Out In The Cold – Still.

16th September 09 – Out in the cold – still

Iceland with its funny banking system and outrageously entrepreneurial businessmen was the first economy to slide down the credit crisis pan. It was not just latitude that made that remote island so cold, and it remains out in the cold.

Data just released shows that Iceland’s GDP shrank by 6.5% in the quarter to June 09 compared to a year ago and, indeed, fell by 2% in the quarter alone. The country’s central bank has forecast that the economy will shrink by 9% this calendar year and as contributory factors, household spending will be down 19.7% and fixed investment will collapse by 48.4%. These are big, big numbers for any sovereign state.

Icelandic interest rates still hover around the 12% mark and controls still stop capital from flowing outwards. The IMF had to bail out the country with a $5.1bn aid package and three of its leading banks, Glitnir, Landsbanki and Kaupthing all failed.

Many of us can remember the somewhat surreal “cod war” when little Iceland actually went onto the offensive against the UK in an attempt to expand the territory of its greatest fishy asset. Now the Icelanders, who previously enjoyed an extremely high standard or living, have something even more fishy on their hands. There are 20 “suspicions of criminal activity” cases in process relating to the banking system. A leaked list of recipients of huge loans has not helped the confidence of Iceland, not least since the security taken is said to be dodgy at best or non-existent at worst.

In the early days of the credit crisis, Iceland complained about the use against them by the UK of legislation drafted originally to prevent terrorism. Assets were “frozen” and deposits placed with Icelandic banks had to be redeemed by the UK taxpayer. Paying this money back to the UK is a condition of the IMF support scheme for Iceland.

The only question in doubt now concerning how the UK reacted initially, is the definition of terrorism.