How did Iceland go bankrupt?

The small and hitherto very prosperous nation of Iceland seems likely to go bankrupt. At the moment they don’t have even enough foreign exchange to import food (which they can’t grow themselves), and because Icelandic banks have defaulted on British depositors, Britain has rather ludicrously declared Iceland to be a terrorist nation. The future is uncertain, but it seems sure that every Icelander will see a big decline in their standard of living, and that includes many who never really profited from the recent boom.
That’s just introductory. Up until a year ago, the Icelandic miracle was one of the big success stories of globalization and financial deregulation. The rest of this post will just be links and citations, most of them obsolete and highly embarrassing..

Update: Iceland as a terrorist nation
They may not have dressed up in burkas and strapped several kilos of Semtex around their waists. But to go into the high street, persuade charities, pensioners, local authorities to deposit money and then disappear, having trousered nigh on £8bn is, even by City standards, bad. Financial terrorism, grand larceny, call it what you will…..

Deregulation brings boom time to Iceland Nov. 9 2007

The catalyst for a dramatic turn-around was the deregulation of the formerly state-controlled financial sector. The move unleashed an unprecedented credit boom and helped to create a business elite now known locally as the billionaire boys club. Flush with cash raised domestically and from international markets and headed by fresh-faced entrepreneurial chief executives, firms such as Bakkavor Group, FL Group and Baugur have used Reykjavik as an unlikely base for aggressive overseas expansion.

Bank July 4, 2005

The Icelandic economy is transforming in a postive way since the currency crisis of the 1980’s from the old collective institutions to government now privatizing sectors and implementing free market reforms opening up this small economy. During the 1980’s, less than satisfactory political management resulted in a currency collapse for the Icelandic krona in that era…..If the government is committed to opening up foreign investment more, especially in areas like energy, Iceland’s future looks tremendously prosperous….Prime Minister Halldor Asgrimsson has been in power since September 2004. Free market reforms under former Prime Minister Oddsson led Iceland from 1991-2004 who spearheaded this economic transformation……During the 1990’s, the Icelandic economy strengthened as deregulation and privatization policies were implemented replacing the former slow growth protectionist and a highly regulated economy hiding behind capital controls.

Newsweek: The Iceman Cometh (May 23, 2005)

Since the mid-‘ 90s, the country’s center-right government has pushed free-market reforms–privatizing banks, ditching price controls and slashing taxes. Companies now pay just 18 percent on profits, down from 50 percent. “The same economic laws apply whether a country is small or large,” says Finance Minister Geir Haarde. “We are experiencing the fruits of a very determined and consistent policy.”

Wall Street Journal, January 29, 2004: Miracle on Iceland

Having stabilized the economy with monetary and fiscal restraint, the Oddsson government started privatizing. It began with small companies, later turning to large fish-processing plants, factories and financial companies. All the commercial banks are now in private hands. Altogether, the sales brought in $1 billion, not a bad haul for a country of 280,000. Only one large company remains, Icelandic Telephone, but it will soon be put on the sales block.

Mont Pelerin Society conference in Iceland, 2005
: The MPS are freemarket cheerleaders. Not much info at the link itself, but I wish I had access to this archive from their conference.

Hannes H. Gissurarson has recently published an article in the Wall Street Journal European edition, on the Icelandic economic miracle. Newsweek has also published an article about the Icelandic economic miracle, interviewing Finance Minister Geir H. Haarde.

The Virtues of a Free Market System (05-25-2008): I included this piece because the passage below is so freaky.(Update: I now see that “The Virtues of the Free Market System” is from a company which ghosts undergrad papers. I should have left it out but it’s just too funny. The humor may have been intentional on the part of the ghostwriter. It’s so damn hard to tell when those folks are serious.)

Free market economic systems are the best way for a country to create wealth and get out of poverty. If we look at the top ten countries based on the UN Human Development Index, we find that highly deregulated countries are in the top ten, namely; 1. Norway 2. Iceland 3. Australia 4. Luxembourg 5. Canada 6. Sweden 7. Switzerland 8. Ireland 9. Belgium 10. United States. As you will note from the above there is no country in the top ten that is socialist in any shape or form.

So much for the ‘free’ market. Now what?

Unfortunately, Britain’s Blairite authoritarians didn’t spend enough time taming the market. That country has been badly wounded by the credit crisis, as have other nations that moved too enthusiastically into free-market deregulation including Ireland and Iceland. Nations that were slower to deregulate, like Canada, have fared better. Prime Minister Stephen Harper is right when he says that. What’s ironic is that if he and other aficionados of the unfettered free-market had been in charge earlier, Canada’s financial system might well be in more trouble than it is.

Milton Friedmanism and the Meltdown in Iceland: just for fun I’ll finish up with this:

What is somewhat incredible is the apparent lack of remorse or self-reflection and doubt being expressed by the ideologues who put these policies in place and caused this economic and financial meltdown. Amazingly, many neo-cons continue to argue that this was caused by regulations that were too strong, or by a confluence of unlikely events, including a rise in “leftist attitudes“.

7 thoughts on “How did Iceland go bankrupt?

  1. Sweden, Switzerland and Norway are not in any way socialist?
    I think every country in that “Top 10”, save the USA, has national health care. Which, we all know is a large slide down the slippery slope of socialism.
    I think this means that the free-market cultists need to STFU for the next 30 years or so. Of course, they won’t… but sensible people (and those burned by their policies) can safely ignore them.
    You know, there’s a reason we put all those regulations in place… to prevent the extreme boom and bust cycles which regularly afflicted the economy prior to the 1930s.

  2. The whole piece took slightly more than an hour to do, including all of the research and some formatting changes. Freemarket bragging about Iceland was not at all hard to find.

  3. “The small and hitherto very prosperous nation of Iceland seems likely to go bankrupt.”
    No, not likely anymore. Haarde and his gang have finally accepted they have to look for a solution on the critically underfunded underguarantee fund, and this will pave the way for an IMF loan that is currently blocked by concerned European countries. The credits that are necessary to pay for the guarantee will be high, but they won’t bankrupt Iceland. Nobody has a real interest in ruining the nation.
    “Britain has rather ludicrously declared Iceland to be a terrorist nation”
    Sry, but that’s total nonsense, pure Icelandic propaganda, designed to dostract people from the almost total failure of the Haarde administration. No UK official ever declared Iceland a terrorist nation. It’s just that the assets of Icelandic banks were frozen under a provision in the british “Terrorism, Crime and Security Act”. The shamelessly discrimating way in which the Icelandic government attempted to got hold of the assrets in order to use them for guaranteeing Icelandic deposits, ONLY ICELANDIC DEPOSITS, at the expense of foreign customers, gave Brwon and Darling sufficient legal reason to use the law to prevent this theft. Even though the communication management of the Brits cold have been better, too, they did everything possible to prevent the banks fronm collapsing. But their generous offer was rejected by the incompetent Icelanders, thus leading to the downfall of Glitnir.
    Really, it seems you have missed all important developments and revelations of the last weeks. I suggest you check the archives at the before writing the next story about the Iceland crisis. There’s much room for improvement.

  4. Unfortunately, also seems to be bankrupt:

    Sorry, ‘’ does not exist or is not available.

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