Iceland Financial Crisis Paper

Iceland Financial Crisis

Name

Date of Submission

Executive Summary

The country that I have selected is Iceland

In 2008 Iceland faced serious financial crisis as its banking system collapsed

At that time most international economies experienced financial crisis as a result of several factors (Erkens, Hung, & Matos, 2012)

Iceland had a huge banking sector (10x GDP) and its reliance on foreign trade (40% of GDP), foreign currency denominated debts, and other factors resulted in the collapse of banking system

The Icelandic government, with the support of the International Monetary Fund, imposed strict capital controls, barring capital from leaving the country

Iceland’s Background

In 1990s, Iceland deregulated its financial markets

Banks and businesses invested heavily abroad thanks to leveraged buyouts

Between 2003 and 2008, banks to operated beyond the capacity of the central bank

As a result, banking sector equated to 900 percent of the Iceland’s GDP

This model was became unsustainable at the beginning of global financial crisis

Iceland’s Bank Operations (2003-2009)

Macroeconomic Shock

The leading banks Kaupthing Bank, Landsbanki, and Glitnir Bank collapsed in 2008

The banks had defaulted about $62 billion of foreign debt

As a result, GDP decreased in real terms by 6% between 2008 and 2009

Unemployment rose from 2.3% in 2007 to 7.2% in 2009

Inflation peaked to 12% in 2008 and 2009 (Bergmann, 2014).

The value of the Iceland’s Krona decreased by 50% against the euro between 2008 and 2009 (Halldorsson, & Zoega, 2010)

Iceland’s Unemployment Rate Between 2003 and 2009

Krona’s Currency Against Other Currencies

Iceland’s Stabilization Policy After the Crisis

The financial regulator (FME) took over control of the banks and the establishment of new banks after the government enacted an emergency legislation (Bergmann, 2014).

The idea was to “ringfence” the operations of the domestic banks

Capital controls were introduced in November 2009 as temporarily measures.

Taxes were raised and public expenditure reduced to return to a budgetary surplus

Monetary policy was tightened to reduce and stabilize inflation

Macroeconomic Assessment and Conclusion

The measures taken were partly effective

Restrictive measures continued to increase unemployment level

The current account remained volatile even after returning to positive levels

Fiscal balance remained below target but returned to positive levels

The Krona started to gain stability steadily against foreign currencies

References

Bergmann, E. (2014). Iceland and the international financial crisis: Boom, bust and recovery. Springer.

Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of corporate finance, 18(2), 389-411.

Halldorsson, O. G., & Zoega, G. (2010). Iceland’s financial crisis in an international perspective. Institute of Economic Studies Working Paper W, 10.

Unemployment

0

1

2

3

4

5

6

7

8

2003200420052006200720082009

Year

Percentage

Chart1

2003
2004
2005
2006
2007
2008
2009
Unemployment
Year
Percentage
3.4
3.1
2.6
2.9
2.3
3
7.2

Atvinnuleysi

Atvinnuþátttaka, atvinnuleysi, vinnutími og fjöldi starfandi eftir
ársfjórðungum 2003-2009
Alls
Atvinnuleysi
Alls Karlar og konur Alls 2003 3.4
2004 3.1
2005 2.6
2006 2.9
2007 2.3
2008 3
2009 7.2
Atvinnuþátttaka er hlutfall vinnuaflsins af heildar mannfjöldanum.
Atvinnuleysi er hlutfall atvinnulausra af vinuaflinu.
Vinnuafl samanstendur af starfandi og atvinnulausu fólki.
Atvinnulausir teljast þeir sem ekki voru í starfi í
viðmiðunarvikunni, geta hafið störf innan tveggja vikna frá því
rannsóknin er gerð og uppfylla auk þess eitthvert eftirfarandi
skilyrða:
1. Hafa verið virkir í atvinnuleit sl. fjórar vikur að viðmiðunarviku
meðtalinni.2. Hafa fundið starf sem byrjar seinna, þó ekki síðar en
innan þriggja mánaða.
3. Bíða eftir að vera kallaðir til vinnu.
Vinnutími er heildarvinnutími svaranda i aðal- og aukastarfi í
viðmiðunarvikunni.
Starfandi teljast þeir sem unnu eina klukkustund eða lengur í
viðmiðunarvikunni eða voru fjarverandi frá starfi sem þeir gegna að
öllu jöfnu. Fólk í fæðingarorlofi telst vera fjarverandi frá vinnu
hafi það farið í leyfi úr launuðu starfi jafnvel þótt það hafi ekki
hug á að hverfa aftur til sama starfs.
Starfshlutfall. Svarandi telst vera í fullu starfi ef hann vinnur að
jafnaði 35 klukkustundir eða meira á viku. Hann telst vera í
hlutastarfi ef hann vinnur 1-34 klukkustundir að jafnaði á viku.

Atvinnuleysi

Unemployment
Year
Percentage

ISK vs. other currencies

0,0

50,0

100,0

150,0

200,0

250,0

jan.03

maí.03sep.03

jan.04

maí.04sep.04

jan.05

maí.05sep.05

jan.06

maí.06sep.06

jan.07

maí.07sep.07

jan.08

maí.08sep.08

jan.09

maí.09sep.09

jan.10

Year

ISK/currency

USDGBPSEKEUR

Chart2

37622 37622 37622 37622
37653 37653 37653 37653
37681 37681 37681 37681
37712 37712 37712 37712
37742 37742 37742 37742
37773 37773 37773 37773
37803 37803 37803 37803
37834 37834 37834 37834
37865 37865 37865 37865
37895 37895 37895 37895
37926 37926 37926 37926
37956 37956 37956 37956
37987 37987 37987 37987
38018 38018 38018 38018
38047 38047 38047 38047
38078 38078 38078 38078
38108 38108 38108 38108
38139 38139 38139 38139
38169 38169 38169 38169
38200 38200 38200 38200
38231 38231 38231 38231
38261 38261 38261 38261
38292 38292 38292 38292
38322 38322 38322 38322
38353 38353 38353 38353
38384 38384 38384 38384
38412 38412 38412 38412
38443 38443 38443 38443
38473 38473 38473 38473
38504 38504 38504 38504
38534 38534 38534 38534
38565 38565 38565 38565
38596 38596 38596 38596
38626 38626 38626 38626
38657 38657 38657 38657
38687 38687 38687 38687
38718 38718 38718 38718
38749 38749 38749 38749
38777 38777 38777 38777
38808 38808 38808 38808
38838 38838 38838 38838
38869 38869 38869 38869
38899 38899 38899 38899
38930 38930 38930 38930
38961 38961 38961 38961
38991 38991 38991 38991
39022 39022 39022 39022
39052 39052 39052 39052
39083 39083 39083 39083
39114 39114 39114 39114
39142 39142 39142 39142
39173 39173 39173 39173
39203 39203 39203 39203
39234 39234 39234 39234
39264 39264 39264 39264
39295 39295 39295 39295
39326 39326 39326 39326
39356 39356 39356 39356
39387 39387 39387 39387
39417 39417 39417 39417
39448 39448 39448 39448
39479 39479 39479 39479
39508 39508 39508 39508
39539 39539 39539 39539
39569 39569 39569 39569
39600 39600 39600 39600
39630 39630 39630 39630
39661 39661 39661 39661
39692 39692 39692 39692
39722 39722 39722 39722
39753 39753 39753 39753
39783 39783 39783 39783
39814 39814 39814 39814
39845 39845 39845 39845
39873 39873 39873 39873
39904 39904 39904 39904
39934 39934 39934 39934
39965 39965 39965 39965
39995 39995 39995 39995
40026 40026 40026 40026
40057 40057 40057 40057
40087 40087 40087 40087
40118 40118 40118 40118
40148 40148 40148 40148
40179 40179 40179 40179
40210 40210 40210 40210
USD
GBP
SEK
EUR
Year
ISK/currency
ISK vs. other currencies
79.501904
128.518095
9.20719
84.496666
77.6755
125.0535
9.14775
83.6985
78.041904
123.521428
9.148714
84.34619
77.066666
121.222777
9.120833
83.503333
72.9625
118.4095
9.22315
84.415
74.04421
122.908421
9.471157
86.31421
77.14
125.357391
9.547782
87.733043
79.8335
127.137
9.6212
88.866
79.181363
127.515
9.79909
88.837272
76.225652
127.81826
9.906739
89.208695
75.8005
128.026
9.86335
88.7
73.074
127.6965
9.9457
89.6685
69.4335
126.618
9.5844
87.6135
68.5125
127.976
9.44405
86.6585
71.050434
129.870434
9.442086
87.178695
73.075555
131.599444
9.550777
87.584444
73.378421
131.041578
9.641947
88.076315
72.146666
131.807142
9.579476
87.598571
71.519545
131.715454
9.541318
87.742727
71.499047
130.053809
9.483809
87.12238
71.730454
128.596818
9.635409
87.617727
70.156666
126.677619
9.668571
87.608571
67.101818
124.726818
9.680318
87.118636
62.731818
121.02409
9.363454
84.067272
62.6555
117.618
9.074
82.1365
62.014
117.038
8.8849
80.72
59.946
114.4185
8.7182
79.2145
62.3125
118.036
8.79435
80.593
64.8315
120.2455
8.94815
82.2535
65.140952
118.460476
8.557523
79.245714
65.114761
114.017142
8.321047
78.415238
63.690454
114.333181
8.389545
78.335454
62.116363
112.345
8.155681
76.140909
60.99619
107.57
7.783523
73.33
61.872272
107.366363
7.628818
72.961363
63.52619
110.900952
7.989809
75.35
61.498571
108.62238
8.009523
74.564285
64.1945
112.23
8.2062
76.693
69.625652
121.406521
8.90626
83.703913
74.48625
131.60625
9.794937
91.46375
71.735238
134.114761
9.821523
91.65619
74.723809
137.608095
10.231523
94.496666
74.369047
137.15619
10.237428
94.347142
70.396363
133.200909
9.793545
90.191818
70.149523
132.29
9.637714
89.325238
68.487727
128.410909
9.33409
86.389545
69.185454
132.278636
9.797863
89.150909
69.356315
136.222631
10.140421
91.65421
70.067619
137.235238
10.023142
91.014761
67.3665
131.7985
9.583
88.041
66.979545
130.43409
9.53859
88.683181
65.284117
129.948823
9.556117
88.272352
63.119
125.1725
9.26385
85.2715
62.790952
124.660476
9.028714
84.223809
60.615454
123.237727
9.049
83.10909
65.043636
130.576818
9.488
88.51409
63.7405
128.5275
9.53225
88.5345
60.685217
123.993478
9.408565
86.31826
60.78409
125.905909
9.603181
89.211818
62.252222
125.986666
9.621166
90.71
64.303809
126.567142
10.023714
94.545714
66.485238
130.550952
10.470571
98.047142
71.603888
143.583888
11.8405
111.382222
74.047142
146.687619
12.450952
116.707619
75.1695
147.684
12.5583
116.984
79.1365
155.467
13.1333
123.0895
78.423043
155.967826
13.083043
123.734782
81.643
153.822
12.98205
121.9545
91.222272
164.002272
13.698727
131.066818
114.094782
192.998695
15.416956
151.855217
135.3205
207.6475
17.0198
172.4
123.9895
184.298
15.49315
166.2765
123.718095
178.682857
15.308
164.164285
113.8285
164.005
13.3721
145.659
114.68
162.790909
13.414727
149.7
126.634444
186.293888
15.364555
167.157777
126.35
194.838421
16.270526
172.384736
126.6575
207.375
16.30335
177.5585
127.356086
208.234782
16.569652
179.413043
127.1465
210.0765
17.7428
181.325
124.606363
203.550909
17.794909
181.447727
123.893636
200.535
17.825136
183.691818
123.744285
205.417142
17.870857
184.639523
125.06619
203.257619
17.580238
182.920476
125.866
203.5865
17.63325
179.779
128.013846
201.411538
17.546846
176.192307

sedlabanki_is

USD GBP SEK EUR Vísitala gengisskráningar
DAGS MIÐ MIÐ MIÐ MIÐ GILDI
Jan-03 79.501904 128.518095 9.20719 84.496666 123.89189
Feb-03 77.6755 125.0535 9.14775 83.6985 121.720285
Mar-03 78.041904 123.521428 9.148714 84.34619 121.957695
Apr-03 77.066666 121.222777 9.120833 83.503333 120.476972
May-03 72.9625 118.4095 9.22315 84.415 119.030265
Jun-03 74.04421 122.908421 9.471157 86.31421 121.338105
Jul-03 77.14 125.357391 9.547782 87.733043 124.067895
Aug-03 79.8335 127.137 9.6212 88.866 126.474825
Sep-03 79.181363 127.515 9.79909 88.837272 126.512909
Oct-03 76.225652 127.81826 9.906739 89.208695 125.707452
Nov-03 75.8005 128.026 9.86335 88.7 125.1406
Dec-03 73.074 127.6965 9.9457 89.6685 124.567935
Jan-04 69.4335 126.618 9.5844 87.6135 120.59732
Feb-04 68.5125 127.976 9.44405 86.6585 119.30148
Mar-04 71.050434 129.870434 9.442086 87.178695 121.330678
Apr-04 73.075555 131.599444 9.550777 87.584444 123.170672
May-04 73.378421 131.041578 9.641947 88.076315 123.569931
Jun-04 72.146666 131.807142 9.579476 87.598571 122.722357
Jul-04 71.519545 131.715454 9.541318 87.742727 122.333695
Aug-04 71.499047 130.053809 9.483809 87.12238 121.682742
Sep-04 71.730454 128.596818 9.635409 87.617727 122.098613
Oct-04 70.156666 126.677619 9.668571 87.608571 121.370785
Nov-04 67.101818 124.726818 9.680318 87.118636 119.674854
Dec-04 62.731818 121.02409 9.363454 84.067272 114.545636
Jan-05 62.6555 117.618 9.074 82.1365 112.450185
Feb-05 62.014 117.038 8.8849 80.72 110.713025
Mar-05 59.946 114.4185 8.7182 79.2145 108.278035
Apr-05 62.3125 118.036 8.79435 80.593 110.846985
May-05 64.8315 120.2455 8.94815 82.2535 113.75498
Jun-05 65.140952 118.460476 8.557523 79.245714 111.179347
Jul-05 65.114761 114.017142 8.321047 78.415238 109.718661
Aug-05 63.690454 114.333181 8.389545 78.335454 109.134109
Sep-05 62.116363 112.345 8.155681 76.140909 106.41825
Oct-05 60.99619 107.57 7.783523 73.33 102.792904
Nov-05 61.872272 107.366363 7.628818 72.961363 102.700495
Dec-05 63.52619 110.900952 7.989809 75.35 105.847776
Jan-06 61.498571 108.62238 8.009523 74.564285 104.075495
Feb-06 64.1945 112.23 8.2062 76.693 107.432755
Mar-06 69.625652 121.406521 8.90626 83.703913 116.98076
Apr-06 74.48625 131.60625 9.794937 91.46375 127.140862
May-06 71.735238 134.114761 9.821523 91.65619 126.593142
Jun-06 74.723809 137.608095 10.231523 94.496666 130.670042
Jul-06 74.369047 137.15619 10.237428 94.347142 130.191561
Aug-06 70.396363 133.200909 9.793545 90.191818 124.298913
Sep-06 70.149523 132.29 9.637714 89.325238 123.04269
Oct-06 68.487727 128.410909 9.33409 86.389545 119.182595
Nov-06 69.185454 132.278636 9.797863 89.150909 122.491177
Dec-06 69.356315 136.222631 10.140421 91.65421 125.179347
Jan-07 70.067619 137.235238 10.023142 91.014761 124.820352
Feb-07 67.3665 131.7985 9.583 88.041 120.547215
Mar-07 66.979545 130.43409 9.53859 88.683181 120.765395
Apr-07 65.284117 129.948823 9.556117 88.272352 119.528505
May-07 63.119 125.1725 9.26385 85.2715 115.42506
Jun-07 62.790952 124.660476 9.028714 84.223809 114.330423
Jul-07 60.615454 123.237727 9.049 83.10909 112.389168
Aug-07 65.043636 130.576818 9.488 88.51409 119.938713
Sep-07 63.7405 128.5275 9.53225 88.5345 119.28446
Oct-07 60.685217 123.993478 9.408565 86.31826 115.587178
Nov-07 60.78409 125.905909 9.603181 89.211818 118.108527
Dec-07 62.252222 125.986666 9.621166 90.71 119.847811
Jan-08 64.303809 126.567142 10.023714 94.545714 124.317733
Feb-08 66.485238 130.550952 10.470571 98.047142 128.817509
Mar-08 71.603888 143.583888 11.8405 111.382222 143.940633
Apr-08 74.047142 146.687619 12.450952 116.707619 149.693852
May-08 75.1695 147.684 12.5583 116.984 150.69184
Jun-08 79.1365 155.467 13.1333 123.0895 158.26778
Jul-08 78.423043 155.967826 13.083043 123.734782 158.315439
Aug-08 81.643 153.822 12.98205 121.9545 158.340255
Sep-08 91.222272 164.002272 13.698727 131.066818 171.662095
Oct-08 114.094782 192.998695 15.416956 151.855217 202.952486
Nov-08 135.3205 207.6475 17.0198 172.4 231.258755
Dec-08 123.9895 184.298 15.49315 166.2765 216.72278
Jan-09 123.718095 178.682857 15.308 164.164285 216.1348
Feb-09 113.8285 164.005 13.3721 145.659
Mar-09 114.68 162.790909 13.414727 149.7
Apr-09 126.634444 186.293888 15.364555 167.157777
May-09 126.35 194.838421 16.270526 172.384736
Jun-09 126.6575 207.375 16.30335 177.5585
Jul-09 127.356086 208.234782 16.569652 179.413043
Aug-09 127.1465 210.0765 17.7428 181.325
Sep-09 124.606363 203.550909 17.794909 181.447727
Oct-09 123.893636 200.535 17.825136 183.691818
Nov-09 123.744285 205.417142 17.870857 184.639523
Dec-09 125.06619 203.257619 17.580238 182.920476
Jan-10 125.866 203.5865 17.63325 179.779
Feb-10 128.013846 201.411538 17.546846 176.192307

sedlabanki_is

USD
GBP
SEK
EUR
Year
ISK/currency
ISK vs. other currencies

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