Iceland: Rising Above the Financial Crisis

The following are informational links regarding Iceland's collapse and recovery from the financial crisis. The majority is a re-posting of information given on the  Crisis Watch Network - "A historic online library focused on researching, analyzing and summarizing the global turning points, commonly known as crises. Our goal is to provide quality information about any critical event which shaped the society or changed human perspective on important issues of the modern world."

The financial crash in Iceland in 6 minutes according to ABC´s 20/20. 

Iceland economic crisis documentary 

The man who changed Iceland - the message for Greece

"The man who forced the government of Iceland to resign and kicked out the IMF representatives from his country, Hordur Torfarson, is now teaching meta-modern democracy throughout Europe.The rest of the world would benefit from following the example set by Iceland: Arresting the corrupt bankers who are responsible for the current economic turmoil."

Iceland financial crisis introduction

During the course of history, the Icelandic population relied mostly on fishing industry and agricultural production as their main resources. The volcanically and geologically active European Island country in the North Atlantic Ocean, placed on the Mid-Atlantic Ridge has a population of about 320,000 and a total area of 103,000 km2 (40,000 sq mi), two-thirds of which are located in capital city Reykjavík and the surrounding area.

Iceland's economy was transformed after World War II with the industrialization of the fisheries. In 1994, Iceland joined European Economic Area and diversified national economy into both economic and financial services industry.Before the global financial crisis Iceland was at the very top among the 177 countries in UN statistics which compared per-capita income, level of education, health care and life expectancy.

Averaging at 80.55 years for males, life expectancy was third highest in the world. Iceland provided a free health and education system, where inhabitants were encouraged to learn and invest in new technologies.

The result was also visible in the statistics, since the country was ranking high in the number of books bought, people owned most mobile phones per head in the world. At one time Iceland had the highest proportion of working women on the planet. A small country was believed to be a modern economic miracle.

The economic growth was based on the extremely fast expansion of the national banking system. Not many people could even imagine that the same system would burden the country with liabilities in excess of $100 billion. The government sought ways to avert financial meltdown but the inevitable happened. In 2003, Iceland's three biggest banks had assets of only a few billion dollars, around 100% of national gross domestic product.In the following three and a half years they grew to over $140 billion and became several times greater than national GDP.

The percentage of growth was of the charts. It was probably the most rapid expansion of a banking system in the human history. The banks were easily lending Icelanders money to buy stocks and real estate, hence the value of Icelandic stocks and real estate went through the roof. From 2003 to 2007, the Icelandic stock market multiplied by nine times while Reykjavík real-estate prices tripled.

The Icesave brand issue

Icesave was an online savings account brand owned and operated by the Landsbanki bank from 2006–2008 that offered savings accounts. The base of operations was in two countries, United Kingdom and the Netherlands. Under marketing slogans such as "clear difference" or "the transparent savings bank" it offered personal savings accounts to interested investors. They attracted over 300,000 customers in the United Kingdom, with deposits of more than €5 billion and 125,000 customers who deposited €1.7 billion in the Netherlands.

When the banks collapsed in 2008, a diplomatic dispute centred on the retail creditors of the brand arose between the countries involved. As a result of the catastrophic collapse more than 400,000 depositors with Icesave accounts were unable to access their money for two to three months, while waiting for payout from the Deposit Guarantee Schemes in their home countries. United Kingdom government decided to use of the anti-terrorism legislation against Iceland to freeze the remaining assets of the failed banks abroad, which raised multiple questions and brought negative tensions between the two countries.

Iceland financial crisis summary

When the conditions froze the global credit market Iceland's economic adversity became clear. In the autumn of 2008 Icelandic banks owed six times the country's total Gross Domestic Product which they were suddenly unable to refinance through new loans. The national economy suffered from the global banking conditions and a bankruptcy seemed a reality.

It all began as the Icelandic government took a 75% stake of the country's third-largest bank, Glitnir, after it faced significant funding problems. Icelandic interest rates skyrocketed to 15.5% while national currency krona freefall on the international currency markets was surpassed only by the Zimbabwean currency.

In October trading on the OMX Nordic Exchange Iceland of the six biggest financial shares was suspended. The government offered an unlimited guarantee for all savers and Iceland's parliament, the Althing, passed emergency legislation enabling the government intervention in countries financial system.

When the bank Glitnir was nationalized, foreign currency was running out quickly because international banks refused to lend more money to the national economy. The government soon took control of the country's second largest banks, Landsbanki. The British government brought the decision to call upon anti-terrorism legislation as a means of freezing Kaupthing assets in the United Kingdom. Iceland government response was harsh criticism and a lawsuit preparation, while in order to prevent total collapse Kaupthing, the biggest bank on Iceland, was nationalized as well.

As the events unfolded, Iceland's central bank raised key interest rate to 18% from 12% in late October. One month later the International Monetary Fund approved a $2.1 billion loan for Iceland, making it the first Western European nation which got an IMF loan since the United Kingdom in 1976. Meanwhile the annual rate of inflation reached a record high of 17.1%.

Protests against the government

The financial crisis in the country ignited protests, which have been referred as the Kitchenware Revolution because the majority of demonstrators banged pots and honked horns in order to disrupt the government action. Protesters in Iceland's capital Reykjavik have clashed with police during a demonstration over the handling of the financial crisis. Several hundred protesters gathered outside the city's main police station to demand the release of a man jailed in a previous demonstration. The man was later freed, after a fine he owed for a previous demonstration was paid.

The protests intensified on 20 January 2009 when thousands of people showed up to protest at the parliament in Reykjavik. Protesters were calling for the resignation of government officials, and for new elections to be held. The protests stopped for the most part with the resignation of the old right-wing government led by Prime Minister Haarde. New Prime Minister Johanna Sigurdardottir set out a new government's plan to rescue Iceland from complete financial ruin.

The Icesave referendum

The new government first issue was the repayment of the debts and negotiation of terms with Britain and the Netherlands as the largest interested parties. The deal that required each Icelander to pay around $135 a month for eight years, the equivalent of a quarter of an average four-member family's salary, was put on the national referendum after a strong public pressure.

The majority of voters viewed the deal as unfair result of their own government's failure to supervise and regulate the recklessness of a handful of bank executives. More than 90 percent of voters had rejected a $5.3 billion plan to pay off Britain and the Netherlands for debts created by the collapse of an Icelandic Internet bank, Icesave.

Iceland financial crisis aftermath

The dramatic change in Iceland happened in the 1990s with the privatization of the banks and the founding of the national Stock Exchange. The free market reforms gave a chance for a new generation of young businessmen, many of which were educated on the banking practices in the United States.

They shared a goal that their country shouldn't have to rely on fishing industry as their main resource and aspired to change the international perception of Iceland as a nation of farmers and fishermen. In order to increase the financial yield of their banks, many went overseas to seek their fortune and find new prospects.

Iceland has been considered one of the poorest countries in Europe for decades. New economy structure raised the average family's wealth grew by 45% in five years. GDP growth accelerated at a rate between four to six per cent a year and the newfound wealth was mostly invested in property.

Expanding banking system offered vast amounts of loans to the public and created an unsustainable boom in home prices in process. In the good times many loans were set up in foreign currency such as Japanese yen or Swiss francs, which resulted with doubled size and thousands of defaults after the krona value fell due to the financial crisis.

National default becomes a reality

Iceland has guaranteed all its savers deposits, but the guarantee wasn't extended to the hundreds of thousands of British savers who have invested money in their internet savings banks. When the government suspended all public service broadcasting, a measure reserved for volcano warnings, fears of the crisis were additionally elevated. Office workers hurried home wondering if they'll still have jobs by the end of the week.

Car showrooms and dealerships were deserted much like estate agencies. Thousands of unsold houses on their books seemed like a nightmare. An unexpected spell of cold weather kept many people inside their homes, making the atmosphere in the numerous shops despite the discount sales quiet.

At the end of the second quarter 2008, Iceland's external debt was around €50 billion. More than 80% of the debt was held by the banking sector and the three largest banks. Compared with national gross domestic product of €8.5 billion in 2007, the difference is almost incredible. The global financial crisis had numerous consequences for the Icelandic economy. The national currency fell sharply in value, suspending foreign currency transactions for weeks.

The market capitalization of the Icelandic stock exchange dropped more than 90% at the peak of the crisis. A severe economic recession was obvious when the national gross domestic product dropped by 5.5% in real terms in the first six months of 2010. Inflation of consumer prices was running at 14%, while interest rates were raised to 15.5% to deal with the high inflation.

The economic recovery

Iceland managed to survive by taking over the domestic units of its banks and leaving the foreign creditors with losses of the bad investment decisions. An 80% slump in the krona against the euro offshore pushed the trade deficit into surplus within months.

Government spending cuts helped stabilize the budget. Iceland will most likely post a shortfall of 1.4% of gross domestic product next year after 2011's 2.7% deficit, according to the Organization for Economic Cooperation and Development. Iceland's transformation came at a high cost, since the government had no option but to allow the banking default after the financial industry grew more than 10 times the size of the economy.

Icelanders suffered an 18% slump in their disposable incomes in 2009, adjusting for inflation. The krona decline sent consumer price growth close to 20% and unemployment neared 10%, which had been considered huge in comparison with 1% before the crisis. Iceland finally recovered its investment-grade rating from Fitch in 2012, which praised the country for restoring macroeconomic stability after its 2008 banking and currency crisis. Fitch raised Iceland's credit rating to BBB-minus from BB-plus with a stable outlook.