The forgotten story…

A small nation of 340 thousand with a GDP of around $14B is one turn around success story that has stayed under the radar of the international media. Who would have thought that a country that went belly up in 2008 will rebound and witness a growth rate of over 2%, (vis-à-vis contraction of 0.3% in EU) within 3 years of witnessing the Icelandic version of the Great Depression? In fact, according to The Economist, Relative to the size of its economy, Iceland’s banking collapse is the largest suffered by any country in economic history.

The 2008 world financial crisis was the coup de grace for first hydrogen based economy in the world, Iceland. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, failed and were nationalized, while the Icelandic currency, Kroner, lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy. Sensing the urgency, the self-proclaimed international lender of last resort, the IMF came into the picture. In association with the EU, they asked Iceland to adopt their usual prescription of economic crisis, the austerity measures and taking IMF loan which are tied to Debt to GDP ratio. At that time Iceland’s debt was 900 times its GNP. If Iceland would have adopted these measures, each Icelandic citizen would have to pay 100 Euros a month (or about $130) for fifteen years, at 5.5%.

The people of Iceland started a revolution of sorts and forced the political leaders to not accept the above deal. While the domestic assets of Iceland’s lenders were protected – costing the state 20 per cent of GDP, according to the IMF – the lion’s share of the collapse was borne by foreign creditors. Iceland skipped on making there international debt payments. It defaulted. The Government was brought down. Of course the IMF and the EU were upset. But the most upset were the English & the Dutch, as the savings of their citizens in Icesave bonds were wiped out. One Icelandic leader said “We were told that if we refused the international community’s conditions, we would become the Cuba of the North. But if we had accepted, we would have become the Haiti of the North.”

As of today Iceland’s net debt stands at 65 per cent of GDP well below IMF’s target of 100 percent. Iceland remains committed to paying foreign creditors large sums of money following the banks’ collapse, although at its own pace. In August last year, it completed a three-year IMF-supported restructuring program, including loans of $10bn, and has started borrowing again on global credit markets. The government announced two weeks ago that it had repaid the IMF $400m ahead of schedule.

Everyone is watching the miraculous economic recovery of Iceland, but alas no one is reporting. Of course, I am not saying that the US or other ‘big’ countries should follow Iceland’s policy (because Iceland is just too small and doesn’t have the same economic clout as the other ‘big’ economy), but Greece can definitely take a page or two from Iceland’s model.

References:

http://www.ft.com/intl/cms/s/0/8a0390dc-78c7-11e1-9f49-00144feab49a.html#axzz1qjXbhc8G