Iceland Crisis

Background Information In three year period of 2008-2011 Iceland suffered one of the worst financial crisis in history. It Is bewildering how a country with population of only 320,000 could gather massive sums of money per capital, lose It all In such a short time period, and then manage an incredibly quick recovery since. Let’s start by shedding some light on the situation leading to the crash. Iceland has always been affiliated with nature and fishermen. Fishing was the most prevalent occupation in Iceland, and a major backbone of their economy for years.

Things turned direction in the ass following the liberalizing of Icelandic banks. Deregulation of banks added a whole new dimension to Icelandic economy and money was flowing more than ever. Glitter, Gapingly. And Landsman were Iceland’s three most notable commercial banks who were enjoying a great time. High savings interest rate offered by Icelandic banks attracted plenty of foreign investors . Fishermen slowly turned into financial advisers to manage the capital inflow from outside, particularly from Germany and the I-J and create more wealth for Icelandic economy in the long-term.

As with every great financial crash, greed and carelessness played a part. Banks, having believed the hype and buzz, were careless handing out big mortgages to loads of under-qualified applicants on low interest and made under-thought Investments abroad, particularly in the US. Iceland’s banking sector was pride of the country which had transformed Iceland into one of the richest countries in Europe in a couple of decades. What Went Wrong The banks were accountable for themselves. There was no precise rules set for them.

They had to go out there and produce. Their capabilities was the most important hinging and all else was secondary. If the banks didn’t have to give ethical answers to the government, then they could be capable of many unthinkable things, especially in the banking world of the ass’s and early asses. The prime minister of Iceland in that period (1991-2004), DavidГ¶ Dodson, was no fan of government owned banks in Iceland, so none of the banks In Iceland had to answer directly to governmental authority. Reliant on external financing.

They used mass wholesale funding to finance their way into the local mortgage market and obtain foreign financial firms mostly in the UK and Scandinavia. The banks were following the international ambitions of a new generation of Icelandic entrepreneurs who set to form global empires in industries from retailing to food production to pharmaceuticals. By the end of 2006, the total assets of the three main banks were $150 billion, eight times the country’s GAPS. Low interest rate offered by Icelandic banks had allowed financing for rapid and pre- mature expansion of various companies in various industries perhaps beyond the nation’s capacity.

In half a decade, Icelandic banks experienced a mass transformation from being pretty much entirely domestic lenders to becoming major international financial intermediaries. The shift and growth was almost too good to be true. This is where things started to go south. As wholesale funding markets seized up (e. G. Lehmann Brothers’ bankruptcy in September 2008), Icelandic banks were shaken and started to collapse under a mountain of foreign debt. The Crash and Its Consequences On October 8th 2008, Suppurating was placed into administration. The government had to intervene. Iceland was on verge of national bankruptcy.

Foreign investors were seeking their money from Icelandic banks and threatened to sue. Everything was a sees. The Icelandic government nationalized Glinting. The control of Lambskin and Glinting were given to representatives of FM (Financial Supervisory Authority). Prime minister, Geri Heard, believed those actions taken by the government prevented the country from national bankruptcy. The impacts of the crash were severe on Icelandic economy, however. At end of second quarter of 2008, Iceland’s external debt rose to close to в?50 billions), more than 80% of which was held by the banking sector.

The national currency (Icelandic Akron) fell sharply in value. Foreign currency orientations were basically suspended for weeks. The Icelandic stock exchange fell by more than 90% and as a result Iceland officially bid hello to a period of economic recession. Recovery Icelandic economy continued to suffer for two years, but the signs since late 2010 have been very positive. Islanders have taken the right steps and have shown urgency in their efforts to get their economy back on track and it has paid dividends. The government’s priority was to minimize the impact of financial crisis on the country.

They placed Iceland ahead of foreign investors. As a result, an emergency isolation was passed, allowing the Financial Supervisory Authority to take over the domestic operations of Iceland’s three major banks. The state intervened by protecting domestic creditors and depositors, not allowing the taxpayers to take the burden of a bailouts. Instead of bailing out the banks (e. G. I-J, Ireland, etc), Iceland opted for defaults of the banks. This fumed foreign depositors, but Icelandic quick recovery was devaluation of Icelandic currency and implementing measures of capital control. The Corona’s value halved making Icelandic exports (e. . Fish) and ours cheaper and more attractive to foreigners. These two sectors flourished as a result and played a significant role in growing the Icelandic economy again. Iceland have worked hard in restoring macroeconomic stability and rebuilding the financial sector. They put the money they received from MIFF ($10 Billion) in use to a 3-year restructuring programmer. The results are impressive as since then, the GAP has grown 2. 5% in two consecutive years. Now that the Icelandic economy is doing better, the government is making settlements to gradually pay the foreign investors back.

The unemployment rates have fallen in half and those accountable for the crash, even the former prime minister, were persecuted at the courts. Iceland did the opposite of Europe and the US to the situation and it has proved effective. Of course, it’s a different situation managing 320,000 people as opposed to millions. It’s not all rosy yet, however, as other economic sectors, notably private and household must catch up to fishing and tourism sector to take the momentum to next level and fully take Iceland out of what could have been a fatal blow. Conclusion 2008 Financial crash shook the world.

The impact in Iceland was more incredible than most places as it nearly brought depression to the country. Deregulated Icelandic banks bit more than they could chew and ambition turned into greed and gamble. Series of factors gave hands to each other and took Iceland on verge of national bankruptcy. What happened after, is perhaps a lesson for all other nations who are struggling with their economies. Icelandic government prioritize its own nation above anyone else, and allowed its banks to default, protecting its people. They have since taken the right measures to increase spending and business in the entry.