The economic crash of 2008 affected the world in a recession that many economists said was paralleled only by the Great Depression. America, a superpower in the global economy, was not the only country to experience the turmoil of financial collapse. Many parts of Europe, in particular, and areas of Asia also suffered as banking systems buckled, emergency loan funds were depleted, and national debts skyrocketed. For many, government bailouts were the last resort.
The underlying causes of the meltdown are multiple, and include an assorted domino effect that, when the last domino fell, took down financial giants and destroyed the working lives of many. Even after 6 years, it’s been a long road to recovery, and although many countries are on the path to rebuild their shattered economies, the struggle is still very real. Housing costs still stabilizing, financial institutions have to be rebuilt, and the trust of big and small investors must be regained.
Like a phoenix from the ashes, Iceland – the tiny country in the North atlantic with little more than 300 000 people – has proved an optimistic success story in its recovery. Before the crash, Iceland grew to a global economic powerhouse, looking towards home mortgages instead of metal-making and other natural resources to grow their capital. It worked. Their stock market grew exponentially, their real estate value tripled, and the assets of their three largest banks grew to 10 times the national GDP (Gross Domestic Product).
But what must go up, must also come down. Iceland eventually lost everything. Their currency, the krona, last a full half of its value, the stock market buckled, and their banks were at a $85 -100 billion loss—roughly $300 000 for each citizen.
Without the help of a bailout from the European Union — the government body it has never been a member of, despite on-and-off negotiations — Iceland bounced back. Their cafes and gourmet restaurants are bustling, the unemployment rate has decreased, tourism is high, and the country has attracted investors. Despite the country still having their share of problems, specifically with their housing debt, this little nation has become an exemplar of national financial savvy in its anomalous steady rise back to prosperity. How did Iceland live through the crash but avoid the decline into despair suffered by countries like Greece and Ireland? Here’s how…
5. Letting the Banks Crash
When many countries’ banks were crumbling, their governments effectively bailed them out at a public cost. In other words, governments used taxpayer money to ensure that their banks wouldn’t go bust. Iceland employed a different strategy: they let the banks fail. Although a bailout wasn’t possible anyway due to the size of the banks in relation to the country’s economy, letting the banks go down had generally favourable effects. In doing so, Iceland effectively expanded their “social safety net,” according to Nobel Prize-winning economist Paul Krugman. Krugman also points out that “where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital,” therefore allowing the country more room and time to strategize.
While other countries were injecting billions into their failing institutions, Iceland let the capitalist process take its course, and let foreign creditors take the brunt the collapse instead of their people. According to Geir Haarde, by doing so, they “saved the country from going bankrupt.”
4. Government Control and Accountability
Some people say the government has no place in meddling with the banking systems of free markets. Iceland, however, marches to a different tune. Even until 2014, Iceland tightly regulated its banks, to the point of passing laws that make it illegal to pay out bonuses to executives that are more than 25% of base salaries.
It’s not only the financial structure the government is monitoring, it’s the people who run it. In December 2013, four bank executives of Kaupthing — Iceland’s largest bank — were sentenced to multi-year prison sentences for their roles in the crash. In addition, Iceland is fostering a new system of ethics and a whole new way of doing business in their successor banks post-crash. Iceland’s finance minister, Bjarni Benediktsson, characterized it as moving “from a situation where the one that took the biggest risk was the employee of the month, to a situation where the one that took the least risk became the employee of the month.” The government still has a heavy hand in their banks. But now, instead of executives who may be tainted by the old code of conduct, banks have new, cautious forerunners.
3. Capital Regulation
In November of 2008, in the wake of the economic crash, Iceland imposed capital controls on all its financial institutions. It also dismantled the old, failing banks, and erected new ones such as Arion. The capital controls prepared by the International Monetary Fund (IMF) applied to capital outflows, and they were called by the IMF an “essential feature of the monetary policy framework.” According to the IMF, the controls helped Iceland reduce inflation, stabilize the currency, and keep rising debt at bay.
In December 2013, the Central bank of Iceland was wary of lifting the controls. Although the economy had grown annually by about 3%, the controls did little to attract foreign investors who are vital to the country’s growth. However, the controls keep about $7 billion of Icelandic money in the country — much needed capital. Considering the massive implications of removing the controls and possibly sending inflation spiralling upward, Már Guðmundsson, an Icelandic economist, said that they “better do it right because of the magnitude of the issue.” There may come a time as the economy strengthens to lift the controls. Until then, they are integral to Iceland’s ongoing recovery.
2. Saying No to the Euro
The question of whether Iceland should join the European Union and therefore adapt the currency of the euro currency has long been debated. It first started to look like a reality in 2009, but negotiations dissolved completely by 2013. Iceland has never taken the leap of giving up their long-standing krona. If put to a referendum today to join the European Union, it’s predicted the majority of the nation would vote “No.” Greece and Ireland serve as cautionary tales of the risks of adopting a currency associated with stronger economies. Once more, the economist Krugman reiterates such warnings, stating that “Iceland has the krona to thank for its recovery,” and warning that adopting the euro may not necessarily protect Iceland’s economic balances. The krona was integral in the country’s debt relief. In 2010, the Supreme Court made it illegal for loans to be issued in foreign currencies (with currencies being converted to foreign countries, the debt nearly doubled). With this law, people were able to repay foreign debts in their native currency, making payments much easier to manage.
1. Thinking Outside the Box
Iceland has always had its own brand of historical, cultural and social identity. Their unique people, politics and business standards have often been their hallmark. It’s these characteristics that contributed greatly to their unparalleled recovery. At a 2007 conference in the country’s capital of Reykjavik, economist Paul Krugman noted the significance of Iceland’s ability to think outside of the box in their economic strategies. “Iceland zigged when all the conventional wisdom was that it should zag,” he said.
This thinking, combined with participating in the IMF-supported program worth $2.1 billion, paved the way to rebuilding their economy. The program’s three objectives were to stabilize the exchange rate, put public finances on a sustainable path, and restructure the financial system. Professor Joseph Stiglitz of Columbia University, another Nobel Prize-winning economist, agreed with Iceland’s policy standards, and their decision not to bail out their banks. “What Iceland did was right,” he said. “It would have been wrong to burden future generations with the mistakes of the financial system.”