Iceland financial crisis aftermath

The dramatic change in Iceland happened in the 1990s with the privatization of the banks and the founding of the national Stock Exchange. The free market reforms gave a chance for a new generation of young businessmen, many of which were educated on the banking practices in the United States.

They shared a goal that their country shouldn't have to rely on fishing industry as their main resource and aspired to change the international perception of Iceland as a nation of farmers and fishermen. In order to increase the financial yield of their banks, many went overseas to seek their fortune and find new prospects.

Iceland has been considered one of the poorest countries in Europe for decades. New economy structure raised the average family's wealth grew by 45% in five years. GDP growth accelerated at a rate between four to six per cent a year and the newfound wealth was mostly invested in property.

Expanding banking system offered vast amounts of loans to the public and created an unsustainable boom in home prices in process. In the good times many loans were set up in foreign currency such as Japanese yen or Swiss francs, which resulted with doubled size and thousands of defaults after the krona value fell due to the financial crisis.

National default becomes a reality
Iceland has guaranteed all its savers deposits, but the guarantee wasn't extended to the hundreds of thousands of British savers who have invested money in their internet savings banks. When the government suspended all public service broadcasting, a measure reserved for volcano warnings, fears of the crisis were additionally elevated. Office workers hurried home wondering if they'll still have jobs by the end of the week.

Car showrooms and dealerships were deserted much like estate agencies. Thousands of unsold houses on their books seemed like a nightmare. An unexpected spell of cold weather kept many people inside their homes, making the atmosphere in the numerous shops despite the discount sales quiet.

At the end of the second quarter 2008, Iceland's external debt was around €50 billion. More than 80% of the debt was held by the banking sector and the three largest banks. Compared with national gross domestic product of €8.5 billion in 2007, the difference is almost incredible. The global financial crisis had numerous consequences for the Icelandic economy. The national currency fell sharply in value, suspending foreign currency transactions for weeks.

The market capitalization of the Icelandic stock exchange dropped more than 90% at the peak of the crisis. A severe economic recession was obvious when the national gross domestic product dropped by 5.5% in real terms in the first six months of 2010. Inflation of consumer prices was running at 14%, while interest rates were raised to 15.5% to deal with the high inflation.

The economic recovery
Iceland managed to survive by taking over the domestic units of its banks and leaving the foreign creditors with losses of the bad investment decisions. An 80% slump in the krona against the euro offshore pushed the trade deficit into surplus within months.

Government spending cuts helped stabilize the budget. Iceland will most likely post a shortfall of 1.4% of gross domestic product next year after 2011's 2.7% deficit, according to the Organization for Economic Cooperation and Development. Iceland's transformation came at a high cost, since the government had no option but to allow the banking default after the financial industry grew more than 10 times the size of the economy.

Icelanders suffered an 18% slump in their disposable incomes in 2009, adjusting for inflation. The krona decline sent consumer price growth close to 20% and unemployment neared 10%, which had been considered huge in comparison with 1% before the crisis. Iceland finally recovered its investment-grade rating from Fitch in 2012, which praised the country for restoring macroeconomic stability after its 2008 banking and currency crisis. Fitch raised Iceland's credit rating to BBB-minus from BB-plus with a stable outlook.

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