Meltdown

For anyone who is only reading Icelandic news, this article should be especially illuminating because it sets the tone for how the outside world sees what is happening,
The first and the last paragraphs are particularly telling..

Confusion grows over Iceland’s rescue plan
By Tom Braithwaite in Reykjavik
Published: October 6 2008 09 :54 Last updated: October

Iceland’s prime minister said late on Sunday that no rescue plan for the country’s beleaguered banking system would be forthcoming, adding to the confusion that has helped destabilise the country’s markets.

Geir Haarde, prime minister, said after a weekend of talks with bankers, employers, unions and pension funds that no initiative was necessary “at this time”. There were hopes on Sunday that the Icelandic Central Bank would receive funding from counterparts in Europe to bolster its foreign exchange reserves.

Instead, Mr Haarde said: “The banks have agreed to decrease their activities abroad and sell assets.” Such action by Kaupthing, the country’s leading bank, and Landsbanki, the second biggest, are likely to have further repercussions in other countries, including the UK.
On Friday Kaupthing contacted some clients using contracts for difference - derivatives that allow investors to take a position on a stock without owning it outright - to request that they add to the cash component of the CFD.

The bank has also attempted to reassure the foreign customers who put their savings in its high-yielding accounts, saying that their money is guaranteed by the UK government up to £50,000. Commercial customers include Baugur, the retail investment company that owns Hamleys, and Robert Tchenguiz, the entrepreneur.

Mr Haarde on Sunday met banking executives, including Hreidar Mar Sigurdsson, chief executive of Kaupthing, to discuss measures to ease the crisis, which has seen the Icelandic krona depreciate significantly and led to government buying a 75 per cent stake in Glitnir, the country’s third largest bank.

Bankers in Reykjavik want any additional funds made available to the Central Bank to be passed on to them to substitute the drying up of wholesale funding, which has caused liquidity problems for banks around the world.

In its most important and controversial intervention so far, the Central Bank last week agreed to spend €600m ($826m, £465m) on a 75 per cent stake in Glitnir. The decision, which the Central Bank said was the only option available, was criticised by Jón Ásgeir Jóhannesson, whose Stodir investment company is the lead shareholder in Glitnir, and Richard Portes, professor of economics at London Business School.

The krona has fallen 20 per cent against the euro in the past month, exacerbating fears about the country’s ability to emerge from the current crisis and adding to acute problems facing Iceland’s 320,000 citizens.

On Monday the country’s currency fell further against the dollar but stabilised against the euro. The krona fell 0.9 percent to $113.63 but rose 0.4 percent to €154.52.
A significant proportion of Icelanders have in the past decade turned to loans for cars and homes denominated in baskets of lower interest rate currencies such as the Japanese yen and Swiss franc. But with the krona’s decline, consumers are left stretched.
Kaupthing and Landsbanki, the two biggest Icelandic banks, have strengthened their deposit bases in the past few years and remain better capitalised than some European peers. They also have little direct exposure to the US subprime assets that sparked the credit crunch.
Copyright The Financial Times Limited 2008