Against promises of high interest rates, for example, 450,000 private individuals in England, the Netherlands and Germany deposited their savings in accounts in Landsbanki’s online bank IceSave. Many were tempted by similarly high interest rates on Kaupthing Edge. In addition, 108 municipalities in England used IceSave, plus a number of police districts, hospitals and foundations.
Much of this is lost money, because in retrospect it turned out that the Icesave not had any deposit guarantee in European countries – only bank guarantee fund in Iceland, and it was virtually empty. According to the EEA agreement , there is a deposit guarantee for the first 20 887 euros per account in the EEA countries. Prime Minister Gordon Brown feared that the Icelanders would never pay, and to the great dismay of the Icelanders, he used anti-terror legislation to secure the country’s and the citizens’ saved funds.
Suddenly it dawned on people in Iceland that they were responsible for at least 5 billion euros of the deposits in IceSave. This corresponds to 40–45 billion Norwegian kroner to be distributed to 300,000 Icelanders. That is approximately 500,000 Norwegian kroner per family of four in Iceland. It is a great extra burden for people who themselves have been hit hard by the bank collapse.
When the IceSave scandal became known, the first demonstrations took place in Reykjavik in October. The money in the IceSave accounts is of course gone, but many hope that Landsbanki has some real estate in London that can meet the IceSave requirements. How much these properties are worth today, however, is highly uncertain. The IceSave scandal is the most serious example of how the authorities underestimated the consequences of the bank collapse.
Only a few politicians and officials were aware of the responsibility for the IceSave accounts when the banks collapsed in October. Among them were Minister of Trade Bjørgvin G. Sigurdsson (Social Democrats) and the Ministerial Adviser in the Ministry of Finance. Sigurdsson was the first in the government to resign, but not until January – 100 days after the scandal became known to the public. By then, Haarde’s government was already on the verge of collapse.
7: Currency crisis
But there were several issues worthy of criticism that led to increasing protests in Reykjavik before the government resigned: The banking crisis led to an acute currency crisis . Already the week after the banks’ collapse, the central bank opened up for free currency trading again – only to discover that the exchange rate of the Icelandic krone fell to the ground. The price was about zero. This also came as a surprise to the central bank.
Confidence was gone and Icelandic kroner could not be exchanged for foreign currency. The Icelanders had no money, except for the small reserves kept in the central banks of Scandinavia and England. Currency had to be rationed in order to import medicines and other necessities from abroad. This led to great uncertainty. How long do stocks last in stores? There was news that people had started hoarding. Demands to apply for EU membership are gaining support in the hope of gaining a foothold in the euro soon – finding an economic haven.
Only now did the government realize that a loan from the IMF was the only solution, but before an agreement with the IMF was in place, central bank governor Oddsson came up with another surprising proposal. He had arranged a large loan from Russia! Just a few days later, it turned out that no money was coming from Russia: the Russians had only said they were willing to talk about loans. This led to uncertainty, increased frustration and increased dissatisfaction with central bank governor Oddsson.
Already in the first weeks after the banks’ collapse, it turned out that companies outside the financial sector were also hit hard. And the problems have only gotten worse since then. The new banks are not working as planned. Companies do not receive normal loans, and unemployment is rising. In February, unemployment had risen to 8 per cent, from less than 2 per cent in September 2008.
8: Frustration – mistrust – change of government
The new year started with ever new incredible stories in the media about widespread corruption and decision refusal in the months and years before the crisis. Kredittilsynet – which was to ensure that laws and regulations were complied with – was understaffed and passive. Ecocrime had little resources, and financiers could do as they pleased. They had gambled with people’s money and lost everything.
The banks had as many as 136 subsidiaries registered in the tax haven Tortola in the Caribbean. There has long been suspicion of money laundering of Russian mafia money via the Icelandic banks – but no one has evidence.
People wondered if the savings might be on Tortola? Nobody knows, not even the authorities. No one has been arrested, no one has been summoned for questioning, no one is leaving. People talk about “decision refusal”. The same people are in the same positions, and no one is taking responsibility for what has happened. In this situation, it finally boils over in mid-January 2009. What is called the ” kitchen utensil revolution ” begins. Ordinary people line up in front of the Althing night after night with pot lids and ladles and demand the government’s resignation.
In the end, the government resigns after much deliberation , and a new minority government under the leadership of the Social Democrat Jóhanna Sigurdardóttir takes over. The government’s task is to continue the agreement with the IMF on restructuring the economy. Applications for EU membership have been put on hold, at least until after new elections are held in Iceland on 25 April, a country located in Europe according to localtimezone.org.
Iceland’s economy was once described as a volcanic eruption – only the future will show if only an ash-filled crater remains.