Saturday, October 04, 2008

Iceland Running Out Of Food

The waves of the global financial crisis have crashed ashore in Iceland, with devastating consequences. This from the Icelandic Business Post:

Icelandic miracle in meltdown
Sunday, October 05, 2008 By Robert Jackson in Reykjavik
While the eyes of the world were focused last week on the US bailout plan, it barely troubled the headlines in Iceland.

Yesterday the Icelandic government was finalising a plan for its crisis-hit economy, but denied it would nationalise Kaupthing, the country’s largest bank. Bjorgvin Sigurdsson, commerce and banking minister, said the government was actively seeking a "large loan" from abroad to shore up the krona...

Confidence in the banking system has been hard hit globally; in Iceland it has evaporated. The currency is now trading at 40 per cent of its January values; the last seven days alone have seen a plummet of over 11 per cent and major international institutions have stopped trading in the currency altogether.

The Icelandic stock exchange, down 80 per cent, is in free fall and money market funds, once a safe haven for savers, are imposing write-downs in anticipation of further corporate failure.

Homeowners are confronted with negative equity, and businesses with no new credit lines. For an island population of 300,000 that relies on imported goods, the prospects of rampant inflation - already running at 15 per cent - deep recession and systemic failure loom.
Some on the ground reporting comes from the blog of Steinn SigurĂ°sson, an Icelandic scientist at Penn State:
The US financial crisis is causing an implosion in Iceland, which is forcing a cascade into the European financial system. Serious talk of a bank holiday and food hoarding has been heard. Head of largest oil company says oil imports may cease because of lack of US dollars.

The root cause of the implosion is that the Icelandic commercial banks overextended aggressive investments and were over leveraged, so when the world economy went bad they got squeezed. The proximate cause of the collapse is that their primary line of credit was with Lehmans and when it vanished shortly before they needed to renew it, they were blindsided and hadn't lined up alternative lines of credit. After the fact, of course, no one wanted to lend to them, and they were about to get calls on their bills with no cash - so they were nationalized.

The government of Iceland is acting - there is bailout plan and looking for a large loan to provide liquidity or capital to the surviving banks. There was open discussion in the Icelandic media today that there might have to be a "bank holiday" - that all banks might close over the weekend, remain closed while exposure to foreign loan and credit was unwound, and the bankrupt institutions nationalized and the remained allowed to reopen. Don't know that it will go that far now or any time soon, but the mere fact that it is under serious discussion is eye opening. I suspect this will depend a lot on whether the other Scandinavian central banks will help intervene, the Norwegian central bank maybe the only institution with that kind of money and the interest in helping.

We're talking about $50 billion, for an economy that is 1/1000th the size of the US.

A more interesting, and somewhat more panicked discussion, was contemplation of the possibility that the government would have to use their foreign currency reserves to secure food supplies for the winter.

Now, Iceland is a major importer/exporter, and a net exporter of food, primarily fish. A lot staples are imported, especially grain and fruit. It is also fashion central, if non-essential imports are constrained by currency shortages there will be a major worldwide consumer crunch - I know it is only 300,000 people, but man we buy a lot of crap. So, if the currency is going to collapse and loans are unavailable, for a while, then currency reserves should be held back for essentials - ie grain and fruit and other essentials not available internally. Temporarily, unless our export markets collapse and stop buying.
More from SigurĂ°sson:
head of major supermarket in Iceland encourages people to hoard food and to stop buying foreign products

no currency for food imports

this is a cultural catastrophe, no more cheerios for breakfast, the kids will have to eat skyr

CEO of Bonus, a major Icelandic grocery market says their foreign wholesalers are refusing lines of credit through Icelandic banks and demanding cash payment before supplying further goods. The store has been refused foreign currency. This was 4 pm friday afternoon.

He encourages people to hoard food and to start buying locally produced goods only.

I guess the rumours I was hearing from my relatives have some truth to them. Oil will run out next.

Oh, and there is a bankrun taking place. Pictures have been banned. The icelandic government has reportedly asked pension funds to sell foreign holdings and buy local. They're "thinking about it".
Will Paulson bailout Iceland?

1 comment :

tom12008 said...

Thank you for this post, Max. This shows how this is not business as usual. I'm sorry I'm slow to get jokes at times, but my sense of humor sometimes goes awry when so many bad things are happening.

I guess the shock value here is that Iceland seemes to have been on a relatively even keel. By some comparisons, that's probably the case, except for that Achilles' tendon of reliance on toxic financiers like Lehman Brothers.
I guess even with geothermal and hydroelectric power available for food production and energy, other costs rely on lines of credit, so they can't just turn within and focus more intently on hydroponic gardening. Time was, I thought their worst concerns were the seismic and volcanic in nature. I was wrong.