Iceland’s economy suffered a meltdown in 2008, with its banks defaulting on $85 billion. In 2009 its citizens took to the streets and demanded action from the government against those they saw as responsible for the crisis. The government responded, putting people before markets, and now Iceland’s economy is outgrowing the euro one and, on average, the developed world.
Bloomberg reported that after it was determined in October 2008 that the banks could not be saved, the government intervened. It ring-fenced domestic accounts and shut out international creditors. Iceland’s central bank prevented the sell off of krona through capital controls, and new banks were created that were controlled by the state. Then the government and the state-controlled banks agreed that amounts in excess of 110% of home values would be forgiven on mortgages.
The country’s supreme court also ruled in 2010 that debts indexed to foreign currencies were illegal, which saved households from having to cover losses resulting from drops in the value of the krona.
An Icelandic Financial Services Association report cited by Bloomberg pointed out that the country’s banks have forgiven loans amounting to 13% of Iceland’s GDP. That lessened the debt load of the population.
What Your Peers Are Reading
In addition, the government is investigating, and prosecuting, numerous prominent figures from the meltdown. Currently more than 200 face criminal charges and a special prosecutor has said as many as 90 may be indicted.
Lars Christensen, chief emerging markets economist at Danske Bank in Copenhagen, was quoted saying, “You could safely say that Iceland holds the world record in household debt relief. Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that.”