Iceland A Country That Became A Hedge Fund Finance Essay

The study of “ Iceland: The State That Become a Hedge Fund ” is written by Peter Gumbel, a Europe editor of Fortune Magazine. This study is fundamentally explained the development of Iceland traveling bankruptcy. The fiscal crisis of Iceland is happened at the terminal of twelvemonth 2008 until now. This crisis involves the prostration of all three of the state ‘s major commercial Bankss which are Glitnir, Landsbanki, and Kaupthing following their troubles in refinancing their short-run debt and a tally on sedimentation in the United Kingdom.

In late September 2008, there was intelligence about Glitnir bank would be nationalized, followed by Lansbanki and Kaupthing was handed over to receiving systems appointed by Financial Supervisory Authority ( FME ) every bit good. At the terminal of 2nd one-fourth 2008, the assets of the three Bankss taken under control of the FME totaled 14.437 trillion kronur. Iceland ‘s external debt was 9.553 trillion kronur, equaled to 50 billion lbs, more than 80 % of which was held by the banking sector.

The fiscal crisis has had serious effects to the Icelandic economic system. The national currency, Kronur had fallen aggressively in value, foreign currency minutess were virtually suspended for hebdomads, and the market capitalisation of the Iceland stock exchange has dropped by more than 90 % . Due to the crisis, Iceland is presently undergoing a terrible economic recession ; the state ‘s gross domestic merchandise ( GDP ) decreased by 5.5 % in existent footings in the first months of 2009. The full cost of the crisis can non yet be determined, but already it exceeds 75 % of the state ‘s 2007 GDP.

Background of the Central Bank Chairman of Iceland, David Oddsson

David Oddsson was born on 17 January 1948 at Reykjavik, Iceland. He is an Icelandic politician and the longest-serving Prime Minister of Iceland, keeping office from 1991 to 2004. He besides served as Foreign Minister from 2004 to 2005. Previously, he was Mayor of Reykjavik from 1982 to 1991, and he chaired the board of governors of the Central Bank of Iceland from 2005 to 2009.

The prostration of Iceland ‘s banking system led to vocal demands for his surrender both by members of the Icelandic populace and by Icelandic Prime Minister Johanna Siguroardottir, which resulted in him being replaced as caput of the Central Bank in 2009. In September 2009 he was hired as the editor of Morgunbladid, one of Iceland ‘s largest newspapers.

Background of Glitnir Bank

Before 1930, Glitnir was foremost named as Islandsbanki. It was founded at1904, to supply funding service particularly for the piscaries sector and the state ‘s emerging industries. It operated until 1930, when its activities were taken over by Utvegsbanki, the Fisheries Bank of Iceland. 60 old ages subsequently, three smaller Bankss, Idnadarbanki Islands ( the Industrial Bank of Iceland ) , Verzlunarbanki Islands ( the Iceland Bank of Commerce ) and Alpydubankinn ( the Union Bank ) were merged with Utvegsbanki to organize a new Islandsbanki, which subsequently became Glitnir.

Now the name Islandsbanki will be adopted one time more to replace Glitnir after the prostration of the fiscal system. The determination to resuscitate the name Islandsbanki was prompted in portion by suggestions made by a big figure of the bank ‘s clients in recent months. Islandsbanki is a valuable and well-known hallmark. The name has a long tradition behind it and reflects the bank ‘s new scheme stressing chiefly its place environment and functioning Icelandic companies and households.

Background of Kaupthing Bank

Kaupthing Bank was an international Icelandic bank, headquartered in Reykjavik, Iceland. It was formed by the amalgamation of Kaupthing and Bunadarbanki Islands in 2003 and is the largest bank in Iceland. Kaupthing Bank antecedently operated in 13 states ; including all the Nordic states, the Netherlands, Belgium, Luxembourg, Switzerland, the United Kingdom and the United States. It is the 7th largest bank in the Nordic states in footings of market capitalisation.

On 9 October 2008, following a major banking and fiscal crisis in Iceland, the Icelandic Financial Supervisory Authority took control of the bank. So far, it has non been declared bankrupt, although it has obtained a moratorium on payments from the District Court of Reykjavik and has been suspended from trading in the Iceland Stock Exchange.

On November 20, 2009, New Kaupthing, the name given to the by-product of the bank ‘s Icelandic based operations, changed its name to Arion Banki. Non-Icelandic assets are still held within the bank which continues to be called Kaupthing, as of August, 2010.

Background of Landsbanki Bank

Landsbanki, besides normally known as Landsbankinn in Iceland and it was international Icelandic bank. On October 7, 2008, the Icelandic Financial Supervisory Authority took control of Landsbanki.

Since its constitution in 1885 ( commenced operations in 1886 ) Landsbanki has been instrumental in the economic development of concern and industry in Iceland. Landsbanki served as the cardinal bank of Iceland from 1927 until 1961. At the clip, this involvement was chiefly directed towards note issue instead than pecuniary policy. It was subsequently replaced in this capacity by the Central Bank of Iceland at the behest of the Althing.

Landsbanki presently has 40 subdivisions and sub-branches throughout Iceland, plus a wide-ranging web of international analogous Bankss. Landsbanki and its subordinates have offices runing in 15 different states, including the major fiscal Centre of Europe, and North American representation in New York, Winnipeg and Halifax.

2.0 Discussion Part

The Main Causes

The chief causes of the crises of Iceland started in 2001 when the Bankss deregulated the Iceland. This makes easier for the Bankss to upload debts when foreign companies were accumulated or doing net income. nevertheless, the crises has unable to refinance their debts. The three major Bankss hold foreign debt extra ?50 billion, compared with Iceland ‘s gross domestic merchandise which is ?8.5 billion. In early March 2008 for sedimentation insurance in Landsbanki and Kaupthing was higher ( 6-8A? % of the amount deposited ) than for other European Bankss.

For the domestic market, the Bankss of Iceland have financed their enlargement with loans on the interbank loaning market and about 60 % lodging outside Iceland, which forms external debt. The cardinal bank reduced the minimal militias demand, the per centum of assets the bank required to lodge with it liberating more of their assets. Households besides took on a big sum of debt equivalent to 213 % of disposable income, which led to rising prices, by deteriorating the pattern of the Central Bank of Iceland publishing liquidness loans to Bankss on the footing of newly-issued, exposed bonds, specially publishing money on demand.

In September 2008, the monetary value increased 14 % compared with the mark of 2.5 % , the cardinal bank of Iceland held high involvement rates ( 15.5 ) compared with 5.5 % in United Kingdom. which has encouraged abroad investors to keep sedimentations in Icelandic Kronur, taking to pecuniary rising prices.

Therefore, the Icelandic money supply ( M3 ) grew 56.5 % in the 12 months to September 2008, with 5.0 % GDP growing. This state of affairs go an economic bubble and the investors was overrating the true value of the currency in Krona. This resulted to go hard to turn over over their loans in the interbank market, the creditors besides insisted on refund while no other Bankss were willing to do fresh loans, whereby in such state of affairs the bank have to inquire a loan from the cardinal bank as the loaner of last resort.

However, the cardinal bank of Island and Icelandic authorities could non vouch the refund of the bank ‘s debt which leads to prostration of the Bankss. And the militias of the cardinal bank of Iceland become 374.8 billion Kronur at the terminal of September 2008, compared with 350.3 billion Kronur of short term international debt in the Icelandic banking sector, while ?6.5 billion ( 1,250 billion Kronur ) of retail sedimentations in the UK.

The Main Effectss

The currency of Iceland

The Icelandic Krone declined more than 35 % against the euro January to September 2008. And the rising prices of consumer monetary value was running at 14 % while the involvement rate was raising to 15.5 % to cover with high rising prices. In 9 October, the Icelandic Krone was traded at 340 to the euro when trading in the currency collapsed due to the FME ‘s coup d’etat of the last major Icelandic bank, and the loss of Krone trade glade houses.

However, the cardinal bank of Iceland set up a impermanent system of day-to-day currency auction on 15 October to ease international trade, the first auction sold ?25 million at a rate of 150 Kronur to the euro, and the last currency auction was held 3 December the Krona climber to 153 to the euro, up 22 % against the last currency auction rate.

The commercial Krona trading to the outside restated on 28 October, at an exchange rate of 240 kroner to the euro, after Icelandic involvement rates had been raised to 18 % . The foreign exchange militias of the cardinal bank of Iceland fell by USA $ 289 million during October 2008. ( kafikir )

( This graph shows worsening of the Icelandic krona against the euro )

Banks of Iceland

On 29 September the bank of Gitnir was planned by the Icelandic authorities to nationalized with purchase of 75 % interest for a‚¬600 million. But the authorities did non mean to keep ownership of the bank for a long period, and the bank was anticipating to transport on operating as normal. However, within few hebdomads Glitnir had turned out that US $ 750 million of debt due to maturate on 15 October.

On 6 October, most of the private interbank recognition installations to Icelandic Bankss were shut down. The premier curate Gier Haarde addressed the state, which he mentioned that there will be a new regulative steps which were to set to the Althing ( is the national parliament of Iceland ) .

Then all of a sudden the Parliament with the cooperation of the resistance parties, these included the power of the FME to take over the running of Icelandic Bankss without nationalising them and discriminatory intervention for depositors in the event that a bank had to be liquidated. However the separate step, retail sedimentations in Icelandic subdivisions of Icelandic Bankss were guaranteed in full.

On 9 October, the Kaupthing bank were placed into receivership by the FME, flowed by the surrender of the full board of managers, and the Bankss province that it was holding proficient default on its loan understanding after its UK subordinate had been placed into disposal.

3. Stock Market

On 6-13October FME suspended the six fiscal companies on the OMX Nordic Iceland Exchange, due to unusual market conditions, the portion monetary value fallen 30 % since the start of the month. On 14 October there were reopened with the chief index, the OMZ Iceland 15, at 678.4, which corresponds to a dip of approximately 77 % compared with 3,004.6 before the closing.

Trading in the portions of Straumur-Buroaras and Eixsta, are the two fiscal services companies. On 9 December the history of the two companies was 12.04 % of the OMX Iceland 15. The values of the portions in both companies dropped aggressively, and the index closed at 394.88, down by 40.17 % on the twenty-four hours. While the portion in SPRON and Kaupthing remains suspended, at monetary values of ISK 1.90 and ISK 694.00 severally.

During the crises the four recognition evaluation bureaus which monitor Iceland ‘s autonomous debt are lowered their evaluation, and their mentality for future evaluations alterations is negative. But the authorities had a comparatively healthy balance, the autonomous debt of 28 % and a budget excess of 5.5 % of GDP, and the debt is now 90 per centum of GDP with a budget shortage. Furthermore, in 2009 the value of foreign currency bonds remain $ 600 million and foreign currency debt service in 2009 is merely $ 215 million.

After looking assistance many states include Moscow, Russian, Denmark and Norway, but finally IMF tentatively agreed to loan a‚¬2.1 billion and another $ 2.5bn of loans and currency barters from Norway, Sweden, Finland and Denmark, flowed by Germany, Netherland and the United Kingdom a joint loan of $ 6.3 bn ( a‚¬5bn )

( The value of the OMX Iceland 15 from January 1998 to October 2008 )

The consequence of the crises

Within Iceland

The current state of affairs of economic has severe effected many Icelandic concern and citizens in the state. The replacing of Nyi Laandsbanki for the old Landsbanki, has caused to loss of 300 employees due to a extremist restricting of the organisation which is intended to minimise the bank ‘s international operations. Similar occupation losingss happened at Glitnir and Kaupthing. The occupation losingss or unemployment are compared with the 2,136 registered and 495 advertised vacancies in Iceland at the terminal of August 2008.

There are besides other company effected in this state of affairs, include, the private Sterling Airlines declared bankruptcy on 29 October 2008, flowed by the national air hose Icelandair has noticed a important losingss for flights.

For the importers it was really difficult hit, because the authorities was curtailing foreign currency to indispensable merchandises such as nutrient, medical specialty and oil. The a‚¬400 million loan from the cardinal Bankss of Denmark and Norway is sufficient to pay for months imports. Iceland ‘s GDP psychiatrist by every bit much as 10 % as a consequence of the crises, seting Iceland by some steps in an economic depression. And the rising prices expected to mount every bit high as 75 % by the terminal of the twelvemonth.

Furthermore, In November 2008, the unemployment had tripled, with over 7000 registered jobseekers, compared to 2136 at the terminal of the August 2008. As 80 % of family debt is indexed and another 13 % denominated in foreign currencies, resulted the debt refund become dearly-won.

Outside Iceland

More than 100 UK local governments was invested over ?840 million in hard currency in Icelandic Bankss, chiefly invested by Kent Country Council bank. the local governments were working under authorities advice to put their money across many national and international Bankss as a manner of distributing hazard, they were invested to a great extent police service and fire governments, and even the audit Commission.

It was hoped tierce of the depositor money will be available quickly, matching to the liquid assets of the UK subordinates, for the settlement of other assets, such as loans and offices will take longer clip.

However, the cost of sedimentation insurance in UK was non wholly clear as Novermber 2008. The fiscal services compensation strategy ( FSCS ) paid ?3 billion to reassign sedimentations from Heritable Bank and Kaupthing Singer & A ; Friedlander to ING Direct. While the UK exchequer paid an extra ?600 million to vouch retail sedimentations that were higher than the FSCS bound.

On grand 28, 2009, Iceland ‘s parliament voted to O.K. a measure to refund the United Kingdom and Netherland more than $ 5 billion lost in Icelandic sedimentation histories.

Decision

A fiscal crisis has happened in Iceland which caused an economical recession in one of the smallest states in Western Europe. A failure in three of the biggest Bankss in the state Glitnir, Landsbanki, and Kaupthing lead to economical crisis. The banking sector of the state was nationalized and integrated into a individual operation unit bank which was called Islandbank. The authorities determination had taken when the foreign debts in Icelandic Bankss reached more than 5 billion lbs. Although one of the Bankss had 40 subdivisions in many different states in the universe, all of them are controlled by Financial Supervisory Authority.

The nationalizing of the three Bankss was decided after the three Bankss could non refinance the net incomes of the accrued foreign debts which were exceeded 50 billion lbs and the sedimentation insurance was highly high. The cardinal bank reduced the minimal militias demand, and besides it held high involvement rates every bit good as increased the money supply to the market which lead to a high per centum of rising prices, and the existent value of the krona was overestimated, that caused for international creditors to mistrust the three Icelandic Bankss. so the cardinal bank could non refund the Bankss because its modesty was less than international debt which was 350.3 billion.

The impact of the crisis has caused many different jobs non merely inside Iceland but it ‘s extended to beyond the state ‘s boundary lines. The major internal impact was increasing in unemployment rate, which was consequence of incorporating the three Bankss together and minimising their international operations. The other internal sector affected was imports, because the authorities restricted the traffics with foreign currencies which were an indispensable portion for merchandising the of import merchandises and points.

Recommendation

The crisis was excessively heavy to hit a little state such as Iceland, the crisis impact will be long term, and the recovery procedure will take long clip. We think the recovery can non be done without the authorities, so the first of import action was to suspend the international operations that dealt with Icelandic Bankss, although it caused rising prices, it took portion in minimising the crisis impact. In order to work out the rising prices job the cardinal bank should diminish the involvement rate and that will promote the families and companies to lodge more money.

Strengthening the liquidness is another of import factor and this can be done by recapitalizing the Bankss, by pulling every bit much depositors to supply financess and capitals. Iceland can utilize the national resources to pull investors and particularly in the fishing industry, and pulling many tourers for sing the state. Besides accommodating the korona as the lone currency inside Iceland, and utilize it for international trading such as pricing the exports of Iceland with korona, and that will stabilise the value of korona.

The authorities must hold entree to adequate sum of liquid assets to run into any imaginable salvation demand from depositors or to recapitalize Bankss that are insolvent every bit good as illiquid. Equally long as the domestic Bankss ‘ sedimentations and short-run liabilities are denominated in domestic currency, this is ever the instance. The cardinal bank has a potentially limitless supply of domestic currency liquidness through its ability to publish legal stamp at will.

They besides must take a audacious stairss against increasing of the rising prices, so the easy can countervail the unfastened market operations, and selling the securities whether they are public securities or private. If the securities are private, the authorities loses the principal and involvement it would otherwise hold received. So if the securities sold are authorities debts, so the authorities will refund the principal and involvement to the private sector.

The revenue enhancements are really of import and the authorities to get the better of rising prices job and they should increase the revenue enhancements in order to minimise the disbursement, so the revenue enhancement remunerators in Iceland must recognize the importance of paying the revenue enhancements which can assist in forestalling rising prices.

It ‘s obvious that cardinal bank of Iceland must borrow an excess foreign exchange. The best method for the cardinal bank is to try to set up foreign currency recognition lines, and besides set uping an overdraft installations which was conducted in the three Nordic Bankss. The barter is a common traffics and agreements conducted by the cardinal Bankss in all around the universe.

In December 2007 the Fed and SNB agreed to trade $ 4 million barter installation, and besides a $ 20 billion barter installation between Fed and the ECB, so if we see Iceland did non took an advantage for barters, because few foreign cardinal Bankss would of course wish to take a important long place in the Icelandic krona. However, the job of the planetary contagious disease radioactive dust from an Icelandic bank failure is likely to be rather Persuasive and the ECB, the Bank of England and the Fed may be willing counterparties.

However the authorities of Iceland faced some troubles in borrowing money from foreign states, and that is due to the recognition evaluation of Iceland after the crisis.

So we will reason our recommendation by stressing on four major points, the first 1 is that fiscal supervising must be more effectual if it was consolidated inside cardinal bank of Iceland, so it ‘s good ground to hold prudential supervising in cardinal bank.

Second the cardinal bank of Iceland should alter step that it uses for its rising prices mark to minimise the influence of lodging monetary value fluctuation, so that means CB should aim on rising prices steps that are largely comprised of monetary values that are gluey, and so exclude plus monetary values such as lodging.

Third Iceland ‘s commercial Bankss should be encouraged and should besides see that it is in their best involvement to unwrap more information about their activities. That will increase the assurance among the persons and clients and bad rumours will be eliminated.

Finally the authorities should implement a formal financial policy regulation in order to stifle the Icelandic concern rhythm to back up pecuniary policy better.