Iceland Finacial Crisis

Topics: Great Depression, Central bank, Recession Pages: 9 (2909 words) Published: April 30, 2013
Cover page:

American College Dublin
Unit name: Contemporary Global Challenges IB408
Teacher’s name: Enda Murphy
Group members: Anas Kadad (2063700)

Assignment question:
The causes and impacts of the crisis in Iceland, and the response of that country.

Table of Contents:
Cover page:1
Introduction: (Background about the Country):3
Iceland Economy:3
What causes the financial crisis in Iceland:4
Conclusion over the Icelandic financial crisis:4
Impacts of the financial crisis in Iceland:5
Responses to the Financial Crisis in Iceland:6
The Current Situation in Iceland:7
Future Developments in Iceland:8

Introduction: (Background about the Country):

Iceland is a northern European country between Greenland Sea and the North Atlantic Ocean, to the North West of the UK. Iceland applied to join the European Union in July 2009 and negotiations still continues to assess the application, despite of Iceland being part of the European Free trade association and its big involvement in the European Market it’s still not a formal member of the EU. The geographic space of Iceland is 100.250 squared kilo meters and a population of 319.000 according to the 2011 statistics of World Bank.

Iceland Economy:
Iceland’s economy is a Scandinavian- type economy known as capitalistic with low unemployment rates and comprehensive welfare system. With the none existence of natural resources such as oil and natural gas, Iceland income mainly depends on exporting fish and fish products that fulfils 70% of export earning while the remaining 30% goes for hydrothermal and geothermal power. What causes the financial crisis in Iceland:

According to the World Bank the present gross domestic product of Iceland is 16.4 billion US dollars at current prices of the dollar however like many other European countries, Iceland suffered from a deep financial crisis between the year of 2008 and 2011 that caused a major political and economical crisis in the country. In early October 2008, Iceland nationalized its largest three banks, Kaupthing Bank, Landsbanki and Glitner Bank that were not paying 62 billion dollars towards the country’s foreign debts. As a result of the crisis banks has been regulated causing foreign investors to flee from Iceland and bringing down the value of its currency to 50% in one week. When the global economic crisis of 2008 shut down bank lending the three banks started to collapse which later on brought down the country’s economy. The three banks ran into debt of 50 billion Euros comparing to Iceland GDP of 1.9 billion euro with a huge mismatch. The fact that house hold debts were a big part of the problem resulted the prices of essential commodities to rise, this started inflation where the more number of a currency, the less value it become. The government further on was assigned to issue loans on uncovered bonds to the banks. The central bank of Iceland tried to cover the losses by charging a high interest rate of 16% which was never heard of in Iceland and the history of Europe where the highest interest rate was 5%. Most of the banks in Iceland refused to make new loans even the three largest banks that I have talked about before found it difficult to roll over their loans in the interbank market when their creditors asked them for repayment. In such a difficult scenario, banks approached the largest bank in Iceland, the Central bank of Iceland that regrettably refused to take ownership or responsibility of the problem while the government didn’t guarantee repayments. It is known to investors that the central bank of Iceland is such a bigger institute than the government of Iceland on its own, all of this resulted of a quick free fall for banks as credit was not ready (not available) for banks and not at least of all to pay creditors. Conclusion over the Icelandic financial crisis:

The Icelandic financial crisis was basically a systematic fault involved only...
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