As a modern globalised economy and an active participant in EU´s single market,Iceland was among the first to become seriously hit in this unprecedented financial
The global financial crisis has hit Icelandic families hard, many have lost their lifesavings and others are at risk of losing their homes. Ordinary Icelanders are now faced with bleak economic prospects even though they were not responsible for the banking crisis: inflation is in the double-digits, external debt is increasing, and unemployment is rising.
The Icelandic banks with international financial operations (Landsbanki, Glitnir Bank and Kaupthing Bank) operated in full compliance with European banking laws and the strictest of international regulatory standards.
Like many banks around the world, the Icelandic banks quickly became victims to the global liquidity crisis as market trust evaporated, despite having virtually no direct exposure to US subprime loans.
The large size of the Icelandic banking sector in comparison to Iceland’s overall economy made the Icelandic banks more vulnerable to the global liquidity crisis.
As capital markets dried up, Glitnir Bank and Landsbanki, two of Iceland's three largest commercial banks were taken into administration by the Government of Iceland on 7 October.
The Icelandic economy is particularly hard hit because these three banks, which were taken into administration, constituted the bulk of the financial system of Iceland.
On 8 October, the UK Government applied the Anti-Terrorism Crime and Security Act of 2001 against the Icelandic bank Landsbanki with the issuing of the “Landsbanki Freezing Order 2008” by the UK Ministry of Finance.
This is the only time that a NATO member has used Anti-Terrorism legislation against another NATO-ally. This was done without consultations with the Government of Iceland.
In other countries, Governments and Central Banks have worked with the Icelandic Banks to solve the problems posed by the international financial crisis in a careful and considered manner.
The decision to use the UK Anti-Terrorism legislation against the Icelandic bank Landsbanki undermined confidence in Iceland’s remaining and strongest bank Kaupthing. The seizure by the UK Financial Services Authority of Kaupthing’s subsidiary, Singer & Friedlander, on 8 October led to the situation whereby the Icelandic Government was forced to take Kaupthing bank into administration on 9 October.
The unprecedented application of the Anti-Terrorism legislation has severely disturbed currency transactions between the UK and Iceland. Exporters have experienced serious difficulties in getting paid for their products. Importers are not able to pay for goods. Icelanders abroad, students and families, are facing difficulties and delays in receiving money from Iceland. Innocent Icelandic citizens abroad have also had to endure verbal abuses in media, in shops and on the street.
The Government of Iceland has never defaulted on its loans. It has declared that Iceland will honour its legal commitments.
Iceland is working constructively with other countries to address issues that have arisen in connection with the banking crisis. Consultations with authorities in the Nordic countries, Germany, Belgium and Luxembourg have already been successful. Iceland is conducting talks with the UK and the Netherlands, and stands ready for similar talks with other countries, as needed.
On October 24, the Government of Iceland reached an agreement with a mission from the International Monetary Fund on an economic stabilisation programme that could be supported by a stand-by arrangement with the Fund.
The fundamentals of the Icelandic economy are strong and will provide a firm basis to overcome the current economic difficulties and needed reforms.