ICY EXPLOSION, the second largest geyser in the world, in Iceland.
by Trey Ratcliff
When the bankers came to
They now tell the world that to basically tell the bankers to sod off when they arrive to rape your country if there is a financial collapse. The world cheered for the plucky little island as they shrugged of the rope of the banks. They dumped the euro and returned to their krona. Dire predictions were made. But here is Iceland today, victorious1
By Haukur Holm
November 08, 2011
"AFP"
Three years after Iceland's banks collapsed and the country teetered on the brink, its economy is recovering, proof that governments should let failing lenders go bust and protect taxpayers, analysts say.
The North Atlantic island saw its three biggest banks go belly-up in the
October 2008 as its overstretched financial sector collapsed under the weight
of the global crisis sparked by the crash of US investment giant Lehman
Brothers.
The banks became insolvent within a matter of weeks and Reykjavik was forced to let them fail and seek a $2.25 billion bailout from the International Monetary Fund.
After three years of harsh austerity measures, the country's economy is now showing signs of health despite the current global financial and economic crisis that has Greece verging on default and other eurozone states under pressure.
The banks became insolvent within a matter of weeks and Reykjavik was forced to let them fail and seek a $2.25 billion bailout from the International Monetary Fund.
After three years of harsh austerity measures, the country's economy is now showing signs of health despite the current global financial and economic crisis that has Greece verging on default and other eurozone states under pressure.
"The lesson that could be learned from Iceland's way of handling its crisis is that it is important to shield taxpayers and government finances from bearing the cost of a financial crisis to the extent possible," Islandsbanki analyst Jon Bjarki Bentsson told AFP.
"Even if our way of dealing with the crisis was not by choice but due to the inability of the government to support the banks back in 2008 due to their size relative to the economy, this has turned out relatively well for us," Bentsson said.
Iceland's banking sector had assets worth 11 times the country's total gross
domestic product (GDP) at their peak.
Nobel Prize-winning US economist Paul Krugman echoed Bentsson.
Nobel Prize-winning US economist Paul Krugman echoed Bentsson.
"Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net," he wrote in a recent commentary in the New York Times.
"Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver," he said.
During a visit to Reykjavik last week, Krugman also said Iceland has the krona
to thank for its recovery, warning against the notion that adopting the euro
can protect against economic imbalances.
He said, referring to one of the key eurozone states struggling to put its public finances in order,
He said, referring to one of the key eurozone states struggling to put its public finances in order,
"Iceland's economic rebound shows the advantages of being outside the euro. This notion that by joining the euro you would be safe would come as news to the Spaniards."
Iceland's example cannot be directly compared to the dramatic
problems currently seen in Greece or Italy, however.
Bentsson said,
Bentsson said,
"The big difference between Greece, Italy, etc at the moment and Iceland back in 2008 is that the latter was a banking crisis caused by the collapse of an oversized banking sector while the former is the result of a sovereign debt crisis that has spilled over into the European banking sector."
"In Iceland, the government was actually in a sound position debt-wise before the crisis."
Iceland's
former prime minister Geir Haarde, in power during the 2008 meltdown and
currently facing trial over his handling of the crisis, has insisted his
government did the right thing early on by letting the banks fail and making
creditors carry the losses.
Can you imagine a person who lives in such a place bowing down to the banks? Nope, the Icelanders are cut from sturdy cloth. Another photo by Trey Ratcliff.
Haarde, 68, told AFP in an interview in July,
"We saved the country from going bankrupt,"
"That is evident if you look at our situation now and you compare it to Ireland or not to mention Greece," he said, adding that the two debt-wracked EU countries "made mistakes that we did not make ... We did not guarantee the external debts of the banking system."
Like Ireland and Latvia, also rescued by international bailout packages and now
in recovery, Iceland implemented strict austerity measures and is now reaping
the fruits of its efforts.
So much so that its central bank on Wednesday raised its key interest rate by a quarter point to 4.75 percent, in sharp contrast to most other developed countries which have slashed their borrowing costs amid the current crises.
It said economic growth in the first half of 2011 was 2.5 percent and was forecast to be just over 3.0 percent for the year as a whole.
David Stefansson, a research analyst at Arion Bank, told AFP Iceland hiked its rates because it "is in a different place in the economic (cycle) than other countries.
So much so that its central bank on Wednesday raised its key interest rate by a quarter point to 4.75 percent, in sharp contrast to most other developed countries which have slashed their borrowing costs amid the current crises.
It said economic growth in the first half of 2011 was 2.5 percent and was forecast to be just over 3.0 percent for the year as a whole.
David Stefansson, a research analyst at Arion Bank, told AFP Iceland hiked its rates because it "is in a different place in the economic (cycle) than other countries.
"The central bank thinks that other central banks in similar circumstances can afford to keep interest rates low, and even lower them, because expected inflation abroad is in general quite (a bit) lower," he said.
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