Wednesday, October 08, 2008

Iceland, Pakistan - Bankrupt

1. Iceland

Iceland's banks face a battle for survival Tuesday after government introduced emergency legislation to give itself sweeping new powers over its collapsing financial sector.

Prime Minister Geir H. Haarde warned late Monday that the heavy exposure of the tiny country's banking sector to the global financial turmoil was raising the specter of "national bankruptcy."

The government's attempt to gain control of the increasingly dire situation and restore some confidence in the country's hard-hit banking sector followed a day of panic Monday that saw trading in shares of major banks suspended and the Icelandic krona shrink in value against the euro.

Iceland is paying the price for an economic boom of recent years that saw its newly affluent companies go on an acquisition spree across Europe and its banking sector grow to dwarf the rest of the economy. Bank assets are nine times annual gross domestic product of 14 billion euros ($19 billion).

Investors are now punishing the whole country for the banking sector's heavy exposure to the global credit squeeze — its currency has gone through the floor, imports have fallen and inflation is soaring.

A major fear is that the government will struggle to rescue any other failing banks after last week coming to the rescue of the country's third largest bank, Glitnir.

"In the perilous situation which exists now on the world's financial markets, providing the banks with a secure life line poses a great risk for the Icelandic nation," Haarde said in a televised address to the nation. "There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy."

Just hours earlier, Haarde had said that no special measures were necessary — but credit lines to banks then seized up as speculation about the solvency of the country's major banks reached fever pitch.

"The position has today altered completely and for the worse," Haarde said.

The new laws will give the Central Bank of Iceland and the Icelandic Financial Supervisory Authority detailed and vast authority to intervene in the control and operation of Icelandic financial institutions, including the ability to take over or create new institutions, call shareholder meetings and limit the authority of boards.

Haarde told reporters that the government would not be closing banks, but foreshadowed the government taking control of more banks.

"We will not be closing banks but it is conceivable that some of them will not be able to function without our authorities intervening," he told reporters, declining to name any potential candidates.

Earlier Monday, the Icelandic Financial Supervisory Authority suspended trading in financial instruments issued by Kaupthing, Landsbanki, Glitnir, Straumur-Burdaras, Exista and Spron, saying that "uncertainties regarding the issuers are likely to disrupt normal price formation, and as such, any trading could be detrimental for investors."

The government also put 100 percent guarantees on savers' deposits, following in the footsteps of Ireland, Germany, Austria, Greece and Denmark.

A collapse of the Icelandic financial system could also have ramifications across Europe given the heavy investment by Icelandic banks and companies across the continent.

One of the country's biggest companies, retailing investment group Baugur, now owns or has stakes in dozens of major European retailers — including enough to make it the largest private company in Britain, where it owns a handful of well-known stores such as the famous toy store Hamley's.

Kaupthing, Iceland's largest bank and one of those whose share trading was suspended on Monday, has also invested in European retail groups.

Part of problem is that Iceland's tiny size has led to a high level of cross ownership of assets between banks and companies, which creates a house of cards scenario.

In that eventuality, the central bank with its liquid foreign assets of just 4 billion euros ($5.5 billion) will be hard pressed to make any more bailouts — the big four banks have combined foreign liabilities in excess of 100 billion euros ($137 billion).

Those concerns led all the major credit ratings agencies to downgrade Iceland's sovereign, or government, credit rating last week.

Source - AP

2. Pakistan

Pakistan's foreign exchange reserves are so low that the country can only afford one month of imports and faces possible bankruptcy.

Officially, the central bank holds $8.14 billion of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion — enough to buy about 30 days of imports like oil and food.

Nine months ago, Pakistan had $16 bn in the coffers. The government is engulfed by crises left behind by Pervez Musharraf, the military ruler who resigned the presidency in August. High oil prices have combined with endemic corruption and mismanagement to inflict huge damage on the economy.

Given the country's standing a frontline state in the US-led "war on terrorism", the economic crisis has profound consequences. Pakistan already faces worsening security as the army clashes with militants in the lawless tribal areas on the north-west frontier with Afghanistan.

The economic crisis has already placed the future of the new government in doubt after the transition to a civilian rule. President Asif Ali Zardari has faced numerous but unproven allegations of corruption dating from the two governments led by his wife, Benazir Bhutto, who was assassinated last December.

The Wall Street Journal said that Pakistan's economic travails were "at least in part, a crisis of confidence in him".

While Musharraf's prime minister, Shaukat Aziz, frequently likened Pakistan to a "Tiger economy", the former government left an economy on the brink of ruin without any durable base.

The Pakistan rupee has lost more than 21% of its value so far this year and inflation now runs at 25%. The rise in world prices has driven up Pakistan's food and oil bill by a third since 2007. Efforts to defer payment for 100,000 barrels of oil supplied every day by Saudi Arabia have not yet yielded results.

Source - Times Of India


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