In 2008 the world suffered a devastating financial crisis. Many countries, when faced with the potential collapse of their largest banks, chose to bail them out. But one country Iceland, did the
exact opposite. They let their banks fail, and many financial experts were surprised with the “remarkable” recovery seen by the Icelandic economy.
So, how did Iceland beat the bank's? Well, it's important to note that Iceland is a small, isolated country in the Nordic region. Its main industries are fishing and aluminium smelting, which are
relatively consistent sources of income.
For the past decades, Iceland has seen steady economic growth, and comparable
standards of living to its Nordic neighbors.
In 2000, Iceland privatize its banking industry. This opened the doors to foreign debt, and by 2007 ,2/3 of their financing came from abroad. When the global recession hit, three of Iceland's
major banks collapsed. This was attributed to overextending their loans and making unsavory business decisions
For instance, one infamous bank, Landsbankin, made Iceland residents responsible for more deposits than they could make payments on. Unlike in the United States, where the bank's deceitful actions merited a bail out, Iceland refused to do the same.
Iceland's central bank chief and former Prime Minister was quoted as saying, “we do not intend to pay the debts of the banks that have been a little heedless.”
Instead, the government instituted social welfare and debt-forgiveness programs, effectively bailing out their own citizens. Additionally, a number of corrupt bankers were even jailed for their role in unscrupulous lending.
As aresult, today Iceland is holding a steady annual growth rate of 3% annually. By comparison, other European countries like Greece and Estonia stroll to maintain a growth rate of 0.2% and 1.1 percent.
Iceland also maintains a low unemployment rate - around 4%, while countries like Greece have seen their unemployment rate hit almost 30%. Not all countries can do what Iceland did. But their success can certainly serve as a model.
The Icelandic president also made a point of comparison between their financial reforms
and the EU’s current austerity measures.
If the struggling European economies “introduce currency controls”, “let their banks fail”, and “provided more support for the poor”, they’d be following in Iceland's path. However, despite their success, letting the banks fail also came with a lot of risk.
For many larger countries, an economic collapse could devastate the world economy as well. in the case of the US, they decided they had too much to lose. Ever heard of Swiss bank accounts, and how they're used to provide a safe-haven for financial privacy? This might not be the case anymore.