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
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Chart1
| 2003 |
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| 2006 |
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| 2008 |
| 2009 |
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
ISK vs. other currencies
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maí.03sep.03
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maí.07sep.07
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maí.09sep.09
jan.10
Year
ISK/currency
USDGBPSEKEUR
Chart2
| 37622 | 37622 | 37622 | 37622 |
| 37653 | 37653 | 37653 | 37653 |
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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
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