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2008 2011 Financial Crisis In Iceland Essay

1588 words - 7 pages

Introduction:
The 2008 financial crisis was one of the major economic and political events in Iceland. Iceland suffered major financial meltdown when all three of the country’s major privately owned banks collapsed as a result of difficulties in refinancing their short-term debt and run on deposits both in and outside of the country. Taking in consideration the size of Iceland’s economy and its population, this crisis was classified as the largest experienced by any country in economic history. [1]
This financial crisis had a significant influence not only on the economic wellbeing of the country but also on the political situation both inside the national parliament, Althing, and outside ...view middle of the document...

[4] This is a very large figure even for such a prominent economy as that of Iceland, especially considering that gross domestic product of Iceland is 8.5 billion euros. [5][113] The national currency of Iceland, krona, on the other hand saw 35 percent decline against euro throughout first three quarters of 2008 [10].
The small size of domestic market urged Iceland’s banks to fund their expansion with loans from other banks and even explore different types of external debt. The inflation in the country was exacerbated by the practice of the Central Bank of Iceland to print money on demand to issue liquidity loans to banks. [118].This caused immense rise in prices. By the September of 2008 prices on products were 14 percent higher than twelve months before. This number was intended to be only 2.5 percent. [15] Along with this the Central Bank of Iceland held interest rates as high as 15.5 percent. Such interest rates, compared with 5.5 percent in the U.K. or around 4% in the Eurozone at that time, encouraged overseas investors to hold deposits in Icelandic kronur. This led to monetary inflation. The money supply of Iceland grew 56.5 percent in twelve months to September 2009, compared with 5 percent GDP growth.
Icelandic banks found themselves incapable of paying their debt to other banks. Their creditors were insisting on payment and due to widespread economic crisis in the world no other bank was willing to make fresh loans. Those banks normally would ask for a loan from the central bank of Iceland, but as already stated above the debt of those banks was much higher than the national economy. Because of this, the government and the Central Bank of Iceland could not guarantee any loans in order to help banks with their loans and the banking system collapsed. [120]
The situation escalated once it became clear that Icesave in U.K. was operating as a branch of one of three major Icelandic banks, Landsbanki, rather than as a legally independent subsidiary. As such, it was completely depended on the Central Bank of Iceland just like Landsbanki rather than being depended on the Bank of England for help. [123] All this had critical influence on the economy and job market of the country.
Effects
As a result of the bank failure, many employees of those banks found themselves without jobs. Those banks were not the only one that had to save themselves by cutting job spaces. The list was joined by Sterling Airlines that declared bankruptcy a month later. The decline in economy also affected the national airlines of Iceland, Icelandair, which saw a significant decline on domestic demands for flights. [137] Several Icelandic news mediums had to either cut some jobs or merge with other media corporations. The newspaper 24 Stundir ceased publication due to the crisis. [137]
Unemployment had more than tripled by the end of November 2008, with over 7000 registered unemployed, compared to 2136 unemployed at the end of August 2008. [144,11] 14 percent of the...

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