Iceland’s Althingi parliament accepted a bill last night on an emergency law enabling the government to stage an extensive intervention in Iceland’s financial system—The most radical economic measures that have ever been taken in the country’s history.
Iceland’s Prime Minister Geir H. Haarde addressed the parliament yesterday evening with the bill, explaining that the emergency law is necessary to prevent the nation from falling into crippling debt or even national insolvency in the coming decades, mbl.is reports.
“The danger is real, dear countrymen, that the Icelandic national economy—if the situation develops in the worst possible way—would get sucked with the banks into the furious surf and the consequent would be nation-wide bankruptcy,” Haarde said in his address to the nation earlier in the day.
“No responsible government would jeopardize its nation’s future in such a way, even when the country’s bank system is at risk. As heads of state, we do not have the authority to take such measures,” Haarde continued in explanation as to why the emergency law is necessary.
According to the new law, under exceptional circumstances (i.e., exceptional financial and/or economic difficulties) the minister of finance would be empowered to act on behalf of the state to allocate capital to establish a new financial company or assume the operations, in whole or in part, of existing financial operations (including banks).
The state treasury may, under certain circumstances, provide saving banks with funding of up to 20 percent of their reported equity.
According to the law, the Financial Supervisory Authority (FME) may intervene in the operations of financial companies with extensive measures in order to minimize damage or the risk of damage to the financial markets. These measures include:
– Calling shareholder meetings or meetings for primary capital owners regardless of the company’s approval or stipulations in the Icelandic Companies Act.
– Assuming the power of shareholders or primary capital owners in order to make decisions on necessary actions. This includes limiting the board’s right of decision, suspending the board’s powers in part or in whole, assuming assets, rights and responsibilities in part or in whole of financial companies and dispose of such companies, including mergers with other companies.
– Limiting or prohibiting financial companies from disposing of its financial instruments and assets.
– Compelling financial companies to apply for moratoria or resort to debt pooling.
Deposits will be given priority in cases of bankruptcy, with balances being reimbursed in ISK. The state Housing Financing Fund would then be permitted to assume mortgage loans originally entered by financial companies.
Last night’s legislation comes in the wake of yesterday morning’s announcement by the Icelandic Financial Supervisory Authority that trading would be suspended in all Icelandic financial companies on that day (i.e., Glitnir Bank, Kaupthing Bank, Landsbanki Bank, Straumur-Burdarás Investment Bank, SPRON and Exista).
The suspension was primarily attributed to likely disruptions to normal price formation due to “uncertainties regarding the issuers,” according the authority’s website.
At a press meeting held after the prime minister’s address Haarde stated that the international financial crisis was beginning to seriously affect Iceland, adding that Icelandic banks are the victims of external conditions. He also stated that the scope of the banks’ debt is 12 times that of Iceland’s GNP and that the nation’s economy cannot cope with such large debt.
The prime minister reiterated that all the public’s deposits in the banks are safe. They will be entirely insured. However, Haarde also commented that shareholders in these financial companies would sustain damage. According to the prime minister, deposits in the bank’s subsidiaries in the UK will be guaranteed by the British state.
Minister of Industry Össur Skarphédinsson commented that everyone has seen what has happened to Glitnir Bank (the bank’s operations were nationalized last week) and that Landsbanki has been under duress in the UK. He says the actions provided for in the proposed legislation represent the state’s responsibility to pay for financial institutions in an effort to protect public interest.
Visir.is reports that Kaupthing Bank has been granted a loan of EUR 50 million (USD 68 million) by the Central Bank of Iceland against collateral in Kaupthing’s Danish bank FIH.
In a draft of the legislation, which has now been accepted, that appeared on RÚV national broadcaster’s news website, there is mention of these temporary measures in which the Central Bank is permitted for the two years following passage of the bill to provide Kaupthing with a loan. However, in the copy of the bill that was distributed to the Althingi parliament there was no mention of these measures.
When asked about the discrepancy at the press meeting yesterday evening, Prime Minister Haarde did not wish to comment, saying it was not prudent for him to comment on the Central Bank’s lending matters. He also stated he believes a mistake was made, as the measures were omitted from the draft presented to parliament. Finally, Haarde commented that Kaupthing Bank believes its position is fairly secure at this juncture.
Similarly, the chairman of Kaupthing Bank, Sigurdur Einarsson, appeared on news magazine Kastljós last night, stating that the bank’s position was rather good, but that conditions can quickly change these days. He also commented that the state taking a 75 percent stake in Glitnir Bank had been an ill-advised move.
At the same time, Einarsson claims that financially this is one of the worst periods people have experienced, and therefore welcomes government intervention. While he did verify that Kaupthing had received a loan from the Central Bank against shares in one of its subsidiaries abroad, he would not confirm that the amount was ISK 500 billion (USD 3.9 billion, EUR 2.9 billion)—only that the amount was large.
Click here to read yesterday’s news of the economic situation in Iceland.