There is arealm of causes that inflicted the financial crisis in Iceland .Deregulation of the bankingsector : the three largest commercial banks, Glintir , Landisbanki andKaupthing had total assets of more than $ 168 billion , or 14 times Iceland’sGDP , wich means the central bank inevitably fails as the lender of the lastresort . they lured deposits from the Netherlands andthe United Kingdom by offering 15% interest rate .
They could offer these ratesbecause the value of Iceland’s currency, the krona, was high. It had become amajor trading currency. The banks used $100 billion in deposits toinvest in foreign companies, real estate and even soccer teams.
That amountdwarfed Iceland’s 2008 GDP of $14 billion. TheGovernment Collapsed : Iceland’s nearly bankrupt economycaused the government to collapse in January 2009. The failure occurred becausePrime Minister Haarde resigned due to cancer. The minority party insistedthat one of its members fill the position. Haarde asked that Gialadottir takethe post. Commerce Secretary Bjorgvin Sigurdsson resigned due tobankruptcy-related stress .Protesters took to the streets in response tosoaring unemployment and rising prices caused by the bankruptcy.The government was forced to nationalise all three of Iceland’sleading banks and to seek loans from the International Monetary Fund and othercountries worth more than $10 billion (£6.
5 billion). Meanwhile, the value ofthe national currency, the Krona, fell sharply, placing an immense burden onpeople who had taken out loans in euros or dollars. Iceland, with only 310,000people, has stayed out of the European Union and jealously guarded its nationalsovereignty. Stockmarket : six companies trading a shares was suspended on 6 Octobers , by thegovernment all tranding on the exchanges was frozen for two days .
The decisionwas made to unusual market conditions , with share prices fallen by 30% . On 14octobers this impact in the market , the three large banks which form 73.2% ,had been set at zero , the values of other equities decreased from 8% to -15% .
CurrencyConverter USD/ISK 1.00 USD US Dollar = 104.0464 ISK Iceland Krona 1.00 ISK Iceland Krona = 0.
009611 USD US Dollar Induced effects of the crisis :High unemployment rate : The current economic climatein the country has affected many Icelandic businesses with the creation of NyiLandsbanki ( the new organization ) 300employees will lose their jobs similarlosses are emersion at Glitnir amd Kaupthing due to a radical restructuring ofthe organization . The private sector will affected by the crisis : thenational airline icelandair has noticed a slump in domestic demand for flights Inflation : the assets of Icelandic pension funds are expected by 15-25% , iceland’s GDP is expected byeconomists to shrink by as 10% as a result of the crisis , putting thissituation in an economic depression , inflation has high as 75% by the end ofthe year . iceland had raised its rates to 15% by raising its repo by a 1.25%in one day , the country was facing an inflation rate about 7% . In Iceland, the most important category in the consumer priceindex is Housing and Utilities (29.3% of total weight). Transport accounts for14.
9% ; Food and Non-Alcoholic Beverages for 14.7% ; Recreation and Culture for10.3% ; Miscellaneous Goods and Services for 6.
2% . Furniture, Household Goodsand Maintenance; Health; Clothing and Footwear; Alcoholic beverages andTobacco; Communication and Education account for the remaining 19.2% of totalweight Increase in liabilities : the 400 euro million loanfrom the central bank of Denmark and Norway is capable to pay for a month’simport.
Iceland external debt was 9.553trillion Icelandic kronur ( 50 euro billion ) more than GDP of Iceland by 7x . Depreciation in currency : the national currency fellsharply in value , foreign currency transactions were virtually suspended forweeks , the Icelandic stock exchange fell by more than 90% . The Icelandic currency , krona has declinedagainst the euro , ISK 100 / EURO .The central bank of Iceland attempt to peg krona at 131 to the euro afterit had tried to set this peg , during the duration korna was ISK 340/ EURO .
In this case the central bank setup a temporary system of daily currency exchange to facilitate internationaltrade the value of krona base on a floting system ( changes based on supply anddemand ) after this policy ISK 150 /EURO was trading as exchange rate . Bad reBadF.F.
Bad reputation : Icelanders don’t trust the governmentmuch anymore, nor do they trust the banks that they must certainly rely upon,no matter what their opinion of them is. They are still digging themselves outof the debt hole that they created for themselves, and no one, not even the IMFor their Scandinavian neighbors will help them. They are doing it all alone.
Atleast they have a sense of humor. Effectoutside Iceland :Over £840 million in cash from more than 100 UKlocal authorities was invested in Icelandic banks. Representatives from eachcouncil met to try to persuade the Treasuryto secure the money in the same way that customers money in Icesave was fullyguaranteed Of all the local authorities, Kent County Council has the most money investedin Icelandic banks, currently £50 million .Transport for London, the organisation thatoperates and coordinates transport services within London, also has a largeinvestment at £40 million Local authorities were working under governmentadvice to invest their money across many national and international banks as away of spreading risk.
Other UK organisations said to have invested heavilyinclude police services and fire authorities and even the Audit Commission. It is hopedthat about one-third of the deposited money will be available fairly rapidly,corresponding to the liquid assets of the UK subsidiaries: liquidation of otherassets, such as loans and offices, will take longer.