March 6, 2012 / 7:08 PM / 8 years ago

Former Iceland central bank chief warned of looming crisis

REYKJAVIK (Reuters) - Iceland’s former central bank chief had warned about the country’s over-sized banks before they went bust in 2008, he said Tuesday at the trial of a former prime minister for failing to prevent the crisis.

Iceland's former Central Bank Governor David Oddsson in Reykjavik in November 2007. REUTERS/Ingolfur Juliusson

David Oddsson was speaking on the second day of witness hearings at the trial of Geir Haarde, the only political leader to face prosecution over the crisis that hit the world economy. He has denied the charges.

Iceland’s top three banks all collapsed in late 2008 after years of debt-fuelled expansion. The country of just 320,000 people was forced to borrow around $10 billion from the International Monetary Fund and other lenders.

Oddsson, blamed by many in Iceland for deregulation which led to the banks growing to 10 times the size of the economy, told the court he met Haarde and others in February 2008.

There, he had related information from talks with European bank officials at the Bank of England a few days earlier.

He said he had “warned the government, in the strongest possible terms, that the Icelandic banks were facing serious difficulties re-capitalizing themselves as the European banks no longer believed in their viability.”

Coming out of that meeting, Oddsson said he had told colleagues: “If this information does not wake these people up, nothing will.” Oddsson said Haarde had not always believed his expressions of concern about the banks.

“The trouble was that all the available data, such as the banks’ quarterly and annual accounts, painted a very rosy picture of the situation, while my views were based on a very uneasy feeling that I had for a long time,” he said.

Oddsson and Haarde have long been linked politically.

Oddsson was prime minister from 1991 to 2004 and went to the central bank in late 2005, before being forced out in early 2009. Haarde was prime minister from 2006 to early 2009, and before then a finance minister, from 1998 to 2005.

Haarde is being tried at a special court of impeachment set up in 1905, which has so far never been used. If found guilty, he faces up to two years in jail.

Oddsson was forced out of the central bank after the crisis and is now the editor-in-chief of a leading daily.

Haarde is charged with gross negligence for failing to take proper measures to prepare for an impending financial crash. He is also accused of failing to rein in the banks before their expansion threatened the whole economy.

Iceland’s biggest banks were all taken over by the state in late 2008 after the credit crunch sparked by the collapse of Lehman Brothers froze their access to funds.

Iceland ring-fenced the domestic operations of its banks and let their international operations go bankrupt.

The economy nosedived and the country was forced to impose capital controls to prop up the value of its krona currency.

The economy has started to recover, having borrowed on the international bond markets last year and getting its investment grade back from Fitch in February.

Reporting by Omar Valdimarsson, writing by Patrick Lannin in Stockholm; Editing by Karolina Tagaris

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