Iceland’s three banks self-invested 70 percent of their capital through cross-financing

Evidence

Iceland’s transformation from a protectionist social democracy to a laissez faire center of international finance was fast and furious. By 2007, average yearly incomes had soared to the equivalent of almost USD 70,000. The value of the stocks of the fifteen firms listed on the Icelandic Stock Exchange increased sevenfold between 2002 and 2007, and the local real estate market more than doubled in value. The three Icelandic banks—Glitnir, Landsbanki, and Kaupthing—were behind this bubble. Their financial structure made Anglo-Irish look like a paragon of good management. Between 2004 and 2008, lending increased on average by nearly 50 percent a year. The banks self-funded on the basis of these loans and then invested heavily in their own stocks. When cross-financing between these three banks is added to the picture, self-investment was 70 percent of these banks’ capital base. If you are thinking of the great investment trusts from the era of the Wall Street Crash of 1929, you are not far off. On the back of this credit pump, private consumption increased and the Icelandic currency rapidly appreciated. By 2005, Iceland had become the most privately indebted country in the world. — Mark Blyth, Austerity, 639

Categorization

• XREF: The self-referential bank-financing structure echoes the 1929 investment-trust collapse, which Blyth explicitly flags.