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Iceland facing national bankruptcy -

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Iceland facing national bankruptcy

The World Today - Tuesday, 7 October , 2008 12:22:00

Reporter: Jennifer Macey

ELEANOR HALL: At the heart of the financial storm is the tiny Nordic country of Iceland.

The government in Reykjavik has just enacted emergency legislation to try to avoid becoming the
first entire country to be bankrupted by the credit crisis.

Iceland's currency plummeted 30 per cent last week and its banking system which had expanded
aggressively overseas in recent years is close to collapse.

As Jennifer Macey reports.

JENNIFER MACEY: The small island nation of Iceland with 319 000 people has been an economic success
story in recent years.

Over the past decade Iceland has gone from a poor fishing nation into one of the fastest growing
economies in Europe, largely due to the deregulation of its banking sector.

Iceland's three largest banks became global players investing heavily overseas and borrowing vast
amounts of money on international markets.

But now there's no credit left and Iceland's banks are facing collapse.

The Prime Minister Geir Haarde addressed the nation and warned the Icelandic economy could be
sucked with the banks into the whirlpool; leading to possible national bankruptcy.

GEIR HAARDE: It's easy to understand why the banks were expanding in the way that they did. But I
think possibly they should have, not possibly for sure they should have provided more for a rainy
day as you say in England and be more careful.

JENNIFER MACEY: Last week the Icelandic currency the Krona plunged 30 per cent against the Euro.

The Government in Reykjavik moved swiftly and suspended trading of shares in six of Iceland's
biggest banks and financial firms.

It also nationalised the countries third biggest bank Glitnir last week.

Now emergency laws have been rushed through to give Iceland's financial regulator the power to
force banks to merge or declare bankruptcy.

The Prime Minister Haarde says the government will also guarantee the savings accounts for all bank

GEIR HAARDE: We will not be closing banks. But it's conceivable that some of them will not be able
to function without our authorities intervening and this is what we are providing for in this bill
of law.

JENNIFER MACEY: But the mood is grim among the islands inhabitants who until recently were the
sixth wealthiest people in the OECD.

INHABITANT 1: What happened in Iceland is that we a good time, we had a great party but now we have
hangovers and they're really, really bad.

INHABITANT 2: This bank is almost ok now but I don't think they're going to survive a long time no.

INHABITANT 3 (translated): We need to be hopeful that our government will find a successful
solution to this problem. They should be the warrant for all deposits that the citizens have in the
banks. We need to have hope.

JENNIFER MACEY: But is the crisis in Iceland so different from what's happening in other European

Professor Gunnar Haradsson is an economist from the University of Iceland.

GUNNAR HARADSSON: The situation now is like in many countries in Europe, we are having difficulties
in financing our companies and our banks. The government and all the players in the economy are
trying their very best to ease the markets to get funds flowing back into the country. So that is
exactly how are we trying to deal with this, what we believe to be a temporary problem.

JENNIFER MACEY: But Professor Fariborz Moshirian from the University of New South Wales says
Iceland's tiny isolated economy leaves it more exposed to the credit squeeze.

MOSHIRIAN FARIBORZ: They are not in a position basically to cash their assets very quickly and due
to again recent financial turmoils their currency declining in value substantially and that puts
more pressure on the banking system as would have government's foreign reserve.

JENNIFER MACEY: And he says other European countries may be reluctant to allow their reserve banks
to step in and give Iceland's finance sector some much needed liquidity.

MOSHIRIAN FARIBORZ: This is one of the consequences of credit squeeze that we are facing that each
bank or even every country is cautious to lend money to another country or another banking if you
like system outside their own national banking system because they don't know what will happen
tomorrow as the you know market unfolds.

And I think for that the reason we need to have a global approach now to credit squeeze that we are
facing and also the current financial turmoil.

ELEANOR HALL: That's Professor Fariborz Moushirian from the Australian School of Business at the
University of New South Wales.