UK: Deloitte Monday Briefing: Iceland, From Doom To Boom

Last Updated: 25 July 2012
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017
  • Iceland saw a deep financial crisis in 2008-9. It is a small economy, with a population of 320,000, roughly the same as Leicester's. Iceland's escape from financial chaos offers almost a text book lesson in how an economy can recover from a major shock.
  • In the long history of financial crises Iceland's rates as a big one. The country's three main banks collapsed and were nationalised in the space of a week. Their assets were equivalent to ten times Iceland's GDP. The economy fell into deep recession, shrinking by 15% in less than two years. The Icelandic Krona virtually halved in value, pushing inflation to a peak of 18.6%.
  • Yet four years later the Icelandic economy has been turned around. This year Iceland is expected to grow by 1.3%, a stronger growth performance than most European countries. Unemployment is lower than in the UK, Germany or the US. Inflation has dropped sharply. And international investors are buying Icelandic government bonds even as they shun Greek debt.
  • As the euro area contemplates a long painful adjustment for its crisis stricken members, does Iceland's speedy recovery from crisis hold any lessons?
  • Iceland didn't bail out its banks - indeed, they were too big to save – with the result that shareholders, many of them overseas, took the pain. This avoided a transfer of huge liabilities from the banks to the taxpayer as happened under Ireland's bank rescue scheme. Iceland prioritised the functioning of the domestic financial system over the interests of foreign investors and depositors.
  • Without government support almost half of Iceland's banks failed, cutting their total number to just fourteen. The authorities swiftly recapitalised these remaining banks, and this led to a significant increase in government debt. But the general consensus is that the speed of Iceland's bank restructuring programme contributed to the economic recovery.
  • The Icelandic government allowed public spending to surge during the initial stages of the crisis. This bolstered demand at the moment of maximum weakness in the economy. Since then the government has tightened fiscal policy and the deficit has shrunk.
  • The collapse in the Krona gave an overnight boost to competitiveness. In just three years Icelandic exports, dominated by fish, aluminium and manufactured goods, rose by more than 30%. Iceland prevented this devaluation from turning into a rout and kept money in the country by imposing controls on movement of capital out of the country.
  • A financial crisis forces an economy into deep, structural change. This process is easier for more flexible, competitive economies. Iceland ranks a respectable 30th in the World Economic Forum's league table of competitiveness, well above all the southern euro area nations and on par with Ireland. Greece, by contrast, ranks in 90th place, below Rwanda, Namibia and a number of other developing countries. This flexibility stood Iceland in good stead during its financial crisis.
  • Contrary to received wisdom, Iceland's experience shows that letting banks fail, and walking away from foreign creditors, can work. The Irish government took a different route, and absorbed its banks' debts, in the process quadrupling the level of public sector debt.
  • Iceland also benefited from the devaluation of its currency, an option that does not exist for individual members of the euro area.
  • But for us the strongest message is a positive one - that, under the right circumstances, countries can recover surprisingly rapidly from deep financial crises.
  • A headline from the Times in October 2008 captured the prevailing mood of the time - "Terror as Iceland faces economic collapse". Less than four years later, the picture had changed. Last month the Daily Telegraph announced - "Booming Iceland makes second early loan repayment to IMF".


The FTSE ended the week 0.3% down, following weak global economic data.

Here are some recent news stories that caught our eye as reflecting key economic themes:


  • The International Monetary Fund (IMF) stated that austerity in the UK "would need to be scaled back if growth does not build momentum by early 2013" – austerity
  • The IMF cut its forecast for GDP growth in the UK in 2012 to 0.2%, from a previous estimate of 0.8% – slowdown
  • UK consumer price inflation (CPI) fell to 2.4% from 2.8% in June from May, the largest fall in the measures history – inflation
  • Spanish 10-year bond yields rose above 7.0%, following an auction of just under €3bn of government debt – euro debt crisis
  • The European Central Bank (ECB) said it will no longer accept Greek sovereign debt and other assets backed by the Greek government as collateral – euro debt crisis
  • The Greek coalition government agreed to make €11.5bn of spending cuts over the next 2 years – euro debt crisis
  • The euro fell to its lowest levels against the US dollar since June 2010 – euro stress
  • Italian prime minister, Mario Monti, claimed that the island of Sicily is close to defaulting on its debts, estimated to be in the region of €5bn – euro debt crisis
  • The salary of King Juan Carlos of Spain will be voluntarily cut by about 7% this year, in line with the government's new austerity package – euro debt crisis
  • UK unemployment fell by 65,000 to 2.58 million in the three months to May – unemployment
  • The Co-operative Group agreed terms to buy 632 high-street banking branches from Lloyds Banking Group, in a deal potentially worth Ł750m – banking
  • 51% of British exports went to countries outside the EU in Q1 2012, the first time a majority has done so since the UK joined the common market in the 1970s – emerging markets
  • The number of Americans filing for unemployment benefits rose by 34,000 for the week ending 13th July, the largest increase since April 2011 – slowdown
  • The Scottish economy has officially entered into recession following a 0.1% decline in GDP in both Q4 2011 and Q1 2012 – slowdown
  • World Bank data shows that approximately 75% of the world's population now have mobile phones, with 5 billion of the 6 billion held in developing nations – technology revolution
  • Chinese president Hu Jintao pledged $20bn in credit to African governments over the next 3 years, and called for greater China-Africa co-ordination – emerging markets
  • Norway's sovereign wealth fund is now the third largest investor in the FTSE 100, with approximately Ł25bn of holdings, according to analysis from The Daily Telegraph – sovereign wealth
  • e-books outsold adult fiction in hardback for the first time in the US in 2011, according to data from the Association of American Publishers – digital revolution
  • Residents of the small Greek island of Ikaria are considering attaching themselves to another European country, as a 100 year old agreement tying them to Athens has now expired, according to Italian newspaper Libero – picking winners

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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