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Iceland’s Rock Bottom Approach to Debt Crisis: Let the Banks Fail

2008 was a year of financial disaster and near government collapse. The crisis has been deemed by economists as the worst financial crisis since the Great Depression of 1930s. But in the worldwide turmoil, the country that got hit the hardest is undoubtably Iceland. With so many countries sticking with the “Too big to fail” mentality, Iceland took a different approach. Take a look at this video to learn about Iceland’s handling of the crisis and how it’s economy has turned out.


Video Transcript

At the end of 2008, Iceland found itself in financial turmoil – its banks owed nearly six times the entire country’s gross domestic product (GDP).

“The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy.” (Comparatively, U.S. debt in 2008 accounted for less than two times GDP. And we thought we had it bad.)

However, unlike the US, instead of avoiding default, Iceland embraced it.

“The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that would have made Iceland’s citizens responsible for its bankers’ debts.” As Grimsson said: “We were told that if we refused the international community’s conditions, we would become the Cuba of the North. But if we had accepted, we would have become the Haiti of the North.”

Domestic deposits and loans were transferred into the new nationalized banks while foreign counterparts were left to default. The government allowed the currency to devalue and cut back on spending. The result? Inflation soared to 75%. Around the country, it seemed as if the economy had collapsed.

But in 2010, it recorded growth for the first time in two years. Today, the worst of its recession is over and its unorthodox approach to economic recovery: letting the banks fail, has the international community spinning.

Nobel prize-winning economist Paul Krugman calls this “bankrupting yourself to recovery.” The lesson, according to him: “…if you’re going to have a crisis, it’s better to have a really, really bad one.”



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