Developments leading to the Icelandic financial crisis

The developments leading up to the Icelandic financial crisis makes for an interesting read, only because of the fact that a lot of factors actually contributed to it. The problem really was – No one was able to understand the magnitude of the problem at hand, resulting in the entire situation to spill over in a big way.

The Krona was depreciating

The national currency of Iceland, Krona, didn't do well in the lead-up to the final bust. Starting January 2008 until September 2008, the Krona had slipped 35% against the value of Euro. It was not that the Euro was strong in itself, but the Krona was way too weak compared to the Euro. This almost triggered a price rise, which resulted in inflation climbing up to 14%.

Eventually, banks in Iceland raised their interest rates to deal with the inflation, to 15.5%.

The Central Bank of Iceland tried to benchmark the value of Kroner at two instances. The first of these was on the 6th October, when they failed to do so. And the other came on the 8th October, when the bank decided to peg the value at 131 Kroner to a Euro.

This attempt failed too, and by the next day, the Krona was dealing at 340 to a Euro, which is when FME took over the last standing major Icelandic bank. In days coming by, the value of the Krona went on to be determined by a lot of factors, most of which don't play a role in the normal sense in determining the valuation of the national currency.

October 2008 was the signal that the worst for Icelandic banks had indeed come, as the exchange reserves of the Central Bank of Iceland dipped by 289 Million Dollars.

Lack of strong action spelt doomsday for the banks

The news that the Iceland Government was planning to nationalize Glitnir, a leading bank by purchasing 75% of its stake at 600 Million Euros, made some people sit up and take notice. One of the leading banks was apparently in trouble and surely, this was a sign of worse things to come by. Apparently, what had happened behind the scenes was The Financial Supervisory Authority didn't let the take-over of 75% stake go through.

Considering the fact that Glitnir had about $750m in debts meant one thing – This development sounded the death knell for banks.

Developments over the next some days meant that banks had completely stopped inter-bank credit lending facilities, leading to Prime Minister, Geir Haarde announcing a new set of regulatory measures. In the coming week post this announcement, two other banks, Landsbanki and Kaupthing, bit the dust, literally speaking.

No activity on the stock markets, either

All this frenetic activity resulted in investors moving out their money out of the stock market. The national indices of Iceland saw a freefall like never before, and finally, the FME drove the final nail in the coffin, by suspending the operations of the stock markets. The markets remain shut for 8 days, before resuming on October 14th.

On resumption itself, the markets nosedived 77%, as a result of the indices and the values of the three major banks being set to zero.

Broadly speaking, these were three major developments that resulted in the ballooning of the Icelandic financial crisis. As discussed before, all of these could have been prevented easily by some proactive measures by the Government. As it turned out, the measures were retro-active.

Read more: http://www.articlesbase.com/banking-articles/developments-leading-to-the-icelandic-financial-crisis-2472301.html#ixzz0p9EH9sNt
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