In 2007, Iceland has marked a high estimate of 35,000-dollar-GDP (Gross Domestic Product) per capita. Hence, Iceland was known as one of the wealthiest nations around the world. Yet its economic crisis from 2010 to 2012 shows how a wealthy country could economically implode. What is more surprising is that Iceland has come up with a solution that no other country could ever find in history.

Iceland is relatively highly dependent on overseas trade when considering the fact that its export is 36 percent of the total GDP compared to 31 percent of its import. Iceland began to actively accrue financial wealth by entering the European Economic Association (EEA) in 1993. The country, however, suffered from massive destruction of the financial industry and its bubble economy in 2012. Once thought as the “dream land”, Iceland has put its economy into a nightmare.

Actually, Iceland’s economy was not too bad before the crisis. Geographically, Iceland was a loner because it was an island whose main source of industry was fishing until the early 20th century. Then, opportunities to trade with nearby and other countries around the world, made Iceland achieve economic prosperity. Moreover, Iceland’s industry grafted together with Information Technology (IT), propelled itself to its new heights.

   
▲ The Cament Prime Minister Johanna.

Prospering Iceland

From 1991, Iceland started to alleviate the foreign currency regulation, and reinforced its government to encourage the investment of foreign industry. As well as increasing the rate of interest, Iceland began to collect investment funds that were seeking a high rate of interest. Iceland undertook industries of nearby countries and reared domestic financial industry, ultimately leading to a strengthening of its economy. Kaupthing, the biggest bank of Iceland, increased its property more than twice since 1996.

The three biggest banks of Iceland have reported a total of approximately 12 trillion krona (the currency of Iceland) at the end of 2007. This is way over nine times of Iceland’s GDP. Such inflow of fortune has caused the price of real estate to increase, and led to the increase of citizens’ property. Commercial banks enlarged the scope of foreign investment by increased investment from other countries. In short, there was no break for Iceland’s economy.

The tragedy began right afterwards. From 2004, Iceland’s economy began to show its weakness. The value of krona has decreased rapidly, and in 2008, Iceland’s bank was struck with a drastic decrease in investment as foreign banks and industries stopped investing. Since about 79 percent of commercial bank accounts of Iceland are foreign currency, the lack of foreign funds was critical. This eventually degraded the trust level of Iceland’s banks, inevitably making it impossible for them to borrow money from abroad. The irreversible financial deprivation caused the three banks to be in a situation where it is impossible to repay foreign banks. Therefore, in 2010, these banks had no choice but to be under state ownership.

The reason why Iceland thrived in the early years of its economic boom is attributed to the extreme amount of foreign loan. In 2009, the benefactor became the main source of a pain. According to EEA, Iceland underwent a significant economic shrinking of about -6.6 percent. What is more is that Iceland also experienced 10 percent inflation, due to the increased price of import products as the domestic price devalued. The government introduced an emergency loan from the International Monetary Fund (IMF) and was actively encouraged to join the European Union (EU) and the European Economic and Monetary Union (EMU).

In 2009, the government officially declared that Iceland would pay Netherlands and England 35 hundred million euros for the next 15 years, and for about 5.5 percent rate of interest. This means that one Icelander has to pay 100 euros each year. This hefty judgment caused citizens to riot, asserting that paying the debt with tax is incomprehensible. In Reykjavik, the capital of Iceland, citizens and police officers collided, and this demonstration is known as the “Kitchenware Revolution” because many of the citizens stroke with their own kitchenware.

   
▲ The Former Prime Minister Geir Haarde.

Citizens’ discontent towards the government’s decision made the Prime Minister Geir Haarde, to excuse himself. The government, as a result, decided whether or not to pay after gathering a referendum in March 6, 2010. Conclusively, it appeared that 93 percent chose not to pay, and the government had to follow accordingly.

The main reason why citizens did not want to pay the debt through burdening their own tax was because most of the deposits of Iceland are from foreign customers. The deposits of foreign customers in Icelandic banks are generally guaranteed according to EU rules. The collapse of all three of the country’s privately-owned commercial banks has seemed to pass its responsibility to innocent citizens. This is why Icelanders rose to their feet and protested against the “unfair” duty they would have to face soon.

Too Big to Rescue

In early October, 2009, the Icelandic government reached the conclusion that the Icelandic banks were too big to rescue. The government could not guarantee the whole balance sheet of the banks, thus nationalization was no longer an option. The surprising fact is, that the pre-crisis total balance sheet of the three Icelandic banks was 110 billion euros, while the entire Icelandic GDP in 2007 was only 14.7 billion euros. When the world’s credit markets dried up, they were left unable to repay the loans.

England and the Netherlands threatened Iceland for not paying back, and other foreign banks also threatened Iceland that it would not beable to receive any support from IMF. Yet Icelanders never gave up their hope that one day the economy would rise again. Other countries, when faced with a similar challenge, have become the “slave” of bank to succor the bank by investing an extreme amount of official fortune. On the other hand, Iceland did not leave the bank on their own. Icelanders demanded to punish the responsible bankers and corporate executives and this led to multiple incarcerations of the wealthy. Even Haarde, was found guilty for not properly managing the economic crisis.

Iceland’s “Let It Fail” Policy

After Haarde was excused in the middle of such disgraceful circumstances, the new Prime Minister Johanna Sigurdardottir took over the office, coming up with a solution yet to be more startling than before. In February, 2009, the Icelandic government decided to forgive all debts that exceeded 110 percent of residence price. Instead of giving away taxes to foreign investors, Iceland decided to save its own citizens. As a result, an approximate of 25 percent of citizens got their exceeding debt cancelled. The cancelled debt comprised 13 percent of GDP. Such decision became the first step of Iceland’s second and most prospering economic boom. The cancellation of debt played its role as a stimulation of domestic demand.

Sigurdardottir also generated a welfare policy to secure the low-income class, which was far from an anticipated scenario of what other countries had done before. She instituted a policy to regulate capitals, and required the enhancement of corporate ethics. Also, rather than trying to save banks that are on the verge of bankruptcy, she decided to disengage unreliable or untrustworthy banks. All of the policy derived from one upright belief; Sigurdardottir did not tolerate Icelanders becoming financial “slaves” of other countries.

Just after Sigurdardottir revised the entire economic policies, positive changes started to shed light to the misty future of Iceland’s economy. Due to the abundance of geothermal heat as most of the land is comprised of cumulative volcanic activity, Iceland could receive ample energy support. Devalued krona rather acted as an opportunity for the domestic market to compete. Exporting became easy and import was minimized because of the drastic reduction in consumption due to depression. At the same time, Iceland, a land of all beauty, applied its tourism industry to the recovery of its economy.

The crucial factor that determined the ultimate rise of the economy was the cohesive culture of Icelanders. Iceland has a relatively low population, and an approximate of 94 percent of total population uses the Internet. The administration disclosed a referendum via the Internet, trying to listen to all opinions as possible. Citizens’ tenacity made them communicate with the government directly through Social Network Service (SNS).

When Iceland’s President Olafur Ragnar Grimmson was asked whether or not countries would be helped by Iceland’s “Let the banks fail” policy, his answer was “Why are the banks considered to be the holy churches of the modern economy? Why are private banks not like airlines and telecommunication companies and allowed to go bankrupt if they have been run in an irresponsible way? The theory that the public has to bail out banks is a theory thatthey allow bankers to enjoy their own profit, their success, and then let ordinary people bear their failure through taxes and austerity. People in enlightened democracies are not going to accept that in the long run.”

What is most important is Grimmson’s reply to the controversial question, “What is the reason for Iceland’s recovery?” He said, “We were wise enough not to follow the traditional prevailing orthodoxies of the Western financial world in the last 30 years. We introduced currency controls, we let the banks fail, we provided support for the poor, and we did not introduce austerity measures like others are seeing in Europe.”

Iceland, Victim of its Own Success

Since 2008, Iceland has created new jobs and encouraged its tourism and green energy sectors. Its vast land is secured with potential volcanic activity, where there are unimaginable amount of natural resources undisclosed. In fact, according to the Icelandic Tourism Board, the number of foreign visitors increased last year by 15.9 percent and tourism industry now accounts for 5.9 percent of GDP.

Professor Park Sung Ho (Yonsei University, International Relations) refused that the miracle of Iceland is all rosy. He says, “Iceland has generated ‘If it seems to fail, then let it fail’ policy. This is somewhat an extremely dangerous policy although it has succeeded. As a result of economic boom, now many Icelanders have to work in two or more jobs to sustain themselves and their families.” He also mentioned the increase in taxes by saying, “Iceland’s decision on letting the banks fail has resulted in a sudden spike in taxes.” Though unemployment is down for less than five percent of the population, Professor Park concludes, “Icelanders have very high standards of living and 60 to 70 hour work weeks are rather showing minimal results.” He then continues, “Yet, Iceland has passed the challenge. Through whatever scope you judge Iceland, it evaded a catastrophe. On the other hand, Iceland should not be hiding from the blame for allowing the banks to fail.”

The frozen island on the edge of the Arctic, Iceland’s economy is on its way back. Once fallen, it has now fully armored with its citizen’s trust and tenacity. Such a rare case of Iceland is something that few European countries can follow. Now, unemployment has fallen to just below five percent and confidence is returning. Perhaps its harsh weather and conditions of frozen tundra and misty dust covering the afternoon have made Icelanders tough, tenacious, diligent and very hard working.

   
▲ Photo of Kaupthing bank.Provided by washingtonpost.com.

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