Here we go again.
Iceland was home to a hot banking sector. Focusing on trade finance, the Icelandic banks attracted deposits from abroad and had assets four times larger than their entire economy. But their undercapitalized banks made some bad loans, and now there isn’t enough cash in the country to bail out the banks.
So the banks are getting loans from the IMF, the English government, and even the Russians. But there’s a hitch. Leveraged financial institutions bought leveraged financial instruments and the Icelandic losses are being magnified through the system. Even a nondescript bank in Lititz, Pennsylvania lost over 18 million dollars.
So expect more headlines about financial losses especially at European banks. It’s not just liar-loans in California anymore. Through the wonders of modern finance, we’re all Icelandic now.
Douglas R. Tengdin, CFA
Chief Investment Officer
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