Icelandic financial crisis

Iceland faces a major financial crisis affecting all three major banks of the country, according to the Associated Press, Iceland “is on the brink of becoming the first ‘national bankruptcy’ of the global financial meltdown.”

Prime Minister Geir Haarde has stated that the actions taken by the government have ensured that the Icelandic state will not go bankrupt. At the end of the second quarter 2008, Iceland’s external debt was 9,553 billion Icelandic krónur, more than 80 percent of which was held by the banking sector.

This value compares with Iceland’s gross domestic product of 1,293 billion krónur (2007). The assets of the three banks taken under the control of the FME totaled 11,353 billion krónur at the end of 2007.

The effects are being felt in various other European countries. In the United Kingdom and the Netherlands, customers of Icesave (the local trade name of the former Landsbanki) found on 7 October that they were unable to withdraw their funds. Many UK local authorities, charities, police authorities and other organisations had funds in Icelandic banks. Many European banks had hundreds of millions of euros’ exposure to the Icelandic banks.

On 11 October, an agreement was reached between the Icelandic and Dutch governments on the savings of about 120,000 Dutch citizens. The Icelandic government will cover the first €20,887 on savings accounts of Dutch citizens held by Landsbanki subsidary Icesave, using money lent by the Dutch government.

The total value of Icesave deposits in the Netherlands is €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 is the amount covered by the Icelandic Depositors’ and Investors’ Guarantee Fund (IDIGF; Tryggingarsjóður in Icelandic): however, the IDIGF had equity 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.

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