Current Status of Iceland
They realised that the crisis was not just an economic crisis; it was also a fundamental political socio-economic and democratic challenge. Their response was not to comply with the traditional thought of implementing severe austerity and slashing government spending and investment. They took a three tiered approach to their country’s problems;
i. They defined the issues as not just an economic problem but as a socio-economic and political problem; a profound challenge top their entire society.
ii. They recognised that the banks were private institutions and as such did not offer bail-outs or guarantees, they were allowed to fail.
The banks investors and bondholders were told that their decision to take risks in a free market and as such they would not be repaid.
They heavily devalued their currency the Krona, they introduced budgets to protect the most vulnerable in society
iii. In early 2010, under pressure from the governments of the UK and Netherlands to repay them for the collapse of the Icesave Bank, (in 2009 Gordon Brown threatened to freeze all Icelandic assets in Britain, He declare Iceland as a rogue terrorist nation and finally threatened to ensure that Iceland would not receive aid from the IMF), despite petitioning from all the various European governments and a bill passed by their own parliament the President of Iceland Olafur Ragnar Grimsson chose to have a referendum – to let the people would choose if the country should make the bank debt a sovereign debt.
It was flatly rejected. The people said NO, and democracy triumphed.
Grimsson let his decisions regarding the crisis to be based upon two lines of thought.
Firstly – he felt that bailing out the banks was a fundamental mistake, as it would send out the wrong message to the bankers, encouraging them to think they could take risks and that if they fail they would be without personal risk as the taxpayer, the ordinary people of the country would pick up the tab and they could just get on with their business.
Secondly – he felt that the financial markets were not more important than democracy, stating that Europe’s most important contribution to the world was not the financial system; it is democracy.
To put into perspective the size of the debt that the Icelandic people were being asked to burden Grimsson said it would have been the equivalent of asking the British public to take-on a trillion dollar debt, which would have condemned his nation to decades of poverty. This simply, was not, a conscionable option.
Europe, non EU and EU countries, along with the United States then turned their backs on Iceland. However Iceland found a friend in an unlikely source – China, who provided loans the Icelandic central bank.
Iceland realised that the traditional model for the conservative, risk adverse banks had been usurped by a high tech model which attracted Mathematicians, Engineers and IT professionals, leaving a skill shortage within the greater economy. However, after the collapse of their IT sector they no longer had to compete with the financial institutions, resulting in an upsurge in the growth of the industry. Showing that in the area of creative and innovation driven industries, which tend to create more sustainable economies, the current model of banking had actually been negatively affecting the development of the economy.
Debt forgiveness was given to home owners with debts exceeding 110% of their home value, therefore if you owed €120,000 and your house was worth €110,000, you now only owed €110,000. Resulting in debt relief for more than 25% of the entire population of the country.