A summary of the causes and effects of the icelandic financial crisis

Comment What should one expect from a country in which the sentence, "What an asshole! In Iceland, which lies on the Mid-Atlantic Ridge and thus on the dividing line of the North American and Eurasian tectonic plates, the earth has a tendency to relieve itself through various geysers, volcanoes and hot springs. The island, an unlikely geological accident, has existed for some 18 million years, but has only been inhabited for 1, years. Icelanders were traditionally fishermen and farmers until they decided to turn their country into a casino for global capital around the turn of the millennium.

A summary of the causes and effects of the icelandic financial crisis

How to Write a Summary of an Article? In retrospect Iceland was essentially operatinglike a firm with a highly unviable growth model.

Iceland's Near Collapse: What Can We Learn?

However, the political relationship between Iceland and Britain also greatly added to the economic downturn and financialcrisis. Although without a doubt the primarycause of the Icelandic financial crisis was economic, political factors such as therelationship and interdependence between Iceland and Britain exacerbated the alreadydire situation.

Iceland began as an isolated, fairly impoverished country whose survival was based largely on its fishing trade. At one point Icelanders wereecstatic and celebrated the fact that their tiny country of aboutpeople had 3 banks in the worlds largest banks.

The large inflow of foreign capital associated with suchmass foreign investment caused the krona to greatly appreciate. Since the krona wasgreatly overvalued it made all imports in both goods and services very inexpensive for Icelanders; the overvalued krona also made it a lot easier for Icelanders to borrow moneyfrom abroad.

This economic boom encouraged Icelanders to borrow from abroad and many failed toforesee that such economic prosperity was limited and that a bust is inevitably going tofollow a boom.

The lack of government oversight on the banking system also was an economicfactor that led to the financial crisis. One large problem with the Icelandic banking sector is that the banks became so large that the Icelandic government was unable to operate asa lender-of-last-resort simply because Iceland with its merepeople has a verysmall tax base.

It would have been less of a problem for the banks to be solarge if they had not remained domiciled in Iceland. It was perhaps too large and ideal of a goal for such a small country like Iceland to become an international financial center.

Iceland was essentially acting like a firm when indeed they should have been lookingafter the economic stability of their whole country. The Icelandic government simplylacked the ability to financially sustain their banks in times of economic crisis. If some of the banks in Iceland had foreign lenders-of-last-resort they might have been able toweather out the economic storm.

However, due to the global economiccrisis foreign capital ceased coming in and when it did the myriad of public and privatedebt became quite evident. Since Iceland does not have an effectual currency to manipulate they are largely unable to support the banks andhave no practical ways to bring down the inflation and interest rates, which have beenstaying in the double digits.

This is just one of the many economic situations currentlyaffecting Iceland. Iceland andBritain once had a very mutually beneficial friendship, which could be seen in that theywere NATO allies and frequent trading partners. However, as the global economic crisis began to take hold this friendship became tenuous at best.

The problems between Icelandand Britain began in late when Britain, in an attempt to protect its financial assets inIceland, invoke its anti-terrorism laws to freeze the British assets of a failingIcelandic bank.

The financial crisis struck Iceland very hard. Its banking system had far outgrown the Icelandic economy and its problems had severe effects for the entire country. Cause of the Crisis During the mids, Iceland flourished. read What Causes A Currency Crisis?) has to be drawn showing exactly when and how to intervene and stabilize a financial crisis. The Icelandic financial crisis and recovery could be seen as the most expensive group therapy of all time. The Icelanders had five years to come together and ask themselves: Who are we, and what.

In many Icelanderseyes and certainly in the eyes of the Icelandic government Kaupthing was the last of theMohicans and its demise signaled the end of the Icelandic banking system? The political decision to invoke anti-terrorism legislation against Iceland essentially branded it as a terrorist state, which in the eyes of every Icelander was athorough abuse of a small neighbor.

Essentially no one wants todo business with a terrorist state. Like therest of the world, thanks to the downturn of the global economy Britain has beensuffering its own financial woes.

This realization by all of the foreigninvestors who were once so eager to invest created a mad rush to get their money out of the failing Icelandic banks.

A summary of the causes and effects of the icelandic financial crisis

However,when the inflow of capital stopped the interdependence of Iceland and its investors became very clear. This is exemplified by the Icelandic-British relationship.Nov 21,  · Iceland's three biggest banks grew to 10 times the size of their economy by offering people overseas, especially in the Netherlands and Britain, higher interest rates than they could get .

The effects of the financial crisis are still being felt, five years on. This article, the first of a series of five on the lessons of the upheaval, looks at its causes print-edition icon. Q: Could you share with me information about the cause of the Icelandic financial crisis and how the government intends to solve that problem.

Thank you very much, Neng Tatu Rohma Tiah, Indonesia A: This was my answer to a previous question on the subject (posted in October ): There is a reason. Iceland's Financial Crisis and Its Causes In October , Iceland nationalized its three largest banks.

Kaupthing Bank, Landsbanki, and Glitnir Bank had defaulted on $62 billion of foreign debt. CHAPTER – CAUSES OF THE COLLAPSE OF THE ICELANDIC BANKS – RESPONSIBILITY, MISTAKES AND NEGLIGENCE 3 RANNSÓKNARNEFND ALÞINGIS lending was to holding companies on the one hand and to foreign parties on the other.

The increase in lending to foreign parties was notably larger. The increase was especially big during the latter part of The financial crisis of –, also known as the global financial crisis and the financial crisis, is considered by many economists to have been the worst financial crisis since the Great Depression of the s.

Iceland's Near Collapse: What Can We Learn?