Icelandic Financial Crisis of 2008
The Icelandic financial crisis of 2008 is one of the most significant economic events in modern European history, with repercussions that are still being felt today. In the brief but tumultuous span of four years, the economy of small island nation, deeply rooted in its fishing industry, had all but collapsed and was forced to resort to a $5.1 billions IMF bailout. Since then, the population has grappled with a deeply entrenched recession and a sharp currency devaluation, though recent figures have shown a positive economic rebound for the small island nation, which is nothing short of miraculous.
The story of the Icelandic financial crisis of 2008 began in March of 2008 when the banking sector, which was dominated by three banks, all with foreign holdings, began to wobble. There had been a mild economic downturn with oil prices remaining low for an extended period, but the truth was that even before the economic downturn, the banks had been taking extraordinary risks, leveraging their operations with large amounts of foreign debt. In spring of 2008, things began to spiral out of control as the global financial crisis hit full swing and the value of their foreign assets began to tank.
The Icelandic Central Bank, caving in to the demands of its foreign lenders, had to temporarily freeze all transactions, meaning that no money could be withdrawn from their own accounts and bank assets could not be exchanged. This move caused panic and had ripple effects throughout the entire country, as businesses virtually stopped functioning, stopped importing goods and services, and were unable to access credit. Soon enough the country ran out of money to pay its creditors and was on the verge of bankruptcy.
Realizing that the situation was beyond serious, the government was forced to ask for help from the International Monetary Fund (IMF). After much deliberation and protracted negotiations, the Icelandic government received a $5.1 billion bailout from the IMF. This influx of money was meant to be used to stabilize the financial system, preserve Iceland’s currency, and help the country recover from its plummeting economy.
The measures taken by the government were effective in stabilizing the economy as unemployment decreased and the banking system was stabilized. But the country still had to contend with the precipitous fall in its currency value, which meant that its citizens had to bear the brunt of the burden--inflation was sky high, wages were cut, and many households lost their savings. Although the economy has slowly been regaining strength, it has been a long road to recovery.
In light of this incident, the government has taken measures to ensure that a similar financial crisis does not occur in the future. Capital controls have been put into effect, limiting the amount of money that can be transferred in and out of the country. New rules for the banking system have also been instituted, with much stricter regulations on excess debt and capital reserves. New laws were implemented to ensure responsible lending and more responsible ownership of financial institutions.
Though much of the population was left reeling in the wake of the Icelandic financial crisis of 2008, the story of Iceland is a true testament to the resilience of its citizens. As of 2020, the country has managed to pull itself out of its slump and is currently enjoying relatively strong economic growth. Though the recovery has been slow, resources are being allocated more efficiently, and the country continues to strive toward a more prosperous future.
