Iceland's PM: Government Has Collapsed

Iceland's PM: Government Has Collapsed

Iceland's prime minister says his ruling coalition has collapsed under pressure from the global financial crisis. Geir Haarde said he will speak to the president, Olafur Ragnar Grimsson, Monday in an effort to dissolve the government.

Mr. Haarde's government, a coalition featuring his Independence party and the Social Democratic Alliance, has been under mounting public pressure since the crisis hit the island-nation in October.

Last week, the prime minister, who suffers from cancer, called early national elections in May and said he would not run. At the time, analysts questioned whether the government could survive four more months.

The situation worsened Sunday, when Commerce Minister Bjorgvin Sigurdsson quit, citing his role in the economic collapse and growing public demands that the government resign immediately.

Sigurdsson acknowledged that Icelanders have lost faith in their government, and he said he wants to share in the responsibility for the economic collapse.

The meltdown forced the government last year to take control of three of the country's biggest banks.

Iceland also secured billions of dollars in assistance from the International Monetary Fund and other countries, to avert a collapse of its once-booming economy.

Some information for this report was provided by AP and Reuters.

VOA News


url: http://english.chosun.com/w21data/html/news/200901/200901270009.html

Video: How Iceland Collapsed

How Iceland Collapsed

12/26/2008

WSJ's Andy Jordan examines how Iceland's economic miracle came to an abrupt end and explains why the world should care about the collapse of the small country's financial system.

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U.S. to Borrow Record This Quarter to Finance Deficit

Iceland, here we come...

U.S. to Borrow Record This Quarter to Finance Deficit (Update1)

By Rebecca Christie and John Brinsley

Nov. 3 (Bloomberg) -- The U.S. Treasury more than tripled its planned debt sales for this quarter to help finance a 2009 budget deficit that bond dealers advising the department estimate may swell to almost $1 trillion.

Borrowing needs are expected to rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July, the Treasury said in a statement in Washington. That follows a $530 billion record in the July-September quarter.

The worsening credit crisis and sluggish economy are straining the country's finances and will leave the winner of tomorrow's U.S. presidential election facing the worst budget shortfall on record next year. The Treasury is scheduled to announce in two days plans to expand debt sales to fund the gap.

``The U.S. Treasury faces an unprecedented financing need,'' said Goldman Sachs analyst Ed McKelvey, echoing a similar comment last week by Anthony Ryan, the Treasury's acting undersecretary for domestic finance.

The Treasury acknowledged the fiscal year 2009 deficit is likely to be far above the $482 billion projected in July, citing a new survey of its primary dealers. The financial firms told the Treasury they expect a $988 billion shortfall for the current fiscal year, which began Aug. 1.

The department didn't release its own estimate for the coming deficit, in keeping with its usual practice. The department did announce more than $1 trillion in borrowing that is taking place between July and December.

Quarterly Record

The quarterly borrowing figures announced today are each more than double the previous record -- $244 billion in new marketable debt in the first three months of this calendar year.

``Economic conditions have deteriorated notably over the past few months,'' Phillip Swagel, Treasury's assistant secretary for economic policy, said in a statement. ``It will take time for financial markets to stabilize and for credit market strains to ease.''

After improving for three straight years, the U.S. budget deficit deteriorated as a slowing economy hurt tax revenue and spending increased, reaching a record $455 billion shortfall in fiscal year 2008, which ended Sept. 30.

The Bush administration, which entered office in 2001 with a $127 billion budget surplus, in July predicted the next president faces a deficit totaling $482 billion in fiscal 2009. In early October, Congress passed a $700 billion bank rescue package that's draining federal coffers and leading some analysts to forecast a deficit of $1 trillion for this year.

Dealer Estimates

Dealers expect the Treasury to borrow $1.4 trillion in marketable debt during fiscal year 2008, with estimates spanning a range between $1.1 trillion and $2.1 trillion, according to the Treasury's survey results announced today.

At its quarterly refunding announcement Nov. 5, the Treasury is likely to announce $25 billion in three-year notes, $20 billion in 10-year notes and $8 billion in 30-year bonds for its next refunding cycle, according to the median forecast of six economists surveyed by Bloomberg News.

The Treasury sells a variety of bills and shorter-term notes to meet the rest of its financing needs.

Ryan said last week that the Treasury plans to increase the sizes of its bill, note and bond auctions, and he repeated that officials are considering additional sales of three-year notes and other longer-term debt.

Ryan's Speech

``Treasury may need to address many different policy objectives'' with its financing program, Ryan told the Securities Industry and Financial Markets Association Oct. 28.

McKelvey projects the Treasury's total 2009 borrowing needs at about $2 trillion.

The Treasury predicted three months ago it would borrow $171 billion in marketable debt in the July-to-September quarter and have a cash balance Sept. 30 of $45 billion. Today, the department said the actual amount it borrowed was $530 billion in the third quarter and the cash balance at the end of the period was $372 billion, including a supplementary financing program on behalf of the Federal Reserve.

At the end of the current quarter, the Treasury is predicting a cash balance of $300 billion. For the January-March period, the Treasury said it expects to borrow $368 billion, leaving a cash balance of $75 billion March 31.

Analysts said the Treasury's estimates don't account for an extension of its borrowing on behalf of the Fed.

``The actual borrowing could be much higher,'' said Louis Crandall, chief economist of Wrightson ICAP. ``The Treasury only projected its own borrowing. The programs the SFP is backing are authorized through next spring.''

Fed Program

For all of fiscal year 2008, which ended Sept. 30, the Treasury had a record net marketable borrowing of $760 billion, compared to $134 billion in 2007. For fiscal year 2008, the Fed redeemed $154 billion in U.S. government securities from its System Open Market Account, the Treasury said.

In July, the department estimated total marketable borrowing in fiscal 2008 would total $555 billion.

Before the Treasury's announcement, analysts were predicting more red ink in coming quarters.

Ward McCarthy of Stone & McCarthy Research Associates in New Jersey said he's expecting financing needs of $715 billion from October through December, followed by $320 billion in the January-March quarter. He predicted a $1.02 trillion 2009 deficit.

``All budget and financing projections should be considered to be fluid,'' he said.

Goldman Sachs projected $400 billion in borrowing needs for the final three months of 2008, followed by $375 billion for the first quarter next year. Those estimates don't, however, include borrowing for the Fed's supplementary financing program, which has already borrowed $220 billion since Oct. 1, Goldman Sachs economists said in a research note.

The Securities Industry and Financial Markets Association is projecting a $687.5 billion budget deficit for fiscal year 2009, according to a survey of its members released Oct. 31.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net; Rebecca Christie at rchristie4@bloomberg.net.
Last Updated: November 3, 2008 16:10 EST

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Stunned Icelanders Struggle After Economy’s Fall

Can this happen in the U.S.? You bet!

November 9, 2008
Stunned Icelanders Struggle After Economy’s Fall
By SARAH LYALL
New York Times

REYKJAVIK, Iceland — The collapse came so fast it seemed unreal, impossible. One woman here compared it to being hit by a train. Another said she felt as if she were watching it through a window. Another said, “It feels like you’ve been put in a prison, and you don’t know what you did wrong.”

This country, as modern and sophisticated as it is geographically isolated, still seems to be in shock. But if the events of last month — the failure of Iceland’s banks; the plummeting of its currency; the first wave of layoffs; the loss of reputation abroad — felt like a bad dream, Iceland has now awakened to find that it is all coming true.

It is not as if Reykjavik, where about two-thirds of the country’s 300,000 people live, is filled with bread lines or homeless shanties or looters smashing store windows. But this city, until recently the center of one of the world’s fastest economic booms, is now the unhappy site of one of its great crashes. It is impossible to meet anyone here who has not been profoundly affected by the financial crisis.

Overnight, people lost their savings. Prices are soaring. Once-crowded restaurants are almost empty. Banks are rationing foreign currency, and companies are finding it dauntingly difficult to do business abroad. Inflation is at 16 percent and rising. People have stopped traveling overseas. The local currency, the krona, was 65 to the dollar a year ago; now it is 130. Companies are slashing salaries, reducing workers’ hours and, in some instances, embarking on mass layoffs.

“No country has ever crashed as quickly and as badly in peacetime,” said Jon Danielsson, an economist with the London School of Economics.

The loss goes beyond the personal, shattering a proud country’s sense of itself.

“Years ago, I would say that I was Icelandic and people might say, ‘Oh, where’s that?’ ” said Katrin Runolfsdottir, 49, who was fired from her secretarial job on Oct. 31. “That was fine. But now there’s this image of us being overspenders, thieves.”

Aldis Nordfjord, a 53-year-old architect, also lost her job last month. So did all 44 of her co-workers — everyone in the company except its owners. As many as 75 percent of Iceland’s private-sector architects have probably been fired in the past few weeks, she said.

In a strange way, she said, it is comforting to be one in a crowd. “Everyone is in the same situation,” she said. “If you can imagine, if only 10 out of 40 people had been fired, it would have been different; you would have felt, ‘Why me? Why not him?’ ”

Until last spring, Iceland’s economy seemed white-hot. It had the fourth-highest gross domestic product per capita in the world. Unemployment hovered between 0 and 1 percent (while forecasts for next spring are as high as 10 percent). A 2007 United Nations report measuring life expectancy, real per-capita income and educational levels identified Iceland as the world’s best country in which to live.

Emboldened by the strong krona, once-frugal Icelanders took regular shopping weekends in Europe, bought fancy cars and built bigger houses paid for with low-interest loans in foreign currencies.

Like the Vikings of old, Icelandic bankers were roaming the world and aggressively seizing business, pumping debt into a soufflé of a system. The banks are the ones that cannot repay tens of billions of dollars in foreign debt, and “they’re the ones who ruined our reputation,” said Adalheidur Hedinsdottir, who runs a small chain of coffee shops called Kaffitar and sells coffee wholesale to stores.

There was so much work, employers had to import workers from abroad. Ms. Nordfjord, the architect, worked so much overtime last year that she doubled her salary. She was featured on a Swedish radio program as an expert on Iceland’s extraordinary building boom.

Two months ago, her company canceled all overtime. Two weeks ago, it acknowledged that work was slowing. But it promised that there would be enough to last through next summer.

The next day, everyone was herded into a conference room and fired.

Employers are hurting just as much as employees. Ms. Hedinsdottir has laid off seven part-time employees, cut full-time workers’ hours and raised prices. The Kaffitar branch on Reykjavik’s central shopping street was perhaps half full; in normal times, it would have been bursting at its seams.

While business is dwindling, costs are soaring. When the government took over the country’s failing banks in October, Ms. Hedinsdottir’s latest shipment of coffee — more than 109,000 pounds — was already on the water, en route from Nicaragua. She had the money to pay for it, but because the crisis made foreign banks leery of doing business with Iceland, she said, she was unable to convert enough cash into foreign currency.

“They were calling me every day and asking me what the situation was, and they got really nervous,” Ms. Hedinsdottir said of her creditors. They got so nervous that they sent the coffee to a warehouse in Hamburg, Germany, where it now sits while she tries to find the foreign currency to pay for it.

Her fixed costs are no longer fixed. Five years ago, the company built a new factory, borrowing the 120 million kronur — about $1.5 million — in foreign currencies. But the currency’s fall has increased her debt to 200 million kronur. This summer, her monthly payments were 2.5 million kronur; now they may be double that — the equivalent of $38,500 in Iceland’s debased currency.

“My financial manager is talking to the banks every day, and we don’t know how much we’re supposed to pay,” Ms. Hedinsdottir said.

In a recent survey, one-third of Icelanders said they would consider emigrating. Foreigners are already abandoning Iceland.

Anthony Restivo, an American who worked this fall for a potato farm in eastern Iceland and was heading home, said all of the farm’s foreign workers abruptly left last month because their salaries had fallen so much. One man arrived from Poland, he said, then realized how little the krona was worth and went home the next day.

At the Kringlan shopping center on the edge of Reykjavik, Hronn Helgadottir, who works at the Aveda beauty store, said she could no longer afford to travel abroad. But the previous weekend, she said, she and her husband had gone for a last trip to Amsterdam, a holiday they had paid for months ago, when the krona was still strong.

They ate as cheaply as they could and bought nothing. “It was strange to stand in a store and look at a bag or a pair of shoes and see that they cost 100,000 kronur, when last year they cost only 40,000,” she said.

In Kopavogur, a suburb of Reykjavik, Ms. Runolfsdottir, the recently fired secretary, said she had worried for some time that Iceland would collapse under the weight of inflated expectations.

“If you drive through Reykjavik, you see all these new houses, and I’ve been thinking for the longest time, ‘Where are we going to get people to live in all these homes?’” she said.

The real estate firm that used to employ Ms. Runolfsdottir built about 800 houses two years ago, she said; only 40 percent have been sold.

By Icelandic law, Ms. Runolfsdottir and other fired employees have three months before they have to leave their jobs. At the end of that period, she will start drawing unemployment benefits.

Meanwhile, her husband’s modest investment in several now-failed Icelandic banks is worthless. “They were encouraging us to buy shares in their firms until the last minute,” she said.

She feels angry at the government, which in her view has mishandled everything, and angry at the banks that have tarnished Iceland’s reputation. And while she has every sympathy with the hundreds of thousands of foreign depositors who may have lost their money, she wonders why the Icelandic government — and, in essence, the Icelandic people — should have to suffer more than they already have.

“We didn’t ask anyone to put their money in the banks,” she said. “These are private companies and private banks, and they went abroad and did business there.”

Despite all this, Icelanders are naturally optimistic, a trait born, perhaps, of living in one of the world’s most punishing landscapes and depending for so much of their history on the fickle fishing industry. The weak krona will make exports more attractive, they point out. Also, Iceland has a highly educated, young and flexible population, and has triumphed after hardship before.

Ragna Sara Jonsdottir, who runs a small business consultancy, said she had met for the first time with other businesses in her office building. “We sat down and said, ‘We all have ideas, and we can help each other through difficult times,’ ” she said.

But she said she was just as shocked as everyone else by the suddenness, and the severity, of the downturn. When the prime minister, Geir H. Haarde, addressed the nation at the beginning of October, she said, her 6-year-old daughter asked her to explain what he had said.

She answered that there was a crisis, but that the prime minister had not told the country how the government planned to address it. Her daughter said, “Maybe he didn’t know what to say.”

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