The 2008-2011 Icelandic Financial Crisis

1. The contest

Until recently Iceland had low unemployment and government debt. But in the years 2000, its government put in place a vast deregulation policy. The country’s three largest banks were privatized.

As a result, in a 5 year period, these banks which had never operated outside of the country, borrowed 120 billion dollars, which represents 10 times the size of Iceland’s economy. When the banks collapsed at the end of 2008, unemployment tripled in 6 months and people lost their savings. The bank losses represent 100 billion dollars, whereas Iceland’s GDP, only 13 billion. All three of the country’s major privately owned banks collapsed, and Iceland’s stock exchange, the OMX Iceland 15, plummeted. Pension funds were slashed, and businesses were wiped out.

What happened shocked the Icelandic public; they couldn’t understand how they got themselves in this situation. Facing the anger of the people, the government had to resign and new elections were held. The conservative party which was traditionally dominant got only 23.7% of votes and the left wing allied with the green party won the elections. The former PM was condemned for failing to manage the crisis.

The consequences were that tax payers found themselves having to pay for the bank losses and not only in Iceland. Indeed, the banks borrowed money from Great Britain and Holland, so Iceland now owes money to both these countries: 400 000 British and Dutch investors lost 4 billion Euros. However, to the referendum that was held twice by the new government, people voted “no”; they will not pay for the banks’ losses. Instead, bankers were prosecuted and the banks nationalized. This however upsets British and Dutch savers who can’t get their money back.

2. The Stakes

The debt is now a great source of tension between Iceland, Holland and Great Britain. From Iceland’s point of view, there’s no reason for the whole people to suffer because of greedy bankers and incompetent politicians. People don’t want to pay for a debt they did not ask for in the first place.

So the two countries, along with other European nations have decided to ask the IMF to put pressure on Iceland and they also intend to take legal action. Finance ministers are thinking of resolving this conflict with the help of the European Free Trade Association. And since the organization recognized Iceland’s debt to Holland in 2010, there’s a chance the country could be condemned to pay what it owes. But as we have seen until now, Iceland refuses to pay and can serve as an example for other countries such as Greece, Spain or Cyprus.

One of the major stakes was the entry of Iceland in the European Union, after a referendum which let choose the citizens between surrendering the sovereignty of Iceland in monetary policy by unilaterally adopting the currency of another country, or becoming a member of the EU, the last option won.

3. The Actors

Iceland is the first actor, at the end of the second quarter 2008, Iceland's external debt was 9.553 trillion Icelandic krónur (€50 billion), more than 80% of which was held by the banking sector. This value compares with Iceland's 2007 gross domestic product of 1.293 trillion krónur (€8.5 billion). But the governement responder very quickly to the crisis, nationalizing the three most important banks in a short period.

Another actor is Europe, on 17 July 2009, lawmakers voted 33–28 (with two abstentions) to approve a government plan for Iceland to apply for full European Union membership. Although Iceland already had a free trade arrangement with the EU, it had always rejected full membership due to concerns that its independence could be compromised. However, Prime Minister Jóhanna Sigurðardóttir, who was elected in April, had promised to bring Iceland into the EU to help stabilize its economy. EU enlargement Commissioner Olli Rehn expressed support for Iceland's membership, stating that as "a country with deep democratic traditions", Iceland will be welcome in the EU's expansion plans.

UK and Holland are important actors: From Great Britain and Holland’s point of view, Iceland does not live up to its international responsibilities and British and Dutch taxpayers also have a right to ask for their money back. Moreover the UK and the Netherlands say the country still owes them €4 billion, and the rejection of paying back the money, caused a rift with the two EU countries.

4. The Actions

During the worst of Iceland’s banking crisis in 2008 enthusiasm for the European Union and for abandoning the krona for the euro were high. The euro crisis has shaken confidence in the bloc as an economic safe haven, and polls show that the euroskeptic, conservative Independence Party and its probable coalition partner, the liberal Progressive Party, have the best chance in April of forming a governing coalition. The center-left governing

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