Iceland’s bank accounts are frozen? Really?

We all know that the U.S. is having some money troubles. We’ve gotten used to hearing ‘seven hundred billion dollars’ repeated and echoed on TV and the radio and in print. But we are not alone in economic distress. Europe’s been feeling a little panicked, too.

By my reckoning, the first country that did a bail-out plan was Ireland. They jumped right on it:

(from 10/1/08)

Ireland said Tuesday it would guarantee payments on as much as €400 billion ($563 billion) in bank debt…The figure, which the government said guaranteed nearly its entire banking system, is twice the country’s gross domestic product.

Ireland acted a lot faster than the US in doing a bailout. And in terms of the size of the each respective country, Ireland’s move is substantially larger than America’s 700 Billions. Ireland is not nearly as large as the US. I think that speaks well of Ireland’s concern for its people and for its reputation. People will not say that the Irish renege on promises. Although, I would feel concern if I were an Irish taxpayer. But Ireland will probably come out all right.

That’s not true of every country. Take Iceland. Right now, the big explosion of Iceland’s banking has left nothing but rubble. Last year, the excitement was high and the money was pouring in. At that time, the London Times describes the scene in Reykjavik, the capital of Iceland. The “billionaires boys club” rode the wave of a deregulated banking system. The icelandic Krona was quite expensive, and everyone was living large:

Flush with cash raised domestically and from international markets and headed by fresh-faced entrepreneurial chief executives, firms such as Bakkavor Group, FL Group and Baugur have used Reykjavik as an unlikely base for aggressive overseas expansion…

The success of these firms has attracted overseas investment far out of kilter with Iceland’s own small economy… It is one reason for the run on the currency sparked by a mini-financial crisis in Iceland last year. Standard & Poor’s, the credit rating agency, gave warning last week that it may cut the country’s sovereign rating, causing alarm bells to ring …To tame inflation it has lifted interest rates to a record 13.75 per cent.

Interest rates of 13.75%? Hot damn! Sign me up! But wait a minute. Even this optimistic times say there was a mini-crisis in 2006 and some “alarm bells” were ringing because the bank’s reach is out of kilter with the country. But people believed that banks are solid. They never fail; they always keep their promises.

Well, this october surprise was a trick, not a treat for the many investors in Icelandic banks: bupkis. Investors put their money in Iceland, and they aren’t getting it back. Not if you’re not an icelander, anyway. This is doesn’t make happy customers. A bunch of officials are converging on the little island. The British Prime Minister Gordon Brown made some speeches back home, telling his countrymen “We will take further action against the Icelandic authorities wherever that is necessary to recover the money…This is the responsibility of the Icelandic government. They’ve got to take responsibility.”

From what I have found, the Prime Minister has to say something.The situation in Iceland seems to have affected every corner of the UK:

Hundreds of thousand of British consumers have accounts now frozen in Icelandic banks that have collapsed and been nationalized. Also stuck is close to £1 billion held by British regional governments, police and fire departments and London’s transport authority. British companies are also thought to have substantial deposits in Iceland.

As far as the Brits were concerned, this must have seemed a sure thing. Everyone was doing it, and the interest rates were not something to pass by. And even if they had some doubts, Iceland was part of the EU. Every bank that was part of the EU guarantees deposits, just like the FDIC in the US. They could deposit up to 20,000 euros worth of money and be secure. That’s the law:

The government, however, has said it may not be able to compensate foreigners…Iceland Prime Minister Geir Haarde said Friday the two countries are trying to work constructively to resolve the dispute, but he found some of Mr. Brown’s comments in recent days “disconcerting and not very helpful.”

I’d say that the British Prime Minister’s comments were disconcerting! What did he mean by “further action” anyway? Is he planning an invasion? The British navy is good, but how are you going to draw blood from a turnip?

See, the Iceland banks did their job on advertising.The British invested heavily in Iceland, lured by the huge interest rates. They weren’t the only ones either; thirteen and three quarter interest attracted customers from a lot of other European nations. Holland had a lot of money over there too.  But you know what bank-savvy country didn’t fall for this fabulous interest rate deal?


The land of banking had a populace that apparently knew better than to fall for a “too good to be true” deal. I would like to think that I would be a credulous of such an outlying front-runner on the interest rate game. But maybe if I’d seen the ad, I’d have fallen for it too. Especially if I kept the balance below the 20,000 euro insured limit. If I had, I’d be screwed just like England.

This economic crisis is a challenge to the European Union’s newly achieved economic status. This month euro is falling against the dollar at last. And  the beaurocrats from Belgium haven’t had to deal with this sort of thing before. It will be a history-making and policy-changing adventure.

For Iceland, it will probably be even more of a change. All those Icelandic suits are going to be in mothballs in their closets. They’ll have to return to being fishermen. Or maybe they can go back to their roots and go pillaging like Vikings.But maybe they just did.