October 8th, 2008

In the previous stage of the financial crisis, companies went bust.

In this stage, countries are on the edge of going broke.

Today, it's Iceland. They've just sent officials to Russia to beg for a €4 billion loan. At first, they'd claimed they'd gotten one, but then the Russians said they hadn't formally been asked and hadn't made any decisions. Finally, Icelandic officials admitted they had "overstated" the agreement and that talks were still "ongoing".

One of their smaller problems? Their banks had been taking lots of deposits from abroad:

From http://www.portfolio.com/views/blogs/market-movers/2008/10/07/the-iceland-dow-connection?tid=true:
There's a British angle, of course: Icelandic banks have been taking Brits' deposits. This is not exactly reassuring:
Times readers reported yesterday morning that they could not withdraw their money from Icesave accounts over the internet. But a spokesman for the bank said that Icesave was now operating normally and depositors could withdraw money. He added that the Icelandic Government had ample foreign reserves to cover the £4bn of British deposits in the event of any collapse.
Er, no, it doesn't. The Icelandic government has 374 billion kronur of foreign exchange reserves; if you convert that at 188 kronur to the pound (as plausible an exchange rate as anything else, and the one I get from Yahoo), that works out at less than £2 billion. Even with an extra €4 billion from Russia (Russia!), Iceland's foreign-exchange reserves aren't enough to last a day, if the locals sensibly decide they'd really rather be in any currency but kronur.
In actual fact, Icesave depositors are being stiffed by the Icelandic government, which took over the bank. In response, Britain's Prime Minister Brown says the UK will sue Iceland over the 300,000 accounts belonging to UK account holders.
"The Icelandic government, believe it or not, have told me yesterday they have no intention of honoring their obligations here,'' [British Chancellor of the Exchequer Alastair] Darling told the British Broadcasting Corporation.

"The first call would be on the Icelandic compensation scheme which, as far as I can see, hasn't got any money in it," he added.
Of course, Iceland's a tiny country. But when this all started, the banks that went bust were tiny ones no one had ever heard of...

And in other financial news...

...the world's central banks finally signaled that they've bought a clue and are making a coordinated emergency cut in interest rates.

The US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, and Sweden's Riksbank have all cut rates by 50 basis points, or 1/2 percent. The Swiss National Bank cut its interest rates by 25 basis points, and the People's Bank of China cut rates by 27 basis points. The Reserve Bank of Australia had already cut rates yesterday by a full percentage point, while the Bank of Japan's rate is so low already, at a half percent, that they could only "express their strong support" for the action.

In the short term this move is mostly symbolic, as it takes months for rate cuts to affect the economy, but the concerted action is meant to reassure markets that the central banks really do understand that something bad is happening. For some of these banks, that understanding's been a long time coming.

Edit: The Hong Kong Monetary Authority also cut its lending rate by a full percent.

Re-Edit: The Bank of Korea and the Central Bank of the Republic of China (Taiwan) each cut by 25 basis points the next day, along with Hong Kong.

The folks at This American Life have done it again.

Some weeks ago, I posted about their story on The Giant Pool of Money, covering the origins of this crisis in the mortgage-backed securities markets.

Now that the story has moved on to credit-default swaps, and the freeze-up of the financial markets, they've done another story, rather bluntly called "Another Frightening Show About the Economy". It's pretty good, too.

As with the previous show, it's only available for free download for a limited time.

(Thanks to belfrynotes for the pointer!)