The Financial Crisis of Iceland By: Austin Kittelson, Lillian Mojica, Miranda Jones, and Rossetti Celis
Background • Population: 317,351 (July 2014 est.) • Government: Constitutional Republic • Unicameral parliament called the Althingi • Chief of State: President OlafurRagnarGrimsson • Head of Government is the Prime Minister • GeirHaarde (2007) SigmundurDavíðGunnlaugsson (current) • Prior to the 2008 crisis, Iceland had achieved high growth, low unemployment, and a remarkably even distribution of income.
Economy • Capitalist Structure • Free market principles • Welfare system • Generous housing subsidies • Depends heavily on the fishing industry and geothermal power • Growth came from a boom in domestic demand and then a rapid expansion in the financial sector.
Central Bank of Iceland • Independent institution • established 1961 by the parliament • In charge of monetary policy with a main objective of price stability • Central Bank maintains external reserves and promoting efficient and safe financial systems • payment systems domestically and with foreign countries. responsible for issuing notes and coin.
Central Bank of Iceland (Cont.) • Was suppose to follow the lead of the central government • 2001 foreign exchange rate policy was introduced • After that the Central Banks was empowered to adopt an inflation target and manage monetary policy • This would help with price stability independent of the central government
Nature of the Crisis • Considered the largest experienced collapse by a country in economic history • Collapse of the financial system • 89B fiscal surplus in 2007 was replaced by a 216B deficit in 2008 • Unemployment increased from 1.6% in 2008 to 8.0% in 2009
Nature of the Crisis – Exchange rates • Increased foreign exchange volatility • Why? Currency tied to high financing requirements • Risk appetite from speculative currency • How? Raises the cost hedging the risk and transaction costs • large asymmetric exchange rate pass-through to general price levels • Greater impact on Iceland than a larger country
Nature of the Crisis - Causes • Deregulation in 2001 • Aggressive expansion upgraded AAA ratings • Bubble in financial sector • Heavy borrowing in foreign currencies • €50 billion in debt > €8 billion GDP • Icesave – depositor’s insurance failure • Expectations and speculation and
Priorities • Stabilizing the krona • Implementing capital controls • Reducing deficit • Contain inflation • Address household debt (mortgage graph) • Restructure financial sector • Diversify the economy
Resolution • Emergency legislation to seize control of the three largest banks • Stand-By-Arrangement with the International Monetary Fund • Fiscal consolidation • Resurrect viable, but downsized, domestic banking system • Enactment of capital controls • Apply for EU membership in 2009
Resolution • Government chose not to rescue the banking system • Aimed for sale of foreign assets • Ensured that losses were not absorbed by the public sector • Implemented private debt forgiveness and defended welfare payments • Reforms in fiscal and monetary policy • Budget cuts and creation of task forces
Resources • http://www.allcountries.org/wfb2007/iceland/iceland_introduction.html • http://www.indexmundi.com/iceland/economy_overview.html • http://www.bis.org/review/r130312d.pdf • http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=77025ed8-cb38-11e1-b050-001ec9ed78b2