The WSJ on Iceland

Looks like Charles Forelle of the famed WSJ backdating/Pulitzer team has got his teeth into another story. This time it's about how the crash of Iceland's banking system and currency. Forelle leads as follows:  

Iceland was one of the international financial bubble's most enthusiastic players. Home to fewer people than Wichita, Kan., Iceland became so leveraged and so deeply intertwined with the global financial infrastructure that its collapse has rattled the world from Tokyo to California to the Middle East. In Japan and Hong Kong, bond buyers got stuck holding all-but-worthless debt. In Beverly Hills, a real-estate developer was forced to default after teaming up with an Icelandic bank to build condos near Wilshire Boulevard. A German regional lender, Bayerische Landesbank, suffered big losses on its Icelandic investments contributing to its need for a €30 billion ($42 billion) bailout package. And in recent weeks, Naomi House, a hospice in southern England, had to cancel a service in which aides made house calls to give the parents of dying children a helping hand. Some £5.7 million ($8.7 million) -- two-thirds of its available cash -- is frozen and may never be fully returned. It was deposited in an Icelandic bank.

Those who don't read much further in this long article will learn that these sympathetic victims were screwed when Iceland lured deposits and buoyed its currency (the krona) with high interest rates. Icelanders paid for tv’s with krona, borrowing in yen. “Like Americans who rode a housing bubble thanks to the U.S. Federal Reserve's maintaining low interest rates for years, Icelanders had found a cheap source of borrowing to finance their consumption.”

Iceland “tried to build a global banking center on top of a tiny currency. So when foreign investors tried to pull out -- converting kronur back into dollars or euros en masse -- its currency fell like a rock, spurring more withdrawals.” “Iceland's new breed of tycoons was living large.”

For human interest, the story focuses on Daniel Herzberg, a Brit “who organizes bicycle and walking tours,” who deposited £10,000 in the Guernsey branch of a British savings bank. Landsbanki [an Iceland bank] bought the branch. In response to his email, Landsbanki told him it would back foreign depositors and that it was strong.

The global financial crisis precipitated a run on Iceland’s banks. Iceland didn't have enough Euros to pay depositors.  British depositors had deposited billions of pounds in Iceland banks. 

One Icelandic bank, Kaupthing, was still trying to work things out when the Brits seized Kaupthing's UK assets and transferred them to ING. This triggered "a cascade of defaults for Kaupthing, blows it simply couldn't survive."

Much of the rest of the article recounts the “global fallout” from the Icelandic collapse, focusing on maximally sympathetic victims of greedy Iceland -- Herzberg the bike tour guy, Naomi House.

Ok, so Forelle has his story. But how about another story: Plucky Iceland bucks the European Cartel Community, and is punished for its temerity. Then it gets brought down by a global financial calamity beyond its control.  Scrambling to fix the problem it's squished by its powerful neighbor. 

And what about Great Britain’s role – a rival not only in banking, but for the raw material of its lifeblood – fish and chips (it fought several “Cod Wars” with Iceland). In the banking crisis, Britain claims it needed to protect its depositors. But how exactly did shutting down Kaupthing, precipitating defaults and exacerbating a run in the midst of its salvage efforts accomplish that?

There are rumors, not mentioned in the story, that Britain held up an IMF rescue loan to Iceland. And Forelle alludes to Britain's "using an anti-terror law to seize other Icelandic assets" -- an incident that especially infuriated the Icelanders [see photo above], but that is not discussed further in the story. As for Mr. Herzberg – why did he leave his money in a Guernsey bank that had no deposit insurance? Because this bike tour operator thought he could figure out the international banking system?

Even without going much beyond Forelle's own factual reporting, this is a story that has apparently been slanted against Iceland because it's a convenient target.  And that's really too bad for Forelle, because the real story seems to me to be more interesting than the one he chose to tell.