FME) has acted to "ring-fence" the Icelandic operations of Landsbanki and Glitnir, stating its aim of "continued banking operations for Icelandic families and businesses". NBI (originally known as ''Nýi Landsbanki'') was set up on 9 October with 200 billion krónur in equity and 2,300 billion krónur of assets. Nýi Glitnir was set up on 15 October with 110 billion krónur in equity and 1,200 billion krónur of assets. Nýja Kaupþing was set up on 22 October with 75 billion krónur in equity and 700 billion krónur of assets. The equity in all three new banks was supplied by the Icelandic government, and amounted to 30% of Iceland's GDP. The new banks will also have to reimburse their predecessors for the net value of the transferred assets, as determined by "recognised appraisers". As of 14 November 2008, these net values were estimated as: NBI ISK558.1bn (€3.87bn), Nýi Glitnir ISK442.4bn (€2.95bn); Nýja Kaupþing ISK172.3bn (€1.14bn). The total debt of 1173 billion krónur is more than 90% of Iceland's 2007 gross domestic product. The international businesses remained with the old banks for winding up. Glitnir and Kaupthing, shorn of their Icelandic operations, obtained moratoria on payments to creditors (similar to Chapter 11 protection) from the District Court of Reykjavík on 24 November. The rescue operations of the central bank along with the restructuring and recapitalization of the banks increased the public debt ratio by about 20 percentage points of GDP.


Effects


Within Iceland

The current economic climate in the country has affected many Icelandic businesses and citizens. With the creation of
Nýi Landsbanki Landsbankinn (literally "the National bank"), originally NBI hf., is an Icelandic bank headquartered in Reykjavík. It was established in 2008 by the Icelandic government out of the domestic operations of its predecessor Landsbanki which failed du ...
, the new organisation which replaces the old
Landsbanki Landsbanki (literally "national bank"), also commonly known as Landsbankinn (literally "the national bank") which is now the name of the current rebuilt bank (here called "New Landsbanki"), was one of the largest Icelandic commercial banks that f ...
, around 300 employees will lose their jobs due to a radical restructuring of the organisation which is intended to minimise the bank's international operations. Similar job losses are expected at Glitnir and
Kaupthing Kaupthing Bank ( is, Kaupþing banki; ) was a major international Icelandic bank, headquartered in Reykjavík, Iceland. It was taken over by the Icelandic government during the 2008–2011 Icelandic financial crisis and the domestic Icelandic ...
The job losses can be compared with the 2,136 registered unemployed and 495 advertised vacancies in Iceland at the end of August 2008. Other companies have also been affected. For example, the private
Sterling Airlines Sterling Airlines A/S was a low-cost airline with its head office at Copenhagen Airport South in Dragør, Dragør Municipality, Denmark. It was created in September 2005 through the merger of two Danish airlines — Sterling European Airli ...
declared bankruptcy on 29 October 2008. The national airline
Icelandair Icelandair is the flag carrier airline of Iceland, with its corporate head office on the property of Reykjavík Airport in the capital city Reykjavik. Linked from here It is part of the Icelandair Group and operates to destinations on both ...
has noticed a significant slump in domestic demand for flights. However, the airline states that year-on-year international demand is up from last year. Guðjón Arngrímsson, a spokesman for the airline, said "we're getting decent traffic from other markets... we are trying to let the weak króna help us." He has also stated that it is impossible to predict whether the company will be profitable this year. ''
Morgunblaðið ''Morgunblaðið'' (, ''The Morning Paper'') is an Icelandic newspaper. ''Morgunblaðið''s website, mbl.is, is the most popular website in Iceland. History ''Morgunblaðið'' was founded by Vilhjálmur Finsen and Ólafur Björnsson, brother of ...
'', an Icelandic newspaper, is cutting some jobs and merging parts of its operations with the media corporation 365. The newspaper '' 24 stundir'' has ceased publication due to the crisis, resulting in the loss of 20 jobs. Importers are particularly hard hit, with the government restricting foreign currency to essential products such as food, medicines and oil. The €400 million loan from the central banks of Denmark and Norway is sufficient to pay for a month's imports, although on 15 October there was still a "temporary delay" which affected "all payments to and from the country". The assets of Icelandic pension funds are, according to one expert, expected to shrink by 15–25%. The Icelandic Pension Funds Association has announced that benefits will in all likelihood have to be cut in 2009. Iceland's GDP is expected by economists to shrink by as much as 10% as a result of the crisis, putting Iceland by some measures in an economic depression. Inflation may climb as high as 75% by the end of the year. Unemployment had more than tripled by late November 2008, with over 7000 registered jobseekers (about 4% of the workforce) compared to just 2136 at the end of August 2008. As 80% of household debt is indexed and another 13% denominated in foreign currencies, debt payment is going to be more costly. Since October 2008, 14% of the workforce have experienced reductions in pay, and around 7% have had their working hours reduced. According to the president of the
Icelandic Federation of Labour The Icelandic Confederation of Labour (ASÍ) (Icelandic: Alþýðusamband Íslands) is a trade union centre in Iceland. It was formed in 1916 and has a membership of 104,500, approximately half of the Icelandic workforce. The ASÍ is affiliated ...
(ASÍ), Gylfi Arnbjörnsson, these figures are lower than expected. 85% of those registered as unemployed in Iceland stated that they lost their job in October, after the economic collapse. On 17 July 2009, lawmakers voted 33–28 (with two abstentions) to approve a government plan for Iceland to apply for full European Union membership. Although Iceland (as a member of
EFTA The European Free Trade Association (EFTA) is a regional trade organization and free trade area consisting of four European states: Iceland, Liechtenstein, Norway and Switzerland. The organization operates in parallel with the European U ...
) already had a free trade arrangement with the EU, it had always rejected full membership due to concerns that its independence could be compromised. However, Prime Minister
Jóhanna Sigurðardóttir Jóhanna Sigurðardóttir (; born 4 October 1942) is an Icelandic politician, who served as prime minister of Iceland from 2009 to 2013. She became active in the trade union movement, serving as an officer. Elected as an MP from 1978 to 2013, ...
, who was elected in April, had promised to bring Iceland into the EU to help stabilize its economy. EU enlargement Commissioner Olli Rehn expressed support for Iceland's membership, stating that as "a country with deep democratic traditions", Iceland will be welcome in the EU's expansion plans. (However, on 13 September 2013 the
Government of Iceland The politics of Iceland take place in the framework of a parliamentary representative democratic republic, whereby the president is the head of state, while the prime minister of Iceland serves as the head of government in a multi-party sy ...
dissolved its accession team and suspended its application to join the EU. On 12 March 2015, Foreign Minister of Iceland
Gunnar Bragi Sveinsson Gunnar Bragi Sveinsson (born 9 June 1968) is an Icelandic politician for the Center Party. He is a member of the Althingi (Iceland's parliament) for the Centre Party for the Northwest of Iceland constituency since 2017. He was the Chairman o ...
stated that he had sent a letter to the EU withdrawing the application for membership, without the approval of the
Althing The Alþingi (''general meeting'' in Icelandic, , anglicised as ' or ') is the supreme national parliament of Iceland. It is one of the oldest surviving parliaments in the world. The Althing was founded in 930 at (" thing fields" or "assemb ...
, though the European Union stated that Iceland had not formally withdrawn the application.) The crisis led to a radical shift in the political landscape of Iceland which until this time had been marked by stability. After the effects of the crisis set in, mainstream parties were discredited as newer parties such as the Left Greens and the
Pirate Party Pirate Party is a label adopted by political parties around the world. Pirate parties support civil rights, direct democracy (including e-democracy) or alternatively participation in government, reform of copyright and patent law, free shari ...
moved into the mainstream. During the Social Democrat-Left Green coalition (2009-13) the crisis was blamed on corruption and a lack of transparency; in reaction to this the government attempted to reform the constitution and protect the welfare state.Silja Bára Ómarsdóttir & Viktor Orri Valgarðsson (2020) Anarchy in Iceland?The global left, pirates and socialists in post-crash Icelandic politics, Globalizations, 17:5, 840-853 (p.842). Joining the coalition resulted in the Left Greens losing their innocence as a party, resulting in voters punishing them at the 2013 election, at which they lost about half of their voter base. Voters were angry that the government had seemingly bowed to the
IMF The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glob ...
demands and introduced austerity. Later on in
2016 File:2016 Events Collage.png, From top left, clockwise: Bombed-out buildings in Ankara following the 2016 Turkish coup d'état attempt; the Impeachment of Dilma Rousseff, impeachment trial of Brazilian President Dilma Rousseff; Damaged houses duri ...
and
2017 File:2017 Events Collage V2.png, From top left, clockwise: The War Against ISIS at the Battle of Mosul (2016-2017); aftermath of the Manchester Arena bombing; The Solar eclipse of August 21, 2017 ("Great American Eclipse"); North Korea tests a s ...
the Left Greens were able to gain back a sizable proportation of their electoral gains by focusing their campaigns on their historical opposition to the Independence Party and oil drilling off the coast as well as arguing that the largest state run bank should be converted into a value vased bank.


Outside Iceland

Over £840 million in cash from more than 100 UK local authorities was invested in Icelandic banks. Representatives from each council met to try to persuade the Treasury to secure the money in the same way that customers' money in Icesave was fully guaranteed. Of all the local authorities,
Kent County Council Kent County Council is a county council that governs most of the county of Kent in England. It is the upper tier of elected local government, below which are 12 district councils, and around 300 town and parish councils. The county council h ...
has the most money invested in Icelandic banks, £50 million. Transport for London, the organisation that operates and coordinates transport services within London, also has a large investment at £40 million. Local authorities were working under government advice to invest their money across many national and international banks as a way of spreading risk. Other UK organisations said to have invested heavily include police services and fire authorities, and even the Audit Commission. In October 2008, it was hoped that about one-third of the deposited money will be available fairly rapidly, corresponding to the liquid assets of the UK subsidiaries: liquidation of other assets, such as loans and offices, will take longer. In an emergency sitting of
Tynwald Tynwald ( gv, Tinvaal), or more formally, the High Court of Tynwald ( gv, Ard-whaiyl Tinvaal) or Tynwald Court, is the legislature of the Isle of Man. It consists of two chambers, known as the branches of Tynwald: the directly elected House ...
on 9 October 2008, the Isle of Man government raised compensation from 75% of the first £15,000 per depositor to 100% of £50,000 per depositor. The
Chief Minister of the Isle of Man The Chief Minister (Manx: ''Ard-shirveishagh'') is the executive head of the Isle of Man Government. The office derives from that of Chairman of the Executive Council. Before 1980 the Executive Council was chaired by the Lieutenant Governor, ...
, Tony Brown, confirmed that Kaupthing had guaranteed the operations and liabilities of its Manx subsidiary in September 2007, and that the Manx government was pressing Iceland to honour this guarantee. Depositors with Landsbanki on Guernsey found themselves without any depositor protection. In October 2008, an agreement was reached between the Icelandic and Dutch governments on the savings of about 120,000 Dutch citizens. The Icelandic government agreed to cover the first €20,887 on savings accounts of Dutch citizens held by Landsbanki subsidiary Icesave, using money lent by the Dutch government. The total value of Icesave deposits in the Netherlands were €1.7 billion. At the same time, Iceland and Britain reached an agreement on the general contours of a solution: Icesave deposits in the UK total £4 billion (€5 billion) in 300,000 accounts. The figure of €20,887 was the amount covered by the Icelandic
Depositors' and Investors' Guarantee Fund The Depositors' and Investors' Guarantee Fund ( Icelandic: ''Tryggingarsjóður innstæðueigenda og fjárfesta'') is the statutory deposit insurance scheme in Iceland. It is established under Act No. 98/1999 on Deposit Guarantees and Investor-Compe ...
(DIGF; ''Tryggingarsjóður'' in Icelandic): however, the DIGF had
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the diff ...
of only 8.3 billion krónur at the end of 2007, €90 million at the exchange rates of the time and far from sufficient to cover the Dutch and British claims. The cost of deposit insurance in the UK was unclear in November 2008. The Financial Services Compensation Scheme (FSCS) paid around £3 billion to transfer deposits from Heritable Bank and
Kaupthing Kaupthing Bank ( is, Kaupþing banki; ) was a major international Icelandic bank, headquartered in Reykjavík, Iceland. It was taken over by the Icelandic government during the 2008–2011 Icelandic financial crisis and the domestic Icelandic ...
Singer & Friedlander to ING Direct, while the UK Treasury paid an additional £600 million to guarantee retail deposits that were higher than the FSCS limit. The Treasury also paid out £800 million to guarantee Icesave deposits that were higher than the limit. A loan of £2.2 billion to the Icelandic government was expected to cover the claims against the Icelandic DIGF relating to Icesave, while the exposure of the UK FSCS is expected to be £1-2 billion. The
Supreme Court of Iceland The Supreme Court of Iceland (, lit. ''Highest Court of Iceland'') is the final court of appeal in the judiciary of Iceland. It is also the oldest of the current courts of law in Iceland and the highest of the three Icelandic court branches, ...
, in 2011, ordered the repayment of "£4.5bn to the UK and €1.6bn (£1.2bn) by liquidating assets". In January 2016,
The Financial Times The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Nik ...
reported that HM Treasury "had been paid £740m from the Landsbanki estate". This payment by the Landsbanki estate was the final repayment to the UK's treasury, which totaled £4.6bn. The crisis also prompted the Ministry of Foreign Affairs to reduce its foreign aid to developing nations, from 0.31% to 0.27% of GNP. The effect of the aid cut was greatly amplified by the falling value of the króna: the budget of the Icelandic International Development Agency (ICEIDA) was reduced from US$22 million to $13 million. Since Iceland's foreign aid is targeted in sectors for which the country has particular expertise (e.g., fisheries, geothermal power), the cutbacks will have a substantial impact in countries which receive Icelandic aid – most noticeably in Sri Lanka, where ICEIDA is pulling out altogether. On 27 February 2009, ''
The Wall Street Journal ''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
'' reported that Iceland's new government was trying to raise $25 million by selling its ambassadorial residences in Washington, New York, London and Oslo. On 28 August 2009, Iceland's parliament voted 34–15 (with 14 abstentions) to approve a bill (commonly referred to as the ''Icesave bill'') to pay the United Kingdom and the Netherlands more than $5 billion lost in Icelandic deposit accounts. Initially opposed in June, the bill was passed after amendments were added which set a ceiling on the payment based on the country's gross domestic product. Opponents of the bill argued that Icelanders, already reeling from the crisis, should not have to pay for mistakes made by private banks under the watch of other governments. However, the government argued that if the bill failed to pass, the UK and the Netherlands might retaliate by blocking a planned aid package for Iceland from the International Monetary Fund (IMF). Under the deal, up to 4% of Iceland's gross domestic product (GDP) will be paid to the UK, in sterling terms, from 2017 to 2023 while the Netherlands will receive up to 2% of Iceland's GDP, in euro terms, for the same period. Talks between Icelandic, Dutch and UK ministers in January 2010 dubbed as "
Icesave The Icesave dispute was a diplomatic dispute between Iceland, and the Netherlands and the United Kingdom that began after the privately owned Icelandic bank Landsbanki was placed in receivership on 7 October 2008. As ''Landsbanki'' was one of ...
" did not result in any specific actions being agreed upon.


Official investigations


Special Investigation Commission

On 12 December 2008, the
Althing The Alþingi (''general meeting'' in Icelandic, , anglicised as ' or ') is the supreme national parliament of Iceland. It is one of the oldest surviving parliaments in the world. The Althing was founded in 930 at (" thing fields" or "assemb ...
established a Special Investigation Commission (SIC), which came to consist of Supreme Court Justice Páll Hreinsson who served as chairman,
Parliamentary Ombudsman Parliamentary Ombudsman ( fi, Eduskunnan oikeusasiamies, sv, Riksdagens ombudsman, is, Umboðsmaður Alþingis, da, Folketingets Ombudsmand, no, Sivilombudet) is the name of the principal ombudsman institutions in Finland, Iceland, Denmark, ...
Tryggvi Gunnarsson and Sigríður Benediktsdóttir associate chair at
Yale University Yale University is a private research university in New Haven, Connecticut. Established in 1701 as the Collegiate School, it is the third-oldest institution of higher education in the United States and among the most prestigious in the w ...
, to investigate the causes and lessons of the crisis. The commission released its
report A report is a document that presents information in an organized format for a specific audience and purpose. Although summaries of reports may be delivered orally, complete reports are almost always in the form of written documents. Usage In ...
on 12 April 2010.


Icelandic criminal investigations

The Office of the Special Prosecutor was founded with the passage of a bill in the Icelandic parliament 10 December 2008. The aim was to investigate suspected criminal conduct leading up to, in connection with or in the wake of the banking crisis, whether these relate to the activities of financial undertakings, other legal entities or individuals, and, as appropriate, to follow up these investigations by bringing charges in court against those concerned. In February 2009, Ólafur Hauksson (b. Reykjavík 1964) was appointed; it was the Icelandic government's second attempt to appoint to the role, and Ólafur was one of only two applicants. He had previously been the police chief in
Akranes Akranes () is a port town and municipality on the west coast of Iceland, around north of the capital Reykjavík. The area where Akranes is located was settled in the 9th century; however, it did not receive a municipal charter until 1942. His ...
. At the time the unit had four staff members; by September 2013 it had 109, with 140 cases under investigation. By that time, the top managers of all three Icelandic banks which collapsed during the financial crisis had been charged, though the cases progressed slowly. The last active investigation related to the financial crisis concluded in December 2017; 202 cases had been investigated in total over the period, with 23 of them ending up in court. By January 2018, 13 of the court cases ended with guilty verdicts, four with not guilty verdicts and six trials were still pending. The investigation has been focusing on a number of questionable financial practices engaged in by Icelandic banks: *Almost half of all the loans made by Icelandic banks were to holdings companies, many of which are connected to those same Icelandic banks. *Money was allegedly lent by the banks to their employees and associates so they could buy shares in those same banks while simply using those same shares as collateral for the loans. Borrowers were then allowed to defer paying interest on the loan until the end of the period, when the whole amount plus interest accrued was due. These same loans were then allegedly written off days before the banks collapsed. *
Kaupthing Kaupthing Bank ( is, Kaupþing banki; ) was a major international Icelandic bank, headquartered in Reykjavík, Iceland. It was taken over by the Icelandic government during the 2008–2011 Icelandic financial crisis and the domestic Icelandic ...
allowed a Qatari investor to purchase 5% of its shares. It was later revealed that the Qatari investor "bought" the stake using a loan from Kaupthing itself and a holding company associated with one of its employees (i.e., the bank was, in effect, buying its own shares).Mason, Rowena (14 April 2009)
"Iceland banking inquiry finds murky geysers runs deep"
''The Telegraph''.


Judgments

*Businessman Aron Karlsson was sentenced to 2 years in prison by the District Court of Reykjavík for committing fraud in real estate dealings. Aron was made to pay a total of 160–162 million ISK with interest to
Arion Bank Arion Banki hf. formerly ''Nýja Kaupþing hf'' or ''New Kaupthing'' is an Icelandic bank with roots tracing back to 1930. The bank operates in the Greater Reykjavík area as well as in the largest urban areas around the country. In 2016 the bank ...
, Glitnir's winding-up board and Íslandsbanki in addition to all legal costs. The 96–97 million ISK profit of the fraud held by Aron's real estate company, AK fasteignafélag, was confiscated. The Supreme Court of Iceland increased his sentence to years in prison. *Baldur Guðlaugsson, permanent secretary of the
Ministry of Finance A ministry of finance is a part of the government in most countries that is responsible for matters related to the finance. Lists of current ministries of finance Named "Ministry" * Ministry of Finance (Afghanistan) * Ministry of Finance and Ec ...
, was sentenced to mandatory 2 years in prison by the District Court of Reykjavík for
insider trading Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company. In various countries, some kinds of trading based on insider informati ...
. The proceeds of the trade, 192 million ISK (including capital gains tax), were confiscated. The case was remitted to the Supreme Court of Iceland which upheld the ruling. It was the first time a conviction was handed down by a court for insider trading in Iceland. *Bjarnfreður Ólafsson, Supreme Court attorney, was acquitted by the District Court of Reykjavik for his involvement in the illegal increase in share capitalisation of
Exista Klakki (known as Exista until 2011) is an Icelandic financial services group formerly listed on the Iceland Stock Exchange. Its activities are based primarily on insurance underwriting and other financial services, although it is also active in ...
by 50 billion ISK. The Supreme Court of Iceland suspended his license to practise as attorney for 1 year and sentenced him to 6 months in prison. Out of the 6 months, 3 were suspended for 2 years. *
Bjarni Ármannsson Bjarni Ármannsson (born 23 March 1968) is an Icelandic banker who resigned as CEO of Glitnir (formerly Íslandsbanki), a financial group based in Iceland, in May 2007. In 2019 Bjarni Ármannsson was appointed CEO of Iceland Seafood Internation ...
, president of Glitnir, was sentenced to 6 months in prison by the District Court of Reykjavik for major
tax noncompliance Tax noncompliance (informally tax avoision) is a range of activities that are unfavorable to a government's tax system. This may include tax avoidance, which is tax reduction by legal means, and tax evasion which is the criminal non-payment of ...
. His sentence was suspended and he was additionally ordered to repay nearly 36 million ISK of unpaid tax. The Supreme Court of Iceland increased his suspended sentence to 8 months. *Elín Sigfúsdóttir, managing director of Corporate Banking of Landsbanki, was acquitted by the District Court of Reykjavik for her involvement in the Imon case. The Supreme Court of Iceland overturned the ruling and sentenced Elín to 18 months in prison for her involvement in the Imon case. *Friðfinnur Ragnar Sigurðsson, managing director of Markets of Glitnir, was sentenced to a mandatory 1 year in prison by the District Court of Reykjanes for
insider trading Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company. In various countries, some kinds of trading based on insider informati ...
. The ruling also subjected him to a 19.2 million ISK asset confiscation The Supreme Court of Iceland decreased his sentence to 9 months in prison and 7.1 million ISK in asset confiscation on the ground that Friðfinnur was a first-time offender. Out of the 9 months, 6 were suspended for 2 years. *Guðmundur Hjaltason, managing director of Corporate Banking of Glitnir, was sentenced to 9 months in prison by the District Court of Reykjavík for a major breach of trust. Out of the 9 months, 6 were suspended for 2 years. The Supreme Court of Iceland acquitted Guðmundur. * Hannes Þór Smárason, chairman and president of FL Group, was compelled by the District Court of Reykjavik to pay 2 billion ISK to Landsbanki because of a contract of suretyship he signed in 2007. Hannes was acquitted by the District Court of Reykjavik for the alleged embezzlement of 3 billion ISK when he transferred money from FL Group's account to the holding company Fons. The Special Prosecutor appealed to the Supreme Court of Iceland. * Hreiðar Már Sigurðsson, president of Kaupthing Bank, was sentenced to mandatory years in prison by the District Court of Reykjavik for his involvement in the Al-Thani case. Following an appeal, the sentence was upheld on 12 February 2015 by Iceland's supreme court.Kolbeinn Tumi Daðason, 'Iceland jails former Kaupthing bank bosses', ''Vísir'' 12 February 2015, http://visir.is/iceland-jails-former-kaupthing-bank-bosses/article/2015150219597. *Jón Þorsteinn Jónsson, chairman of Byr Savings Bank, was acquitted by the District Court of Reykjavik for his involvement in the Exeter case. The Supreme Court of Iceland overturned the ruling and sentenced Jón to years in prison for breach of trust in the Exeter case. *Lárus Welding, CEO of Glitnir, was sentenced to 9 months in prison by the District Court of Reykjavík for a major breach of trust. Out of the 9 months, 6 were suspended for 2 years. The Supreme Court of Iceland acquitted Lárus. *Lýður Guðmundsson, chairman of Exista, was fined 2 million ISK by the District Court of Reykjavik for his involvement in the illegal increase in share capitalisation of
Exista Klakki (known as Exista until 2011) is an Icelandic financial services group formerly listed on the Iceland Stock Exchange. Its activities are based primarily on insurance underwriting and other financial services, although it is also active in ...
by 50 billion ISK. The Special Prosecutor appealed to the Supreme Court of Iceland which sentenced him to 8 months in prison. Out of the 8 months, 5 are suspended for 2 years. *Magnús Guðmundsson, president of Kaupthing Bank in Luxembourg, was sentenced to mandatory 3 years in prison by the District Court of Reykjavik for his involvement in the Al-Thani case; following an appeal, the sentence increased to four-and-a-half years on 12 February 2015 by Iceland's supreme court. *Ólafur Ólafsson, a shareholder of Kaupthing Bank, was sentenced to mandatory years in prison by the District Court of Reykjavik for his involvement in the Al-Thani case; following an appeal, the sentence increased to four and a half years on 12 February 2015 by Iceland's supreme court. *Ragnar Zophonías Guðjónsson, president of Byr Savings Bank, was acquitted by the District Court of Reykjavik for his involvement in the Exeter case. The Supreme Court of Iceland overturned the ruling and sentenced Ragnar to years in prison for breach of trust in the Exeter case. * Sigurður Einarsson, chairman of Kaupthing Bank, was sentenced to mandatory 5 years in prison by the District Court of Reykjavik for his involvement in the Al-Thani case; following an appeal, he was sentenced to four years on 12 February 2015 by Iceland's supreme court. *Sigurjón Þ. Árnason, president of Landsbanki, was acquitted by the District Court of Reykjavik for his involvement in the Imon case. The Supreme Court of Iceland overturned the ruling and sentenced Sigurjón to years in prison for his involvement in the Imon case. *Steinþór Gunnarsson, managing director of Brokerage of Landsbanki, was sentenced to 9 months in prison by the District Court of Reykjavík for
market manipulation In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
in the Imon case. Out of the 9 months, 6 were suspended. *Styrmir Þór Bragason, president of MP Bank, was twice acquitted by the District Court of Reykjavik for his involvement in the Exeter case. The Supreme Court of Iceland overturned the ruling and sentenced Styrmir to 1 year in prison for breach of trust in the Exeter case.


Arrests by UK Serious Fraud Office

On 9 March 2011,
Robert The name Robert is an ancient Germanic given name, from Proto-Germanic "fame" and "bright" (''Hrōþiberhtaz''). Compare Old Dutch ''Robrecht'' and Old High German ''Hrodebert'' (a compound of ''Hrōþ, Hruod'' ( non, Hróðr) "fame, glory ...
and
Vincent Tchenguiz Vincent Tchenguiz (born 9 October 1956) is an Iranian-British entrepreneur born in Tehran. Robert Tchenguiz is his younger brother. Tchenguiz is known as a major donor to the Conservative Party (UK) and an investor in the controversial company ...
were arrested in London by the UK's Serious Fraud Office as part of their ongoing investigation in conjunction with Iceland's Special Prosecutor's Office into the collapse of Icelandic Bank Kaupthing. Neither was, however, indicted, and in fact they sued the Serious Fraud Office for wrongful arrest, receiving large sums in compensation.


Scrutiny of Icelandic business leaders

Since the crisis began, many of Iceland's business leaders, who had previously been considered financial gurus who greatly developed Iceland's economy, are now under intense public scrutiny for their roles in causing the financial crisis: *
Jón Ásgeir Jóhannesson Jón Ásgeir Jóhannesson (born 27 January 1968, in Reykjavík) is an Icelandic convicted criminal and former CEO of Baugur Group. Early career Jón Ásgeir's parents were Jóhannes Jónsson (1940-2013) and Ása Karen Ásgeirsdóttir (1942-), ...
and
Jóhannes Jónsson Jóhannes Jónsson (31 August 1940 – 27 July 2013) was an Icelandic businessman and one of the founders of the investment company Baugur Group, which applied for bankruptcy protection in February 2009. His warm public personality and co-foundin ...
, the owners of the Baugur Group retail empire, which includes
Hamleys Hamleys is a British multinational toy retailer, owned by Reliance Retail. The world's oldest toy store, it was founded by William Hamley as "Noah's Ark" in High Holborn, London, in 1760. It moved to its current site on Regent Street in London's ...
,
House of Fraser House of Fraser (also operating as Frasers) is a British department store group with 44 locations across the United Kingdom, which is now part of Frasers Group. It was established in Glasgow, Scotland in 1849 as Arthur and Fraser. By 1891, it ...
, The Oasis Centre and a large portion of Iceland's media. Jón Ásgeir, who had been known as the "popstar businessman" due to his shaggy golden mullet, has become the subject of a satirical video on YouTube set to the theme of the movie ''
The Godfather ''The Godfather'' is a 1972 American crime film directed by Francis Ford Coppola, who co-wrote the screenplay with Mario Puzo, based on Puzo's best-selling 1969 novel of the same title. The film stars Marlon Brando, Al Pacino, James Caa ...
''. In addition, a former mistress later revealed details of his "playboy lifestyle" during a trial that found him guilty of false accounting (which prompted the Baugur Group to relocate to the United Kingdom). *Lýður Guðmundsson and Águst Guðmundsson, the frozen food entrepreneurs who were in charge of Kaupthing. *
Björgólfur Thor Björgólfsson Björgólfur Thor Björgólfsson (born 19 March 1967), known internationally as Thor Bjorgolfsson, and colloquially in Iceland as Bjöggi, is an Icelandic businessman and entrepreneur. He is also chairman and founder of Novator Partners. Björ ...
and
Björgólfur Guðmundsson Björgólfur Guðmundsson (born 2 January 1941) is an Icelandic businessman and former chairman and owner of West Ham United. Björgólfur was Iceland's second wealthiest businessman worth more than a billion dollars — his son, Björgólfur ...
, the shipping and brewing moguls who owned Landsbanki. Reportedly, all of those under scrutiny are now rarely seen in public and some have apparently left the country. They are also reportedly the subjects of an ongoing investigation to determine if any of their business practices warrant criminal prosecution.


Statements from former politicians

Former Prime Minister Davíð Oddsson has claimed that Iceland needs to investigate "unusual and unconventional loans" given by the banks to senior politicians during the years before the crisis. Björn Bjarnson, the former Minister for Justice and Ecclesiastical Affairs, has started a blog detailing the problems with the business sector and the efforts to cover them up. This was cited as an example of how politicians and businessmen, who traditionally held a tight grip over the Icelandic media, have lost this control and that dozens of similar blogs have been created. Björn stated that:
"I have written a lot about problems in the business sector over the last 14 years, and I can only compare some parts of it to
Enron Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional compani ...
. Here companies have been playing a game, using the media and publishing to make themselves look good. We only hope that the foreign media will soon begin to understand what has been going on".


Political aftermath

Parts of the Icelandic public have arranged protests against the Central Bank, the
Parliament In modern politics, and history, a parliament is a legislative body of government. Generally, a modern parliament has three functions: representing the electorate, making laws, and overseeing the government via hearings and inquiries. Th ...
and the government's alleged lack of responsibility before and after the crisis, attracting between 3000 and 6000 people (1–2% of Iceland's population) on Saturdays. In early November 2008, the
President of Iceland The president of Iceland ( is, Forseti Íslands) is the head of state of Iceland. The incumbent is Guðni Thorlacius Jóhannesson, who is now in his second term as president, elected in 2016 and re-elected in 2020. Vigdís Finnbogadóttir ...
,
Ólafur Ragnar Grímsson Ólafur Ragnar Grímsson (; born 14 May 1943) is an Icelandic politician who was the fifth president of Iceland from 1996 to 2016.Official CV. He was previously a member of the Icelandic Parliament for the People's Alliance and served as Mini ...
, at an informal lunch with foreign diplomats, criticized Iceland's traditional friends (particularly Britain, Sweden and Denmark) as well as the International Monetary Fund. According to a memo from the Norwegian embassy, he suggested that the Russians might want to use the
Keflavík Air Base Naval Air Station Keflavik (NASKEF) was a United States Navy station at Keflavík International Airport, Iceland, located on the Reykjanes peninsula on the south-west portion of the island. NASKEF was closed on 8 September 2006, and its facilitie ...
, the Russian ambassador replied that they had no need for it. The President is quoted to have said that Iceland would soon recover, even if they had to fight alone. The President does not necessarily agree with the government on these issues. In October 2008, the UK PM
Gordon Brown James Gordon Brown (born 20 February 1951) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 to 2010. He previously served as Chancellor of the Exchequer in Tony ...
used provisions in part 2 of the Anti-Terrorism, Crime and Security Act 2001 to freeze Landsbanki holdings in the United Kingdom. Iceland's prime minister Geir Haarde protested against what he described as "a terrorist law being applied against us", calling it "a completely unfriendly act". Angered by the British decision, Iceland decided to submit a formal complaint to
NATO The North Atlantic Treaty Organization (NATO, ; french: Organisation du traité de l'Atlantique nord, ), also called the North Atlantic Alliance, is an intergovernmental military alliance between 30 member states – 28 European and two N ...
about their move, and it also provoked more than 80,000 Icelanders (equal to 25% of its entire population) to sign an online petition set up under the heading "Icelanders are not terrorists". The relationship got even tenser when UK replied a month later by cancelling its scheduled patrol of the Icelandic airspace in December 2008. Iceland has no
standing army A standing army is a permanent, often professional, army. It is composed of full-time soldiers who may be either career soldiers or conscripts. It differs from army reserves, who are enrolled for the long term, but activated only during wars or ...
of its own, and relies on a long-term standing agreement with NATO where a group of member states have committed in turns to defend the Icelandic airspace, and the UK
Royal Air Force The Royal Air Force (RAF) is the United Kingdom's air and space force. It was formed towards the end of the First World War on 1 April 1918, becoming the first independent air force in the world, by regrouping the Royal Flying Corps (RFC) an ...
had now cancelled this after mutual agreement with NATO (presumably with another member state having accepted the responsibility). According to a poll from late November 2008, 64% were in favour of early elections, with only 29.3% opposed. In a poll from 22 November 2008, the Social Democratic Alliance led with 33.6%, followed by the Left-Green Alliance at 27.8% and the Independence Party at 24.8%; the Progressive Party and the Liberal Party were far behind, with only 6.3% and 4.3%, respectively. As the Parliament met again on 20 January 2009, there were
protests A protest (also called a demonstration, remonstration or remonstrance) is a public expression of objection, disapproval or dissent towards an idea or action, typically a political one. Protests can be thought of as acts of coopera ...
with reinvigorated force and escalation of conflict between protesters and the police. On 22 January, police used tear gas to disperse people on
Austurvöllur Austurvöllur () is a public square in Reykjavík, Iceland. The square is a popular gathering place for the citizens of Reykjavík, and especially during good weather due to the prevalence of cafés on Vallarstræti and Pósthússtræti. It has ...
(the square in front of the Alþing), the first such use since the 1949 anti-NATO protest.


Government resignation

Prime Minister
Geir H. Haarde Geir Hilmar Haarde (; born 8 April 1951) is an Icelandic politician, who served as prime minister of Iceland from 15 June 2006 to 1 February 2009 and as president of the Nordic Council in 1995. Geir was chairman of the Icelandic Independence Pa ...
announced on 23 January 2009 that he would be stepping down as leader of the Independence Party for health reasons: he has been diagnosed as having a malignant oesophageal tumour. He said he would travel to the Netherlands around the end of January for treatment. Education Minister and Independence Party vice-chairman
Þorgerður Katrín Gunnarsdóttir Þorgerður Katrín Gunnarsdóttir (born 4 October 1965) is an Icelandic politician, who has been chairman of the Reform Party since 2017. Þorgerður was deputy chairwoman of the Independence Party from 2005 to 2010. She was the Minister o ...
was to serve as Prime Minister in his absence. The leader of the Social Democratic Alliance,
Foreign Minister A foreign affairs minister or minister of foreign affairs (less commonly minister for foreign affairs) is generally a cabinet minister in charge of a state's foreign policy and relations. The formal title of the top official varies between co ...
Ingibjörg Sólrún Gísladóttir, was also unwell, undergoing treatment for a
benign Malignancy () is the tendency of a medical condition to become progressively worse. Malignancy is most familiar as a characterization of cancer. A ''malignant'' tumor contrasts with a non-cancerous ''benign'' tumor in that a malignancy is not s ...
brain tumour since September 2008. The government recommended that elections be held on 9 May 2009. Björgvin G. Sigurðsson, Iceland's
Commerce Minister A Commerce minister (sometimes business minister, industry minister, trade minister or international trade minister) is a position in many governments that is responsible for regulating external trade and promoting economic growth (commercial polic ...
, resigned on 25 January, citing the pressures of the nation's economic collapse, as the country's political leaders failed to agree on how to lead country out of its financial crisis. One of his last acts as minister was to dismiss the director of the Financial Supervisory Authority (FSA). Björgvin acknowledged that Icelanders have lost faith in their government and political system. "I want to shoulder my part of the responsibility for that," he said. Negotiations on continuing the coalition broke down the next day, apparently over demands from the Social Democratic Alliance to take over the leadership of the government, and Geir Haarde tendered the government's resignation to the President of Iceland, Ólafur Ragnar Grímsson. The President asked the present government to continue until a new government can be formed, and held talks with the five political parties represented in the Althing. After these discussions, Ingibjörg Sólrún Gísladóttir of the Social Democratic Alliance and Steingrímur J. Sigfússon of the
Left-Green Movement The Left-Green Movement ( is, Vinstrihreyfingin – grænt framboð), officially the Left Movement – Green Candidature and also known by its short-form name ''Vinstri græn'' (VG), is an eco-socialist political party in Iceland. The Left-Gree ...
were asked by the President to negotiate the formation of a new coalition government. Such a coalition would be five seats short of an overall majority in the Althing, but the Progressive Party (seven seats) was expected to support the coalition without actually joining the government. Neither party leader became Prime Minister: instead, the position went to Jóhanna Sigurðardóttir of the Social Democratic Alliance, then the Minister of Social Affairs and Social Security, who became the new chairwoman of her party on 28 March 2009. On 8 April 2009, former Prime Minister Geir H. Haarde stated that he was solely responsible for accepting controversial donations to the Icelandic Independence Party in 2006, ISK 30 million from the investment group FL Group, and ISK 25 million from Landsbanki. Geir was strongly criticized in the April 2010 report of the Special Investigative Commission into the financial collapse, being accused of "negligence" along with three other ministers of his government. Iceland's parliament voted 33–30 to indict Geir, but not the other ministers, on charges of negligence in office at a session on 28 September 2010. He will stand trial before the ''
Landsdómur The National Court ( ) is a special high court in Iceland established in 1905 to handle cases where members of the Cabinet are suspected of criminal behaviour. Composition The National Court has 15 members: five Supreme Court justices, the Rey ...
'', a special court to hear cases alleging misconduct in government office: it will be the first time the ''Landsdómur'' has convened since it was established in the 1905
Constitution A constitution is the aggregate of fundamental principles or established precedents that constitute the legal basis of a polity, organisation or other type of entity and commonly determine how that entity is to be governed. When these pr ...
. The trial began in Reykjavik on 5 March 2012. Geir Haarde was found guilty on one of four charges on 23 April 2012, for not holding cabinet meetings on important state matters. Landsdómur said Mr. Haarde would face no punishment, as this was a minor offence.


Crisis resolution


Recovery starting in 2011

Iceland's financial position has steadily improved since the crash. The economic contraction and rise in unemployment appear to have been arrested by late 2010 and with growth under way in mid-2011. Four main factors have been important in this regard. First is the emergency legislation passed by the Icelandic parliament in October 2008. It served to minimise the impact of the
financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
on the country. The Financial Supervisory Authority of Iceland used permission granted by the emergency legislation to take over the domestic operations of the three largest banks. The much larger foreign operations of the banks, however, went into receivership. A second important factor is the success of the IMF Stand-By-Arrangement in the country since November 2008. The SBA includes three pillars. The first pillar is a program of medium term fiscal consolidation, involving painful austerity measures and significant tax hikes. The result has been that central government debts have been stabilised at around 80–90 percent of GDP. A second pillar is the resurrection of a viable but sharply downsized domestic banking system on the ruins of its gargantuan international banking system which the government was unable to bail out. A third pillar is the enactment of capital controls and the work to gradually lift these to restore normal financial linkages with the outside world. An important result of the emergency legislation and the SBA is that the country has not been seriously affected by the
European sovereign debt crisis The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, is a multi-year debt crisis that took place in the European Union (EU) from 2009 until the mid to late 2010s. Several eurozone memb ...
from 2010. Despite a contentious debate with Britain and the Netherlands over the question of a state guarantee on the Icesave deposits of Landsbanki in these countries,
credit default swaps A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event. That is, the seller of the CDS insures the buyer against some ...
on Icelandic sovereign debt have steadily declined from over 1000 points prior to the crash in 2008 to around 200 points in June 2011. The fact that the assets of the failed Landsbanki branches were estimated to cover most of the depositor claims had an influence to ease concerns over the situation. The third major factor behind the resolution of the financial crisis was the decision by the government of Iceland to apply for membership in the EU in July 2009. While views on the feasibility of EU membership are quite mixed in Iceland, this action has served to enhance the credibility of the country on international financial markets. One sign of the success of the above efforts is the fact that the Icelandic government was successfully able to raise $1 billion with a bond issue on 9 June 2011. This development indicates that international investors have given the government and the new banking system, with two of the three biggest banks now in foreign hands, a clean bill of health. The first two major measures were implemented by the government of
Geir H. Haarde Geir Hilmar Haarde (; born 8 April 1951) is an Icelandic politician, who served as prime minister of Iceland from 15 June 2006 to 1 February 2009 and as president of the Nordic Council in 1995. Geir was chairman of the Icelandic Independence Pa ...
but also carried out by the government of Johanna Sigurdardottir, which then took the step to apply for EU membership. Finally, the fourth major factor was the sharp rise in foreign tourism, which pumped a large amount of money into the economy; this tourism boom was caused primarily by the
2010 eruptions of Eyjafjallajökull Between March and June 2010 a series of volcanic events at Eyjafjallajökull in Iceland caused enormous disruption to air travel across Western Europe. The disruptions started over an initial period of six days in April 2010. Additional lo ...
and the rise in popularity of ''
Game of Thrones ''Game of Thrones'' is an American fantasy drama television series created by David Benioff and D. B. Weiss for HBO. It is an adaptation of '' A Song of Ice and Fire'', a series of fantasy novels by George R. R. Martin, the fir ...
'', which had some scenes that were filmed in Iceland. Iceland has undertaken recapitalization of lenders such as injection of ISK 33 billion (2.1% of 2010 GDP) into Housing Financing Fund at the end of 2010, under a restructuring plan approved by the EFTSA.


Aftermath (2012–2013)

By mid-2012 Iceland was regarded as one of Europe's recovery success stories. It has had two years of economic growth. Unemployment was down to 6.3% and Iceland was attracting immigrants to fill jobs. Currency devaluation effectively reduced wages by 50% making exports more competitive and imports more expensive. Ten-year government bonds were issued below 6%, lower than some of the
PIIGS PIGS is a derogatory acronym that has been used to designate the economies of the Southern European countries of Portugal, Italy, Greece, and Spain. During the European debt crisis of 2009-2014 the variant PIIGS, or GIPSI, was coined to include ...
nations in the EU (Portugal, Italy, Ireland, Greece, and Spain). Tryggvi Thor Herbertsson, a member of parliament, noted that adjustments via currency devaluations are less painful than government labor policies and negotiations. Nevertheless, while EU fervor has cooled the government continued to pursue membership. Iceland
elected Elected may refer to: * "Elected" (song), by Alice Cooper, 1973 * ''Elected'' (EP), by Ayreon, 2008 *The Elected, an American indie rock band See also *Election An election is a formal group decision-making process by which a population ...
a new government in April 2013, which as one of their top priorities wanted to negotiate a debt
haircut A hairstyle, hairdo, haircut or coiffure refers to the styling of hair, usually on the human scalp. Sometimes, this could also mean an editing of facial or body hair. The fashioning of hair can be considered an aspect of personal grooming ...
towards foreign creditors of the three failed Icelandic banks now in receivership, as part of a deal to lift the long enforced (since November 2008)
capital control Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measure ...
s. The current capital controls ban a swap/exchange of ISK denominated assets to foreign currency, and so by effect has trapped repayment of ISK denominated assets to the creditors – which in theory mean they should be interested to accept a haircut in return for getting the capital controls lifted. The Icelandic government intent somehow to route the saved money from the negotiated debt haircut for creditors into a national household debt relief fund, enabling a 20% debt relief for all household mortgages. In July 2013, Standard & Poors recommended Iceland to drop the debt relief initiative, as it would only result in increased debt for the government – making it even more difficult to lend at credit markets, and it was forecasted also to ignite high inflation along with an economic recession equal to a GDP detraction of 10%. The government has nevertheless appointed a taskforce to present proposals on how best to achieve the government's goal about implementing a combined capital control abolition and debt relief for households, with a reporting deadline in October 2013. Capital controls were eventually ended in March 2017. A significant amount of the capital trapped in Iceland by the capital controls was channelled into property investment, partly by the financial management company Gamma, and was one factor that fuelled rising property prices in Iceland after the crash.Kári Tulinius,
So What's This Literary Scandal I Keep Hearing About?
, ''The Reykjavík Grapevine'' (9 June 2015).


See also

* 2008–12 California budget crisis *
Banking in Iceland Banking in Iceland faced a crisis in 2008, which resulted in the government taking over three of its largest commercial banks. The short-term liabilities of Icelandic banks in proportion to Iceland's GDP are 211%, as of 11 October 2008, or 480% ...
* Darien scheme *
Economy of Iceland The economy of Iceland is small and subject to high volatility. In 2011, gross domestic product was US$12 billion, but by 2018 it had increased to a nominal GDP of US$27 billion. With a population o350,000 this is $55,000 per capita, based on pur ...
*
Financial crisis of 2007–2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of ...
*
Icelandic outvasion The Icelandic "outvasion" ( Icelandic: ''útrás'' ) was the period in the economic history of Iceland between 2000 and the onset of its financial crisis in October 2008. With the privatisation of the Icelandic banks being advantageous for investor ...
* 2010 Icelandic loan guarantees referendum * 2011 Icelandic loan guarantees referendum * Iceland - IMF relations * List of acquired or bankrupt banks in the late 2000s financial crisis *
Swedish banking rescue Swedish or ' may refer to: Anything from or related to Sweden, a country in Northern Europe. Or, specifically: * Swedish language, a North Germanic language spoken primarily in Sweden and Finland ** Swedish alphabet, the official alphabet used by ...
*
The Report of the Althingi Special Investigation Commission Antecedents and Causes of the Collapse of the Icelandic Banks in 2008 and Related Events ( is, Aðdragandi og orsakir falls íslensku bankanna 2008 og tengdir atburðir), better known as The Report of the Investigation Commission of Althing ( is ...
* Timeline of the Icelandic financial crisis


References


Further reading

* Aliber, Robert Z., and Gylfi Zoega, eds. ''Preludes to the Icelandic Financial Crisis'' (Palgrave Macmillan; 2014) 357 pages *Bagus, Philipp and David Howden (2011).
Deep Freeze: Iceland's Economic Collapse
',
Ludwig von Mises Institute Ludwig von Mises Institute for Austrian Economics, or Mises Institute, is a libertarian nonprofit think tank headquartered in Auburn, Alabama, United States. It is named after the Austrian School economist Ludwig von Mises (1881–1973). It ...
, 2011. * *, original title * *Gudmundsson, Már and Thorsteinn Thorgeirsson (2010).
Fault lines in Cross-border Banking: Lessons from the Icelandic case
', SUERF Studies 05/2010, Vienna. * *Jonsson, Ivar (2012) "Explaining the Crisis of Iceland – A Realist Approach" in ''Journal of Critical Realism'', 11,1. * Sigríður Benediktsdóttir, Gauti Eggertsson, and Eggert Þórarinsson. 2017. The Rise, the Fall, and the Resurrection of Iceland. * Steinsson, Jón. 2017. Comment on The Rise, the Fall, and the Resurrection of Iceland. *Silja Bára Ómarsdóttir & Viktor Orri Valgarðsson (2020) "Anarchy in Iceland? The global left, pirates and socialists in post-crash Icelandic politics", Globalizations, 17:5, 840-853


External links


Hrunið þið munið
a website listing and reviewing scholarly and artistic handlings of the Crisis.
What happened to Iceland?
BBC News
Kreppanomics
''The Economist''

''Time''

''Time''

''Time''

''Financial Times''
The Skeleton Economy
''
The Reykjavík Grapevine ''The Reykjavík Grapevine'' is an English language Icelandic magazine and online newspaper based in the Icelandic capital of Reykjavík. Its target audience primarily consists of foreigners, immigrants, international students, young Icelanders ...
''
Icelanders struggle with economic collapse
''The New York Times''
The first casualty of the crisis: IcelandCredit collapse numbs Icelanders
BBC News

''Fortune''
The Vikings are coming!A modern Icelandic self-image in the light of the economic crisis
scholarly analysis by Ann-Sofie Nielsen Gremaud, in: NORDEUROPAforum 20 (2010:1–2), 87–106.
We Do Not Intend to Pay The Debts of the Banks That Have Been a Little Heedless
translated extracts of an interview given by Davið Oddsson on Icelandic public-service broadcaster
RÚV Ríkisútvarpið (RÚV) (pronounced or ) ( en, 'The Icelandic National Broadcasting Service') is Iceland's national public-service broadcasting organization. Operating from studios in the country's capital, Reykjavík, as well as regional ce ...
, 7 October
The Icelandic banking crisis and what to do about it: The lender of last resort theory of optimal currency areas
{{DEFAULTSORT:2008-11 Icelandic financial crisis Economic history of Iceland
Iceland Iceland ( is, Ísland; ) is a Nordic island country in the North Atlantic Ocean and in the Arctic Ocean. Iceland is the most sparsely populated country in Europe. Iceland's capital and largest city is Reykjavík, which (along with its ...
Icelandic financial crisis Icelandic refers to anything of, from, or related to Iceland and may refer to: *Icelandic people *Icelandic language *Icelandic alphabet *Icelandic cuisine See also * Icelander (disambiguation) * Icelandic Airlines, a predecessor of Icelandair * ...
Icelandic financial crisis Icelandic refers to anything of, from, or related to Iceland and may refer to: *Icelandic people *Icelandic language *Icelandic alphabet *Icelandic cuisine See also * Icelander (disambiguation) * Icelandic Airlines, a predecessor of Icelandair * ...
Iceland Iceland ( is, Ísland; ) is a Nordic island country in the North Atlantic Ocean and in the Arctic Ocean. Iceland is the most sparsely populated country in Europe. Iceland's capital and largest city is Reykjavík, which (along with its ...
Financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
Financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
Financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
Financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
Iceland Iceland ( is, Ísland; ) is a Nordic island country in the North Atlantic Ocean and in the Arctic Ocean. Iceland is the most sparsely populated country in Europe. Iceland's capital and largest city is Reykjavík, which (along with its ...
Iceland Iceland ( is, Ísland; ) is a Nordic island country in the North Atlantic Ocean and in the Arctic Ocean. Iceland is the most sparsely populated country in Europe. Iceland's capital and largest city is Reykjavík, which (along with its ...
Iceland Iceland ( is, Ísland; ) is a Nordic island country in the North Atlantic Ocean and in the Arctic Ocean. Iceland is the most sparsely populated country in Europe. Iceland's capital and largest city is Reykjavík, which (along with its ...
Iceland Iceland ( is, Ísland; ) is a Nordic island country in the North Atlantic Ocean and in the Arctic Ocean. Iceland is the most sparsely populated country in Europe. Iceland's capital and largest city is Reykjavík, which (along with its ...
Political scandals in Iceland