Collapse Of Icelandic Economy
Iceland is a small country with a population of about 320,000 people. The country’s economy before collapse was ranked as one of the best. “Iceland government” (2009, para. 3) argues that the UN described the economy of Iceland as the best in the world only to realize that it had been built on the worldwide credit boom. The three major banks in the country ran bankrupt leading to the collapse of the economy of the country as a whole. In addition to the tragedies of the country, the government of the country of the day also collapsed due top bankruptcy. The economy of the country is expected to recover as from early this year if the expected investment will create the necessary jobs needed to stimulate the economy. This research paper examines the collapse of the Iceland economy. It establishes the factors that led to the collapse of the economy and the possible solutions (“Iceland government” (2009, para. 3).
Economic history 经济史
Iceland is a small country (with a population of about 120,000) and therefore its economy is also small. The economy o the country provides the citizens of the country with a living.
The economy of Iceland has remained the same after the settlement in the 9th century. The economy is determined by natural resources and it faces constraints of growth from culture and technology. Initially the economy was characterized by animal husbandry. Two thirds of the population depended on agriculture at the beginning of the 20th century (“Iceland government” 2009 para 3).
The 20th century saw the starting of industrial revolution in the country with milestone being made in the fishing industry where motor trawlers were used. This enabled the diversification of the marine sector. There was rapid development of manufacturing sector, fisheries and service sectors hence enabling the economy of the country to be transformed into a modern state tat is industrial.
The source of energy for the economy was from geothermal power but today its energy comes from electricity. 99.9% of the population of Iceland can access electricity today that is supplied by public as a public utility. The economy of the country depends on fishing. Iceland is one of the world leaders in fish exports. For example in 1999, fish exports were valued to $1.33 bn making Iceland be ranked among the top five countries in fish exports in the world (Islandsbanki n.d. para 1-4).
Banking overhaul 银行业改革
After the collapse of the Iceland economy, the politicians were angry at the central bank board of governors. The pressure was from all over the country as citizens vilified the head of the central bank, David Oddson that he did little to save the country from the financial crisis. They pressurized the newly elected government to overhaul the board of governors of the central bank and replace them with more responsible and skilled people. As the newly elected prime minister and her cabinet assumed office, they promised to overhaul the central bank’s leadership (Smeddum 2009 para 2-6).
The small airport of Reykjavik is overused since there are so many planes using the airport. A population of around 200,000 people lives in the surrounding environment of the airport. The city initially depended on cod (which was limited) and pop music exports. The deregulation of the financial sector brought change to the city. The move to deregulate the financial sector brought a huge credit boom and it helped create the elites in business that is known as billionaire boys clubs. Local firms of the country extended their overseas activities using the Reykjavik as the base for expansion. They used cash that was generated locally and from the cash generated from overseas markets that are headed by new chief executives.
The business that flourished after the deregulation of the financial sector has bought shares in big multinational firms like the Singer and Friedlander, Geest and Karen Millen. It is the helicopters of these businessmen that have made the small airport busy because they fly in day and night as they go out to check on business abroad. The success of these businesses has attracted foreign investments (e.g banks like Kaupthing and Landsbanki) despite the size of the economy of Iceland. The banks have a large stake of capital in Iceland than in their original countries.
Te effects of the deregulation of the financial sector resulted in a boom. As indicated above. The businesses started to perform very well. In addition to that, it is estimated that the good performance of business in the country has enabled 90% of the population to own their own homes that they bought from mortgages which are taken in Euros. Thus new vigor was brought to a city that was a business backwater by the deregulation of the financial sector.
Causes of financial collapse 金融崩溃的原因
The collapse of the Iceland economy can be attributed to bankruptcy in the financial sector. The economy collapse due to the resignation of the prime minister due to bankruptcy related stress. The bankruptcy could have been caused by several causes. The three largest banks of Iceland (Kaupthing, landsbanki and Glither banks) were nationalized following default to pay national debt amounting o $62 billion. Due to the collapse, investor flew from the country leading to the drop by 50% in the value of the currency of the country, Krona. The banks had acquired foreign assets using borrowed funds from the government amounting to $100 billion that led to the deficit of the country’s GDP by $14 billion. The banks collapsed collapsing the Iceland economy due to limited lending that was created by the global financial crisis. The IMF bailed out the banks using $ 10 billion (Islandsbanki 2009 n.d).
The bankruptcy of the Iceland banks was increased by global financial crisis. The entire Europe was affected by the collapse since the banks in Iceland had expanded their activities in Europe for example the largest private company in UK is the Iceland’s Baugur.
Effects of the collapse 崩溃的影响
Domestic Stocks market: the collapsed economy cast a doubt on the credibility of the government in the management of financial institutions. The collapse caused a shadow of uncertainty about the future of business in the country. The citizens will reduce investment and purchasing will go down. Since there will be uncertainty on the future of business, borrowing will be minimized and therefore the investment in the stock market will reduce. The reduction in the investment in the local stocks is also as a result of uncertainty in the future performance of the companies and hence stocks.
Currency: the economic crisis in Iceland affected the currency of the country (the Krona). The Iceland banks had borrowed funds and invested them abroad in form of foreign assets. With the denial of borrowing that was caused by the global financial crisis, the bank went bankrupt and collapsed causing the economy to collapse. The Krona lost its value by 50%.
Citizens: with the drop of the Krona by 50%, the citizens of Iceland who had invested in mortgages ion foreign currencies were deterred from further investment. They face double mortgage costs at the time when costs of houses are dropping ().
Government: the collapse of the large there banks of Iceland due to bankruptcy caused the government to collapse. It started by the resignation of the then prime minister Geir Haarde due to cancer. Ingibjorg Gialadottir who was then the commerce secretary took over as the prime minister but he also resigned following stress related to bankruptcy. The entire government collapsed (Smeddum 2009 para 5 ).
Global impact: the collapse of the Iceland economy can affect other countries in the world indirectly or directly. For example, U.S has invested in the country $5.1 trillion. If the cash is not funded in time it will affect the U.S economy. it will increase the public debt of the U.S. on the other hand, If the economy of U.S is affected other countries in the world will be indirectly affected since U.S being the largest economy will affect the donor funding and international trade. Europe will be affected since the three major banks of Iceland have branches in Europe. Their activities in Europe will be affected since the reputation of the banks will be destroyed and it will take time for the citizens of Europe to regain their confidence in the banks. Therefore, the activities of the banks in Europe will face a lot of hard times.
Government intervention: the government wanted to bail out the bankrupt banks. The bail out would have improved the situation by ensuring that there I o much loss of jobs. In fact, the banks will have enough money to land out to businessmen so theta the y can invest. The investment would have created more jobs and reemploy those who would have lost their jobs due to the economic crisis (‘Iceland government’ (2009, para. 9),
However the Icelanders refused the government bailout of the banks claiming that the banks have left the suffering allot and paying double debts of mortgages that resulted from the collapse of the Krona. Therefore, the government would have intervened by bailing out the banks under the pressure from the British and Dutch governments but the defiant residents refused the move by voting it pot in a referendum (Smeddum 2009 para 4).
According to Molin, (2009, para. 1), the economy of Iceland is set to recover from this year early. He argues that though the contraction of the economy was 7% last year, the, economy is set for a slow recovery. However, he adds that this would only happen if substantial investments in the energy sector and other related sectors of the economy are done in time. The investments in these sectors of the economy will increase production by increasing the employment of the Icelanders. The economy will start to recover though in a slow manner. Financial weaknesses should be closely monitored so that weaknesses can be corrected and previous mistakes of the financial institutions are not repeated. Molin (2009, para. 11) suggests that the country should seek EU membership immediately because the European Union and the Euro will help the Krona to stabilize and make the recovery process faster.
In addition to the above, Molin (2009, para. 12) argues that the fiscal measure that are corrective should be pursued by the government. At the initial stages, the government will increase its revenue base by increase the level of taxes but the government expenditure should increase in the long run in order to increase job creation (Molin, 2009, para. 13). .
Government overhaul 政府改革
First came the bankruptcy of the three major banks of Iceland then came the economic meltdown in the country. This led to the overhaul of the country. According to ‘Iceland government’ (2009, para. 3), the collapse was as a result of the failed talks between the coalition partners. The prime minister resigned over cancer claims while his successor resigned over claims bankruptcy stress. The whole government was overhauled and the new government was put in place. The new government that assumed power was advocated for the overhaul of the central bank board of governors. The government also working in collaboration with the British and the Dutch governments was to bail the bankrupt financial institutions out a move that the citizens of the Iceland refused in the referendum. The government also has faced challenges of demonstrations in the country (‘Iceland government’ 2009, para. 3),
European Union applications 欧洲联盟的应用
According to Molin, (2009, para. 20), Iceland has suffered the worst economic crisis experienced by any country in the world. The government on its part by denying responsibility paid the price by collapsing. There have been violent cases of protests in Iceland and all over Europe in countries like Latvian, Lithuania, Greece and Spain. He suggests that the Iceland should join the European Union as soon as possible. Its membership will highly assist the country in strengthening the Krona. In addition to that, the country will have the advantage of sharing the credibility of the European central bank (Molin, 2009, para. 15).
Lessons learned 经验教训
The financial crisis has plunged Iceland to turmoil causing it to suffer much. Despite the crisis and the problems that the Icelanders are going through, life must continue. But there are lessons that Europe and other countries have to learn from the experience from Iceland. The country is a small open economy that is exposed to the world economy. The crisis has left many jobless and business premises empty without clients. The world learns that it should not leave the financial market to work freely but instead they should be regulated to avoid situations that might lead to the economic collapse and recessions (Hoppe, 2008, para. 3-10).
Iceland is a small country with a population of about 320,000 people. The country economy is a small open economy is linked to the world. Before the global recession the economy of the country was performing very well. The banks of the country collapsed after the world recession because of bankruptcy. The government also collapsed. The collapse fop the economy of the country led to many problems including losing of jobs increasing the rate of unemployment. The country needed bailout and the government was to bail out the business organizations in order to stimulate the economy. The country applied for the membership of EU. The reliance on the credibility of the EU bank will help the court y to gain some credibility and continue in growth.