The financial crisis affected every person and company in
Iceland. Let’s look at the main factors and what the situation is now.
When the bank crashed in October 2008 the parliament
accepted an emergency legislation. This was done in order to minimize the
impact of the financial crisis. The Financial Supervisory Authority of Iceland
used that law to take over the domestic operations of the three largest banks
while almost all foreign operations of the banks went into receivership.
The decline of the currency against every currency was very
dramatic as can be seen on the graph of the Index of ISK. It had been getting
stronger for many years and at beginning of 2008 investors were realising that
the currency was getting too strong and would eventually have to get weaker to
balance the economy. From January to September 2008 the Icelandic króna had
declined over 35% and interest rates were raised to 15.5% to deal with high
inflation. On the 8th of October the Central Bank tried to peg the
Icelandic króna to the Euro at 131 krónur per Euro. In less than 24 hours that attempt
had failed, The Icelandic króna was then traded for 340 Icelandic krónur per
Euro. The central bank set up currency restriction so the trade of the króna
was not free any more. On 28th of October the Central bank had an
official price of 180 krónur per Euro while the European Central bank was
quoting 280 krónur per Euro. It took a long time to get a balance between the
offshore market and the Central Bank price, there is still a misbalance but it
is minor to what it was before. These restrictions will be slowly released but
probably not completely until 2013.
Another important factor was the agreement with IMF which
was signed in November 2008. This gave the Icelandic government access to
foreign liquidity as international markets were really sceptic in general and
especially with Iceland. The Icelandic government successfully raised 1$
billion with a bond issue on June 9, 2009. There were some doubts that such a
high bond issue could not be successful shortly after the collapse, but demand turned
out to be higher than supply in the end. There were some delays in the IMF
programme with Iceland but they officially completed that 33 month programme in
August this year.
Now Iceland has completed the IMF programme, and the economy
is expect to grow more than double the Euro area average in 2011. Unemployment
seems to be decreasing slowly and foreign investors are starting to show more
interest in the Iceland as the economy is more stable but the currency still
low. So I would say that the long term future for Iceland is quite bright even
though it is a bit tough in the short term.
Graphs:
http://www.statice.is/lisalib/getfile.aspx?ItemID=13068
http://m5.is/?gluggi=gjaldmidill&gjaldmidill=22
http://www.statice.is/lisalib/getfile.aspx?ItemID=13068
http://m5.is/?gluggi=gjaldmidill&gjaldmidill=22
Do you believe something like this could happen again in future? What measures have been implemented to prevent this? Additionally, how has a balance been achieved to ensure new regulations / limits do not slow economic recovery?
ReplyDeleteCrisis is something that happens every 7 years so I believe it will happen again. On the other hand I believe they have learned from these crisis and implemented enough regulations to prevent this from happening again. I don't think next crisis in Iceland will be bank crisis, there will just be some other external factor that will affect the crisis.
ReplyDeleteI do not fully understand what you mean by the second part but currency restrictions are slowing down the recovery of the economy but on the other hand are necessary. Without them Iceland would never have made it so far. I might write another blog (after the Argentinian blog) about how Iceland survived the crisis. That blog will be more detailed so please keep reading my blog.