Iceland Better Off Than Ireland Because They Let Big Private Banks Fail, says President

irish 2010/11/28 13:37:13

Iceland’s President Olafur R. Grimsson said his country is better off than Ireland thanks to
the government’s decision to allow the banks to fail two years
ago and because the krona could be devalued.

“The difference is that in Iceland we allowed the banks to
fail,” Grimsson said in an interview with Bloomberg
Television’s Mark Barton today. “These were private banks and
we didn’t pump money into them in order to keep them going; the
state did not shoulder the responsibility of the failed private

Ireland’s Prime Minister Brian Cowen said this week his
government has discussed an 85 billion-euro ($112 billion)
bailout with the European Union and International Monetary Fund
after the country’s banks threatened to bring the euro member to
the brink of bankruptcy. Iceland’s banks, which still owe
creditors about $85 billion, were split to create domestic units
needed to keep the financial system running, while foreign
liabilities remained within the failed lenders.

As a consequence, “Iceland is faring much better than
anybody expected,” Grimsson said. The Icelandic state’s
liability on foreign depositor claims stemming from Icesave
accounts at failed Landsbanki Islands hf should be put to a
national referendum, he said.

“How far can we ask ordinary people -- farmers and
fishermen and teachers and doctors and nurses -- to shoulder the
responsibility of failed private banks,” said Grimsson. “That
question, which has been at the core of the Icesave issue, will
now be the burning issue in many European countries.”

Accept Losses

Iceland is relying on a $4.6 billion IMF-led loan to
rebuild its economy. Grimsson said today the government may not
need the entire amount.

Bondholders of European banks should be prepared to accept
losses because voters are becoming increasingly unwilling and
unable to fund bailouts, FXPro Financial Services Ltd. said in a
Nov. 24 note.

“The taxpayer has no realistic prospect of being able to
save their banks, such is the magnitude of their bad loans and
their extraordinary dependence on central bank support,” wrote
Michael Derks, chief strategist in London at foreign-exchange
firm FXPro. “Both junior and senior bondholders in these
insolvent banks need to suffer huge haircuts,” he said.

Forcing bond holders to “share the burden,” may help the
euro region remain intact, Derks wrote.


Grimsson, who said Iceland’s talks to join the European
Union are ongoing, in January this year blocked a $5.2 billion
deal to cover British and Dutch depositor claims stemming from
Icesave accounts. The move prompted Fitch Ratings to downgrade
the island’s debt to “junk” as a normalization of
international relations grew more remote. Iceland’s Finance
Ministry on Nov. 16 said the country may now be weeks away from
a “final resolution” to the Icesave dispute as it secures
broad lawmaker backing for a new accord.

Kaupthing Bank hf, Landsbanki and Glitnir Bank hf failed
within weeks of each other in October 2008 after they were
unable to secure short-term funding. The banking crisis led to
an 80 percent slump in the krona against the euro offshore,
until the slump was stemmed by the introduction of capital
controls at the end of 2008.

Kaupthing’s winding-up committee today said it finished
dealing with claims lodged against it. The bank is dealing with
a total of 28,167 claims filed by creditors across 119 countries
totaling 7.32 trillion kronur ($63 billion), it said in a
statement today.

To contact the reporter on this story:
Omar Valdimarsson in London at

To contact the editor responsible for this story:
Tasneem Brogger at

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