The global financial crisis in short-term liquidity reached the shores of Iceland days after the collapse of the venerable Lehman Brothers. The island nation’s leading banks
collapsed under the weight of the crisis. Upon until this point the banks were solvent and sufficiently capitalized. The banks did not have any of the toxic securities that constituted a large part of Lehman Brothers’ portfolio. The Gilitnir hf. and Landsbanki Islands hf. banks went under first. When foreign short-run credit lines ceased to exist the banks sought support form the Central Bank of Iceland (CB), which refused to intervene. The governor of the CB, David Oddsson who had served as P.M. for 13 years before moving to the head of the C.B. in 2005, refused to lend assistance. There is little doubt that his decision not to intervene was based on political and not economic considerations. In Iceland there has never been a clear line between the banking industry and politics. At this point margin calls began raining down from European lenders. Mr. Oddsson’s public remarks lead to Britain seizing the assets of the subsidiaries of Kauphing Bank hf., which caused its collapse. The country’s currency, the Korna, took a terrible beating. As the crisis worsened the Korna traded at all time lows and ceased to be traded domestically. As a result of bad politics, fear of navigating unknown territory and general political brinkmanship Iceland became the first known causality of the financial crisis. Iceland’s economic Achilles heel was that its debt to GNP ratio was excessively out of high.
This drastic turn of events irreparably damaged the confidence and physic of most Icelanders. Just a few months early the United Nations had designated Iceland as one of the best countries to live in. Many considered Icelandic society a model worth emulating.
It can be argued that there were many errors in policy and practice that led to Iceland’s 2008 economic problems. There is no dispute that other nations whose economies imploded shortly afterwards also employed some of the same policies and practices that Iceland practiced. In my opinion Icelandic economic and financial leaders were no more incompetent than those of the U.S. ,EZ, and other developed nations. For many years the world markets were recklessly driven by excessive and risky credit practices. The American housing market was fueled by this out of control credit risk taking. Where is the American housing market today?
Iceland’s financial crisis caused unemployment to jump. Businesses closed and others sought protection in bankruptcy. Protesters marched through the streets in a display of anger at and frustration with their leaders. Inflation rose precipitously while the national currency lost almost of its pre-crisis value. In December 2008 the Haarde government secured a loan of $2.1 billion from the IMF. $827 million of the loan was immediately available to Iceland. It was agreed that the rest of the loan would be paid out in 8 equal installments, subject to quarterly review.
The Haarde coalition government fell in January 2009. In the beginning of February 2009 Social Democrat Johann Siguroardottir formed a new government and became Iceland’s first woman P.M. Siguroardottir promised that her government would be based on new social values. The new P.M. is a veteran politician with many years of civil service. It is fair to characterize Iceland’s present government as being politically left of centre. The citizens of Iceland exercised their democratic rights to force a charge of government. They also rejected in March 2010 the repayment (plan) of $5 billion lost in the collapse by depositors from Britain and the Netherlands. P.M. Siguroardottir has promised to continue negotiations with both countries in a hope of negotiating more favorable terms that Icelanders will approve. It does not seem that Icelanders are in the mood to repay any of the money. They seem to believe that they should not bear the responsibility for the elected leaders’ errors. It is not possible for Icelanders to draw a distinction between themselves as citizens and their elected leaders.