Country Analysis- Iceland of All

¶ … Country Analysis- Iceland

Of all the nations affected by the world credit crisis, Iceland has suffered some of the hardest blows of all of the nations of the developed world. The small, remote nation, described as a place the size of Illinois where everyone knows one another like family, suffered what has been described as a national currency meltdown. Iceland's Gross Domestic Product (GDP) shrank 3.3% over the last four economic quarters, as of November 2009. Inflation hovers around 8.6%, which is a marked improvement to the 15% rates Iceland was suffering immediately after the worldwide recession (Sigurdardottir 2008). However, fears remain that it may balloon again, as high as 18%, given the instability of its economy (Update, 2009, Thompson). "The collapse of the banking sector led to a recalibration of the monetary policy objectives. The effective exchange rate plunged 40% in early October 2008 with respect to its level at the beginning of the year. The domestic authorities and the IMF agreed that stabilizing the krona was a fundamental element of the program for economic recovery" (Chapter 2: OECD Economic Surveys, 2009).

Currently, Iceland's unemployment rate is 7.6%. But as banks and major industries continue to fail, with little signs of systemic recovery, the nation's long-term economic prospects seem bleak in the eye of many Icelanders. Although the overall rate is not as bad as the U.S. At present, "prior to the 2008 crisis, Iceland had achieved high growth, low unemployment, and a remarkably even distribution of income" (Iceland, 2009, Trading Economies). While other nations suffered a crisis, Iceland weathered a catastrophe. Many people who became investment bankers were forced to go back to their family trade of fishing. The nation's self-image and hopes for its prosperity were shattered, not just for the next few years, but possibly for the entire next generation.

Today, "Iceland is one of the most indebted nations in the world, in terms not only of private sector (corporate and household) debt but also of gross and net national debt" (Appendix: Iceland, 2009, Monetary Bulletin). Said one man: "it is still unclear how much the [national] debt is, but it looks like it will be over $30,000 USD per each and every person in the country. I have 5 children so that equals over $200,000 for my family' (Smarason 2009) "Private sector debt is far higher than the U.S.," despite hand-wringing over American indebtedness to credit cards (Appendix: Iceland, 2009, Monetary Bulletin). A relatively young population, few renting accommodations, and high rates of student loans contributed to enthusiastic 'live for today' mentality of borrowing that preceded the crisis. As well as tremendous national debt, Icelanders have "tens of billions of dollars in personal losses… from the 85% collapse in the Icelandic stock market" (Lewis 2009, p.1) "Stock-market gains provided collateral for non-financial firms to borrow to expand. Their total debt more than doubled as a share of GDP over the four years to the end of 2007, to 284% (Table 1.5). The increase in this ratio and the level reached are both high by international comparison; according to the IMF (2008b), this compares with 73% in the United States, 77% in the euro area (2005) and 278% in the United Kingdom (financial liabilities, which include equities" (Chapter 1: OECD Economic Surveys, 2009, p.27).

Many economists also cite Iceland's relative lack of financial sophistication as one of the cultural source of its decline into folly. Before the credit crisis, the Nordic nation's economy depended "heavily on the fishing industry, which provides 40% of export earnings and employs 5% of the workforce" (Iceland, 2009, Trading Economies). Iceland's economy had been diversifying into more modern industries but still had a relatively underdeveloped banking sector: "In 2003, Iceland's three biggest banks had assets of only a few billion dollars, about 100% of its gross domestic product. Over the next three and a half years they grew to over $140 billion" (Lewis 2009, p.1). "By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry," while the real estate market, so vitally necessary to the lifestyle of most Icelanders, also expanded stratospherically. During the period from 2003-2008, "Icelanders amassed debts amounting to 850% of their GDP, compared with 350% in the U.S. (Lewis 2008, p.1).

Iceland's speculation was more feverish than the U.S. because of the relatively modest circumstances of most Icelanders before, which fueled even more enthusiastic spending with easy credit. Furthermore, the fishing industry had always encouraged speculation and borrowing in the face of an uncertain future -- recklessness was part of the culture, despite the age-old nature of this industry. "With local interest rates at 15.5% and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn't afford, was to borrow not kronur but yen and Swiss francs. They paid 3% interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising… By 2007, Icelanders owned roughly 50 times more foreign assets than they had in 2002. They bought private jets and third homes in London and Copenhagen" (Lewis 2009, pp.2-3). "The top Icelandic banks failed under a mountain of debt in early October and the currency effectively ceased to trade, ultimately forcing Iceland to turn to the International Monetary Fund and several countries for $10 billion in aid" (Update, 2009, Thompson).