Iceland review - 2015, Page 63

ICELAND REVIEW 61
BOOM AND BUST
The Icelandic economy had in the 20th
century grown faster than others in
Europe, moving from being one of the
poorest in the continent to towering over
some of the world lists measuring econom-
ic prosperity. By the early years of the new
millennium conservative-led governments
had deregulated financial services, plugged
Iceland into the European internal market
and privatized its state-owned banks. In
a massive move coined as the ‘outvasion,’
Iceland went from being an isolated out-
post to becoming a global player in the
banking world. The economy was soon
divided between three cross-border bank-
ing conglomerates, centered on Kaupþing,
Landsbanki and Glitnir. Each was run by
a group of young alpha-males who were
preoccupied with competing with each
other. In this climate the Icelandic financial
sector was, in only a few years, to grow to
ten times the country’s GDP—before col-
lapsing so spectacularly.
In early 2008, the massive capital inflow
of 2003 to 2007 reversed, as it did in
other high-yield countries like the Baltics,
Greece, Portugal and Spain. The carry
trade, which had helped to keep the lid on
inflation by hiking the value of the króna,
was now leaving the economy exposed
to nervous reversal. Subsequently the
Icelandic banks were finding it ever more
difficult to access funds.
When the international crisis hit,
Iceland’s financial sector had become
unsustainable. All of the three cross-bor-
der banks, amounting to 85 percent of the
country’s financial system, came tumbling
down within a single week in early October
2008. The stock exchange and the equity
market were virtually wiped out and the
tiny currency, the ISK, tanked, spurring
rampant inflation which, in the following weeks and months,
was eating up most people’s savings. Property values dropped by
more than a third and unemployment approached levels never
seen before in the life of the young republic. The ruined currency
finally stabilized below half its pre-crisis value after introduction
of currency controls.
After the crash many ambitious proposals and initiatives for
widespread political reform were caught in what can be described
as a new critical order taking hold in the Icelandic post-crisis socie-
ty, which was marked by political infighting. Still some initiatives
had significant effect. In a controversial move, Iceland’s former
Prime Minister Geir H. Haarde was sentenced to suspended
imprisonment for not placing the risk of a banking crisis on the
agenda of formal cabinet meetings. A handful of bankers thought
to be responsible for the crisis were investigated and some sen-
tences were passed. Surely the most significant to date was the
conviction in the Al-Thani case in February 2015. *
Eiríkur Bergmann Einarsson is Professor of
Politics and Director of the Centre for European
Studies at Bifröst University in Iceland. His pub-
lications include Iceland and the International
Financial Crisis: Boom, Bust & Recovery
released by Palgrave Macmillian in 2014.
BANKING COLLAPSE
Hegningarhúsið prison in downtown Reykjavík.
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