Iceland's Financial Problems and Volcano Eruption - Is There a Connection?
Just asking and wondering...
Iceland Woes Go Skyward as Volcano Erupts on Island’s Recovery
By Omar R. Valdimarsson and Tasneem Brogger
April 15. 2010 (Bloomberg) -- Just as Iceland starts repairing a financial implosion that rattled world markets, a volcanic eruption is compounding its economic woes, hurting tourism and disrupting trans-Atlantic air traffic.
“First the banking sector, then Icesave and now this,” said Gunnar Sigurdsson, a sales clerk who works in Reykjavik. “Hopefully this doesn’t have any long lasting influences. I sometimes get the feeling that Iceland is being punished.”
A volcano under the Eyjafjallajökull glacier in the south of the island erupted for the second time in four weeks, prompting the evacuation of more than 800 people as melted ice raised river levels. Thousands of travelers have been stranded as smoke clouds across Scandinavia and the British Isles disrupt air travel.
The island, which has 30 volcanic systems and more than 600 hot springs, straddles tectonic plates on the mid-Atlantic ridge, making it one of the most geologically active places on the planet. Though Icelanders are used to tremors and occasional volcanic clouds, the sight of molten lava spewing into the sky is rare. Tourism, which accounts for 13.3 percent of Iceland’s export revenue, may grind to a halt in an economy struggling to recover from the worst recession in the western world.
The island’s economy is relying on exports to help it out of its worst crisis since it gained independence from Denmark in 1944. The failure of its three biggest banks, Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf, in October 2008 left the nation with debt obligations equivalent to 10 times its gross domestic product.
“This is abysmal for tourists coming to Iceland, people leaving the island and the tourist industry as a whole,” said Erna Hauksdottir, director of the Icelandic Travel Industry Association, in a phone interview. “There’s no way for us to calculate the cost of this eruption, although we can say for sure that this is very, very bad.”
Last year’s 6.5 percent record economic contraction drove household incomes down 17.6 percent, while unemployment soared to 9.3 percent in March from 1 percent two years earlier.
Iceland owes the U.K. and Netherlands about $5.3 billion to cover depositor losses from the so-called Icesave Internet accounts of Landsbanki. That’s equivalent to 45 percent of last year’s economic output, or $16,400 per citizen.
The volcano has sent clouds of smoke spilling into the stratosphere and drifting as far as Russia.
U.K. airspace is closed until at least 6 p.m., according to flight-control body National Air Traffic Services, while Norway and Sweden also shut airports as the ash threatens to stall jet engines and affect the air quality in plane cabins. British Airways Plc scrapped flights for the rest of the day and carriers including AMR Corp.’s American Airlines cut services.
“The eruption has delayed or grounded 12 flights for Icelandair and affected about 2,000 people,” Gudjon Angrimsson, head of Icelandair’s communications, said in a phone interview. “We are still planning to resume our U.S. bound flights later today and due to the direction of the ashes coming from the volcano, the impact on Icelandic air traffic isn’t as severe as the impact this is having on air traffic in mainland Europe.”
Aluminum smelters in the south of the island, owned by Rio Tinto Plc and Century Aluminum Co., are unaffected by the eruption, said Bjarni Gylfason, an economist at the Federation of Icelandic Industries.
The cost to Iceland of covering emergency measures will drain municipal coffers, said Elvar Eyvindsson, the mayor of Rangarthing Eystri, the municipality that includes the erupting volcano.
“The cost of the eruptions has already been significant,” he said in a phone interview. “It has forced the municipality to spend more on security and infrastructure. This comes at the same time that unemployment is up and spending is down.” He said it was too early to estimate the size of the cost.
Even so, Icelanders say they’re happier dealing with volcanic explosions than with imploding financial systems.
“Iceland can handle a volcanic eruption much better than a banking crisis, as people know that something like that can happen and one has learned to live with it and is prepared,” said Susanna Fridriksdottir, a 38-year-old chemical engineer at Actavis Group hf. “One can’t do much about natural catastrophes. The banking crisis on the other hand was something new, a catastrophe no one foresaw.”
To contact the reporter on this story: Tasneem Brogger in London at firstname.lastname@example.org
Last Updated: April 15, 2010 09:41 EDT
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Deutsche Bank, Citigroup Loans Boosted Iceland Risk, WSJ Says
By Chris Peterson
April 15, 2010 (Bloomberg) -- Loans from foreign banks including Deutsche Bank AG and Citigroup Inc. helped fuel the crisis which led to the collapse of Iceland’s banking system, the Wall Street Journal reported, citing a report by an Icelandic parliamentary commission.
Foreign banks made large loans to wealthy Icelandic business figures to fund a large number of acquisitions, and when they needed to fund margin calls and satisfy other conditions tied to the loans they borrowed from Icelandic banks, in which they often held a significant stake, often using their shares as collateral, the newspaper said.
Deutsche Bank and Citigroup declined to comment, the WSJ reported.
Last Updated: April 15, 2010 00:09 EDT