Iceland

Topics: Bank, Central bank, Inflation Pages: 7 (4838 words) Published: October 22, 2014

Ryan Garner
Shelia Waddell
Finance
7 September 2014
Executive Summary
Iceland’s financial misfortune became clear in the fall of 2008 when then global credit market froze. At this time Iceland’s top three banks owed nine times the nation’s total Gross Domestic Product finding themselves abruptly unable to refinance even with new loans. Therefore without being able to back its banks as a lender of last resort the economy of Iceland suffered from the global banking crisis with nationwide bankruptcy inevitable. The major question brought by the Financial Crisis of 2008 was whether banks were just too large to fail? Iceland’s three largest banks did just that in October 2008. Feeling the influence from the global financial crisis, Glitnir, Landsbanki, and Kaupthing, Iceland’s three largest commercial banks went into bankruptcy and later forced the Government to seek a bailout from the International Monetary Fund (IMF). In October 2008, these three banks represented 85% of Iceland’s total assets of all the country’s banks. This involved overseas assets which in the long run became too big for the Central Bank of Iceland to rescue ultimately leading the entire nation to being brought down with the banks forcing the government to declare bankruptcy. After, the citizens of Iceland blamed their government of handling the situation wrong, the entire government collapsed in January of 2009. Iceland’s Finical Crisis of 2008:

Financial crises are not something new to the world, with the economy being effected by crises from time to time and the notion that the most recent one probably will not be the last one to hit the world. Starting in the United States in 2007, the most recent financial crisis developed within the housing market. While in 2006 houses prices peaked they dropped more than 30% in 2007 (Riksrevisionen). It spread across the world and severely damaged the economies of many other countries, reaching its highest level in 2008 when Lehman Brothers and other prominent financial institutions filed for bankruptcy. Actions which eventually turned into a global finical crisis that brought a loss of confidence within the whole financial system. Leading the world to face the worst economic performance since World War II. The major question left by the Financial Crisis of 2008 was whether banks were just too big to fail? Iceland’s banks did just that in October 2008 from the sway of the global financial crisis when its three largest commercial banks, specifically the Glitnir, Landsbanki, and Kaupthing were placed into bankruptcy by the government and lastly forced to seek a bailout from the International Monetary Fund. In November of 2007, Iceland was said to be the best place to live in the world by the United Nations. This was underscored by the fact that it went from being one of Europe’s poorest countries to having one of most successful economies in the West (Pierce). However, this period of prosperity did not last long in Iceland. In October 2008, Iceland suffered when the countries three major banks all collapsed within the same week triggered by the bankruptcy of the Lehman Brothers. This was due to the global financial crisis, a recession seemed to be deeper in Iceland than it hit in other countries throughout Europe. Iceland has the smallest economy among the Organization for Economic Development (OECD). According to the OECD Economic Survey on Iceland: “It appears that the Icelandic financial supervisory authorities had become overwhelmed by the complexity of the national banking system, and had been unable to stop their expansion. By the end, the size of the banks far exceeded the limited capacity of the Icelandic authorities to rescue them” (OECD). The financial crisis in Iceland is to be considered to be the hardest ever effected by an OECD nation (Fantauzzo). As stated earlier the downfall of Lehman Brothers in September of 2008 caused Iceland to enter a drastic economic...


Cited: Fantauzzo, Shaun. “On Iceland’s Financial Crisis.” University of Windsor. 2012.
Ivester, Eric J., Bradley G
OECD (2009). “OECD Economic Survey: Iceland” OECD Volume 2009/16. 29 August 2014. Web.
Pierce, Andrew
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