Iceland reflects on poor decisions for high risk banking system after collapse

Article source: Tony Allen-Mills -

Iceland reflects on poor decisions for high risk banking system after collapse

Just before the September the 11th attacks in America, the Icelandic Prime Minister, David Oddsson, who was popular for his literary interests, was in a poetic mood as he spoke to his country’s diplomatic corps.

Oddsson said that his government was aiming at “managing things so well” that future poets would return to Iceland to pay handsome tribute and give good wishes. However, he finds himself at the centre of the financial hurricane that blew away his country’s banks and provoked an unequivocally vulgar outbreak of international animosity.

After stepping down in 2004, Oddsson was bestowed upon the chairmanship of the country’s central bank. At this time, there were no comments about this appointment but the recent crumple of the Icelandic banking system coupled with the spiteful diplomatic row with Britain raised many questions about the wisdom of handling effective control of an evidently independent financial institution to a powerful, right-wing politician who ardently adopted free-market policies.

Until now, several analysts have concluded that serious misjudgements by the Icelandic central bank had opened the door to destruction of the national currency, the krona. Professor Snjolfur Olafsson of the University of Iceland said that Oddsson has very strong political views adding that a lot of people think he has been the main cause of the problem.

Being a politician and a banker, Oddsson played a key role in Iceland’s emergence as a Nordic powerhouse with a bark that has now turned out to be bigger than its bite. His career in a number of ways portrays both the energy and vision that propelled a country with a 320,000 population to one with an elite economic reputation.

The roots of Iceland’s volcanic transitions from dismal narrow-minded subsistence to instant global shame are surprisingly easily traced. It all started in the 1990s with a newly liberated gang of eager Russians and an angry young Icelander named Thor Bjorgolfsson. Thor the son of a Reykjavik shipping owner, set off for St Petersburg in 1993 to explore entrepreneurial opportunities in the aftermath of the communist collapse.

Together with his father, Thor helped form a bottling company that was later on sold to Pepsi, with the proceeds reinvested in a local brewery that instantly thrived. Thor sold his operation, named Bravo International, to Dutch giant Heineken for a reported $400 million (a whooping £235 million). He spent a large amount of the proceeds on a 45 percent share in Landsbanki, newly privatised by Oddsson.

Professor Olafsson (of the University of Iceland) says a small number of them were rich and it was suddenly very easy to borrow cheap money. He added that a number of people at that time raised doubts about the country getting in so much debt, but everyone was proud that Icelanders could also get rich.

It was however noted by analysts at Merrill Lynch, the US investment bank and the Danske Bank of Copenhagen that Icelandic banks had taken on too much debt as compared to the country’s GDP and were left susceptible to a credit crunch. On response, Oddsson aggressively termed the suggestion of an impending bank crisis as being outlandish saying that he did not think that a crisis was looming; that not even an indication was there.

Later on, the krona and the stock market recovered from a short-lived tremor but a fateful lesson had been learnt. Icelandic banks needed to even up their balance sheets, the central bank’s commitment to raising interest rates to combat inflation offered a promising solution: high-interest deposit accounts, the rest is history.