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Iceland teeters on the brink of bankruptcy
(Agencies)
Updated: 2008-10-08 11:42 Famous for its cod fishing industry, geysers, moonscape and the Blue Lagoon, Iceland last year won the UN's "best country to live in" poll, with its residents deemed the most contented in the world.
No more. Despite sunny skies Tuesday after three days of unseasonably cold weather, Reykjavik's mood remained grim, cafes were half-empty, real estate agents sat idle, and retailers reported few saleir acquisition wallets were filled by a stock market boom and a well-funded pension system. Back home, the average family's wealth soared 45 percent in half a decade and gross domestic product rose at around 5 percent a year. But the whole system was built on a shaky foundation of foreign debt. The country's top four bcing its debts, such as the more than $5.25 billion racked up by Kaupthing in five years to help fund British deals. Iceland is unique "because the sheer size of its financial sector puts it in a vulnerable situation, and its currency has always been seen as a high risk and high yield," said Venla Sipila, a senior economist at Global Insight in London. The krona is suffering in part from a withdrawal by a falloff in what are called carry trades, where investors borrow cheaply in a country with low rates, such as Japan, and invest in a country where returns, and often risks, are higher. After watching the free-fall for several days, the Central Bank of Iceland stepped in Tuesday to fix the exchange rate of the currency at 175, a level equal to 131 krona against the euro. Haarde said he believed the measures had renewed confidence in the system. He also was critical of the lack of an Europe-wide response to the crisis, saying Iceland had been forced to adopt an "every-country-for-itself" mentality. He acknowledged that Iceland's financial reputation was likely to suffer from both the crisis and the response despite strong fundamentals such as the fishing industry and clean and renewable energy resources. As regular Icelanders begin to blame the government and market regulators, Haarde said the banks had been "victims of external circumstances." Richard Portes s were reckless," said. "Quite the contrary. They were hugely unlucky." |
