Once the country erupted into full-blown chaos during the first week of October 2008, the Icelandic government needed a quick-fix solution in order to stop the bleeding in the short-term, as well as stabilize the economy in the long-term. Iceland was too small to offer a state bailout; therefore, alternative measures had to be taken. The Financial Supervisory Authority (FME), the single authority for the Icelandic financial sector, handed over Iceland’s 3 major banks to receivers, as they could not meet their short-term debt obligations and foreign run-on deposits for customers in the UK and Holland. Consequently, during the first couple weeks of October 2008, all three of Iceland’s privately owned commercial banks collapsed. Equally noteworthy, the Iceland banks, Kaupthing Bank hf., Glitnir Bank hf. and Landsbanki Islands hf., did not receive any “American-style” banking bailout from the government, which in retrospect, proved to be a crucial decision in the country’s recovery efforts.
At this point in the crisis, the Icelandic stock market had taken a 90% plunge in just 2 months, and Iceland was making international news regarding the collapse. Abroad, more than half a million depositors in Icelandic banks found their assets frozen as the foreign branches of Iceland’s three major banks were placed in receivership. Since no immediate repayment was coming from the Icelandic institutions because the 'Depositors and Investors Guarantee Fund' was fresh out of the legally required deposit guarantees, the Dutch and UK governments covered the losses of their citizens in full.
In an attempt to sort out its financial mess, Iceland sought out a rescue loan from the International Monetary Fund (IMF), an international organization in which countries contribute funds to an international pool that allows countries with temporary payment shortcomings to borrow money. The IMF enforced a series of capital controls that would help stabilize the chaos clouding the market surrounding its currency. The capital rules restricted the conversion of funds into foreign currencies, making it impossible to get money out of Iceland. Ultimately, Iceland's capital controls prevented about $7 billion worth of Icelandic Krona from leaving the country. As a result, the controls provided the necessary restrictions thwarting the Icelandic Krona from spinning into uncontrollable inflation.
In order to finance their incredible deficits and reform the domestic banks, Iceland received a $5.1Bn debt package comprised of $2.1bn from the IMF and $3bn from a group of Nordic countries. These borrowings helped Iceland get back on its feet in the short-term and provided a foundation to slowly rebuild and stabilize its economy in the long-term. This loan, in additional to the capital controls, and the Icelandic government’s decision to apply for membership into the European Union, proved the correct remedy to heal the nation, and replace the “artificial prosperity” found during the economic bubble with stable growth and conservative capital measures.
From an ethical standpoint, Iceland was intent on punishing the individuals accountable for destroying the economy, and went to great lengths to make sure they accomplished this mission. In the end, a number of high-level banking executives, accountable businessmen and government workers were sentenced to time in jail. The actions of the Icelandic government sent a clear message to its citizens that they intended to hold the individuals responsible for this mess accountable for their actions.
Ultimately, quick thinking, financial intervention and accountability, began to replace the greed and negligence that got Iceland into trouble in the first place. Iceland’s President Olafur Ragnar Grimmson helped embody the recovery by stating, “We were wise enough not to follow the traditional prevailing orthodoxies of the Western financial world in the last 30 years. We introduced currency controls, we let the banks fail, we provided support for the poor, and we didn’t introduce austerity measures like you’re seeing in Europe.”
Additionally, the country’s decision to allow its major banks to fail has been widely applauded by the international community. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net, said internationally renowned economist, Paul Krugman. Iceland, he found, had demonstrated the case for letting creditors of private banks gone wild, eat the losses.
Chapter 3: The Current State of the Icelandic Economy
Bouncing Back; Iceland‘s Economic Meltdown and the Journey Back to Prosperity. Chapter 2
Once the country erupted into full-blown chaos during the first week of October 2008, the Icelandic government needed a quick-fix solution in order to stop the bleeding in the short-term, as well as stabilize the economy in the long-term. Iceland was too small to offer a state bailout; therefore, alternative measures had to be taken. The Financial Supervisory Authority (FME), the single authority for the Icelandic financial sector, handed over Iceland’s 3 major banks to receivers, as they could not meet their short-term debt obligations and foreign run-on deposits for customers in the UK and Holland. Consequently, during the first couple weeks of October 2008, all three of Iceland’s privately owned commercial banks collapsed. Equally noteworthy, the Iceland banks, Kaupthing Bank hf., Glitnir Bank hf. and Landsbanki Islands hf., did not receive any “American-style” banking bailout from the government, which in retrospect, proved to be a crucial decision in the country’s recovery efforts.
At this point in the crisis, the Icelandic stock market had taken a 90% plunge in just 2 months, and Iceland was making international news regarding the collapse. Abroad, more than half a million depositors in Icelandic banks found their assets frozen as the foreign branches of Iceland’s three major banks were placed in receivership. Since no immediate repayment was coming from the Icelandic institutions because the 'Depositors and Investors Guarantee Fund' was fresh out of the legally required deposit guarantees, the Dutch and UK governments covered the losses of their citizens in full.
In an attempt to sort out its financial mess, Iceland sought out a rescue loan from the International Monetary Fund (IMF), an international organization in which countries contribute funds to an international pool that allows countries with temporary payment shortcomings to borrow money. The IMF enforced a series of capital controls that would help stabilize the chaos clouding the market surrounding its currency. The capital rules restricted the conversion of funds into foreign currencies, making it impossible to get money out of Iceland. Ultimately, Iceland's capital controls prevented about $7 billion worth of Icelandic Krona from leaving the country. As a result, the controls provided the necessary restrictions thwarting the Icelandic Krona from spinning into uncontrollable inflation.
In order to finance their incredible deficits and reform the domestic banks, Iceland received a $5.1Bn debt package comprised of $2.1bn from the IMF and $3bn from a group of Nordic countries. These borrowings helped Iceland get back on its feet in the short-term and provided a foundation to slowly rebuild and stabilize its economy in the long-term. This loan, in additional to the capital controls, and the Icelandic government’s decision to apply for membership into the European Union, proved the correct remedy to heal the nation, and replace the “artificial prosperity” found during the economic bubble with stable growth and conservative capital measures.
From an ethical standpoint, Iceland was intent on punishing the individuals accountable for destroying the economy, and went to great lengths to make sure they accomplished this mission. In the end, a number of high-level banking executives, accountable businessmen and government workers were sentenced to time in jail. The actions of the Icelandic government sent a clear message to its citizens that they intended to hold the individuals responsible for this mess accountable for their actions.
Ultimately, quick thinking, financial intervention and accountability, began to replace the greed and negligence that got Iceland into trouble in the first place. Iceland’s President Olafur Ragnar Grimmson helped embody the recovery by stating, “We were wise enough not to follow the traditional prevailing orthodoxies of the Western financial world in the last 30 years. We introduced currency controls, we let the banks fail, we provided support for the poor, and we didn’t introduce austerity measures like you’re seeing in Europe.”
Additionally, the country’s decision to allow its major banks to fail has been widely applauded by the international community. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net, said internationally renowned economist, Paul Krugman. Iceland, he found, had demonstrated the case for letting creditors of private banks gone wild, eat the losses.
Chapter 3: The Current State of the Icelandic Economy
