Iceland
A brief background and sources for more information on the Republic of Iceland banking crisis of 2008.
An example of capital controls.
Population: ~320,000
GDP: ~US$12 billion
Currency: Icelandic króna (ISK)
Short history:
- Foreign investors had borrowed at very low interest in yen or Swiss francs and bought Icelandic króna to be deposited in high-interest accounts (around 0.5 million offshore depositors) plus government bonds in Iceland – the carry trade in action
- Collapse of Lehman Brothers saw investors reverse their trade – Iceland’s 3 major banks collapsed within a week
- The IMF supported programme entailed:
- Abandonment of attempt to peg krona at 131 ISK per EUR 8-Oct-2008
- Segmentation of banks into ‘good’ and ‘bad’ banks
- Bad banks, that included foreign assets and liabilities, run into bankruptcy
- Good banks taken over by the government’s Financial Supervisory Authority and capital injected
- IMF and Nordic banks provide US$5 billion to increase the foreign exchange reserves of the Iceland central bank
- Krona sales limited to EUR2150/month (for foreign travel) for population and other control on forex sales
- Impact of financial crisis and policy response:
- Losses to creditors, depositors and shareholders estimated at 7 times Iceland’s GDP, including 3 banks’ bankruptcies amounting to US$200 billion
- Fiscal injection into banks (~30% GDP) and central bank equivalent, in total around 64% of GDP
- Public debt climbed from 20% of GDP to 90%
- GDP dropped 10% over 2 years
- ISK fell from 70 ISK per EUR through earlier 2008, to 150 ISK initially and then 250 ISK when currency trading resumed
- Funds isolated in Iceland helped fund the public deficit and increase demand for local real estate
- Sales of Rolex watches increased (used as ‘currency’ when travelling abroad)
- Emigration of 5000 people in 2009
- Coalition government collapsed and central bank governor sacked Jan/Feb 2009
Sources:
Thorvaldur Gylfason, Professor of Economics, University of Iceland
Wikipedia
