Iceland Financial Crisis
Iceland Financial Crisis (2008-2011)
Introduction
Iceland experienced a significant financial meltdown and subsequent economic downturn after the 2008 financial crisis struck the country, known as Icelandic Financial Crisis. The crisis was a major economic and political event happened in Iceland that involved the collapse of all three of the country’s major privately owned commercial banks, following their difficulties in refinancing their short-term debt and a run on deposits in the Netherlands and the United Kingdom. Relative to the size of its economy, Iceland’s systematic banking collapse is the largest crisis experienced by any small country in economic history.
Since 1980s, Iceland's macroeconomic stability had been constantly deteriorated by the most volatile annual CPI and asset-price inflation dynamics in the OECD. More than a decade of robust growth dynamics left behind an internationally over-exposed banking sector which exceeded the size of country's GDP by nearly 10 times. The failure of Lehman Brothers and a global credit crunch, in turn, raised CDS rates on Icelandic banks which immediately declared insolvency after the global interbank lending froze.
Causes
There are several reasons that inflicted the financial crisis in Iceland. Deregulation and privatization of the banking sector was believed as the ultimate root of the Iceland’s financial crisis. There were three largest commercial banks, Glintir, Landisbanki and kaupthing in Iceland, had total assets of more than $168 billion USD, which its total assets had exceed the country’s economy by several times and the central banks inevitably fails as the lender of last resort, mostly because it is impossible for the central bank to build up strong foreign reserves. The ultimate causes of the crisis was the failure of the central bank’s mismatched regulation of the banking sector and its failure to forecast the possibility of the financial crisis in a series of the policymaking failures among
Introduction
Iceland experienced a significant financial meltdown and subsequent economic downturn after the 2008 financial crisis struck the country, known as Icelandic Financial Crisis. The crisis was a major economic and political event happened in Iceland that involved the collapse of all three of the country’s major privately owned commercial banks, following their difficulties in refinancing their short-term debt and a run on deposits in the Netherlands and the United Kingdom. Relative to the size of its economy, Iceland’s systematic banking collapse is the largest crisis experienced by any small country in economic history.
Since 1980s, Iceland's macroeconomic stability had been constantly deteriorated by the most volatile annual CPI and asset-price inflation dynamics in the OECD. More than a decade of robust growth dynamics left behind an internationally over-exposed banking sector which exceeded the size of country's GDP by nearly 10 times. The failure of Lehman Brothers and a global credit crunch, in turn, raised CDS rates on Icelandic banks which immediately declared insolvency after the global interbank lending froze.
Causes
There are several reasons that inflicted the financial crisis in Iceland. Deregulation and privatization of the banking sector was believed as the ultimate root of the Iceland’s financial crisis. There were three largest commercial banks, Glintir, Landisbanki and kaupthing in Iceland, had total assets of more than $168 billion USD, which its total assets had exceed the country’s economy by several times and the central banks inevitably fails as the lender of last resort, mostly because it is impossible for the central bank to build up strong foreign reserves. The ultimate causes of the crisis was the failure of the central bank’s mismatched regulation of the banking sector and its failure to forecast the possibility of the financial crisis in a series of the policymaking failures among