Catastrophe Befalls Iceland

During a time in which countries, such as the United States, Canada, and Russia, are vying for control of previously unclaimed arctic regions, in order to exploit any available resources, one small country, in the north Atlantic, has become a major casualty of the recent financial crisis. Iceland, whose banks extended beyond its borders into Europe and Asia, is facing economic bankruptcy.

With few natural resources, other than seafood, in order to participate in exchange-based trading, Iceland's banks and bankers began to rely upon foreign investments, and had amassed foreign investments eight times larger than Iceland's Gross Domestic Product. Using a conservative investment strategy, the banking sector also negotiated foreign loans which grew to twelve times Iceland's national economy. This activity fueled the expansion of Iceland's three major banks, Landsbanki, Glitnir, and Kaupthing, into European markets, where the banks offered potential customers a higher-than-usual rate of return on savings accounts.

As a result, the people of Iceland became affluent. As stocks markets around the world began to tumble, however, and as loans, which had been extended, went into default, Iceland's banks descended into economic turmoil. The small banking giant was in need of a loan.

Iceland's bankers point out that their bank investments did not contain any American mortgaged-backed securities. The head of Landsbanki stated that Landsbanki, in particular, had deliberately not acquired sub-prime investments due to their risk. The disparity between Iceland's physical size and its financial size was noted by the banking community. Prior to the stock market crash of 2008, Iceland had been regarded as one of the wealthiest nations in Europe.

According to a story which appeared in the International Herald Tribune in April, 2008, foreign hedge fund managers may have deliberately targeted the tiny, and until recently, wealthy country, in an attempt to undermine its banking system. Richard Portes, a respected London Business School economist, was referenced. Portes had asked an unnamed senior partner of a hedge fund, prior to the stock market crash, if the partner's fund was "shorting Iceland", or betting that the value of Iceland's currency would decline, especially since the partner in question had actively solicited as much negative feedback as possible about Iceland. The Icelandic krona lost 22% of its value against the Euro between January and April, 2008, before the krona plunged to a low of 25%-30% in October, 2008.

Additionally, Icelandic banks had previously financed business deals in other European countries, including $5.25 billion in loans in Great Britain. Without the liquidity provided by the markets, at the time of the crash, these debts overburdened Iceland's banks, which responded by freezing the assets of their depositors, including those located in other countries. Although, under Icelandic law, the deposits were guaranteed, depositors at Icesave Bank, a British bank controlled by Landsbanki, were offered partial coverage through the British deposit insurance system by the British Financial Services Authority, when British customers became unable to access their funds.

In Norway, the Norwegian Banks' Guarantee Fund loaned Glitner $820,000 for its Norwegian branch. Iceland's central government-based bank, as well as the Swedish central bank, loaned Kaupthing $680 million and $720 million respectively. Savings bank ING Direct UK purchased $5.3 billion of deposits from Kaupthing Edge and Landsbanki's British Heritable Bank.

Kari Stefansson, an Icelandic neurologist, and former Harvard professor, stated that Icelanders "do better when times are difficult than when times are good." He believed that "we will return to old values by focusing on things which create value", and added that "we lived in this country for 1,100 years, desperately poor, in a very harsh country, fishing in open boats in the worst weather." Stefansson, like many other Icelanders, is attempting to remain positively focused, despite the crisis.

Prior to the European restructuring of its banking sector, Icelandic officials had attempted to negotiate a $5.44 billion loan from the Russian government, due to the existence of Iceland-based banks in Russia. Neither the United States nor European countries were initially interested in helping the island nation, even though the United States had formerly kept a military base in Iceland until 2007.