Iceland: Success through failure

Michael Victory's picture

on Iceland, Ireland, and Latvia

via TVR:

Iceland fared better by letting banks fail

by Thomas Molloy of Irish Independent:

Iceland pursued better policies than Ireland or Latvia when the three countries’ economies collapsed in 2007 because the Reykjavik government allowed banks to fail, according to a new report by the influential Bruegel think tank.

The report by economist Zsolt Darvas looked at the response of the three small and open economies. The three countries all initially allowed the credit boom to fuel property speculation and investment imbalances. As the crisis began, property prices fell, banks went bust and all three countries had to turn to the International Monetary Fund (IMF) for help.

The governments then introduced fiscal austerity programmes, structural reforms and reforms of the banking system. These similarities allow economists to compare the different responses in an attempt to determine what worked best.

The experience with the collapse of the gigantic Icelandic banking system suggests that letting banks fail when they had a faulty business model can be the right choice,” the report notes.

“The banking sector suffered meltdown in Iceland and foreign lenders to banks suffered massive losses. Yet, the crisis impact was much more benign in Iceland than Latvia.”

Mr. Darvas notes that it was the last Fianna Fail-led government’s decision to issue a bank guarantee to Irish-based banks [that led to the crisis deepening] but adds that Ireland then came under pressure from the European Central Bank to keep the guarantee in place.

“While socialising bank losses in Ireland was initially an Irish decision, later, when the Irish government wanted to change course, European institutions barred it primarily in the name of financial stability in the euro area and beyond,” he writes.

The report is sceptical that a collapse in the Irish banking sector would have harmed the rest of the eurozone.

“Little is known about what would have happened to financial stability outside Ireland in the event of letting Irish banks default, but one thing is clear: other countries have benefited from the Irish socialisation of a large share of bank losses, which has significantly contributed to the explosion of Irish public debt,” it adds.


The only way to avoid potential cross-country spillovers of national bank collapses would be to centralise the regulation and supervision of European banking along with the system for bailing out insolvent lenders, the report concludes.

“There is a strong case for a banking federation,” states the report.

Iceland has suffered least among the three countries. Latvia has suffered most since the economic crisis began — seeing a bigger collapse in output than any other country in the world, the report notes.

Ireland has endured the fifth worst economic contraction, while Iceland’s was the seventh worst. Latvia has also suffered the worst declines in employment. Iceland came out from the crisis with the smallest drop in employment .

The good news for all three countries is that recovery has begun in each economy. Latvia is seeing the fastest improvements, although this has not yet generated many jobs. Both Latvia and Iceland have returned to the bond markets.

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sara29's picture

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Martin T's picture

Good post on why Iceland is faring better by letting its banks fail.


fredquimby's picture

Latvia is seeing the fastest improvements, although this has not yet generated many jobs.


So what improvements are those then?

THE DORK OF CORK's picture

Back of the envelope

Using current market prices , the April 2011 census figures and 2010 GNP figures I calculate 27,985 euros a head.


THE DORK OF CORK's picture

GNP per head at current market prices

2007 : 37,661

2010 : 28,667


GDP per head

2007 : 43,773

2010 : 34,892

I don't think these figures took into account the 8.1 % rise of pop recorded in April 2011 !!! 

whoisjohngalt11's picture

Failure is an Option!!! Imagine if little Johnny was allowed to fail and learn from

DarthVaderMentor's picture

I wish Johnny Corzine had been given that failure earlier in his life.....

LawsofPhysics's picture

Makes sense, especially since when losing or failure is outlawed, then no one can win.

TheAkashicRecord's picture

Lessons from Iceland

 Olafur Ragnar Grimsson, Iceland's president, discusses his thoughts on the eurozone crisis, what countries should learn from Iceland, and how austerity measures worked for his country.

A lucky Country, geographically speaking (all from Wiki)

"About 81 percent of total primary energy supply in Iceland is derived from domestically produced renewable energy sources."

"In 2007, geothermal energy provided about 66 percent of primary energy"

"Renewable energy provides 100 percent of electricity production"

Plate tectonics bitchez!

THE DORK OF CORK's picture

The author seems unaware of the Irish GDP / GNP anomaly

He cannot understand why unemployment is so much higher down here relative to Iceland given the broadly similar GDP decline.

Perhaps we should do a personnel swap of Irish Aughinish Alumina workers for Icelandic fishermen.
To prove a point.

GNP at current market prices

2007 : 163,243 million

2010 : 128 ,207 million

It will be lucky to get to 126 billion in 2011


If you don't believe me or GNP look at the Irish energy consumption figures for 2007 & 2010.

Oil inputs 2007 : 9047 KTOE

Oil inputs 2010 : 7373 KTOE

Is oil demand inelastic in depressions ?

Me don't think so.

The slightly different from GNP  TOATAL DOMESTIC DEMAND metric at current prices is even more striking.

Year 2007 third quarter : 42, 099 million euros

Year 2007 fourth quarter : 43, 645 million euros

Year 2011 third quarter : 29 ,927 million euros.


Gross fixed capital formation was just under 50 billion euros during 2006 & 2007

It was 18 billion in 2010.

And will be 15 /16 billion in 2011

Don't believe the propoganda - Ireland is bleeding to death.



Freddie's picture

Maybe if Bono and U2 paid some bloody taxes.  They sent tens billions of europeans tax money to their corrupt pals in Africa.  All the Euro lib scum pols did Bono's bidding giving tens of billions to Afirca.   Throw Bono and Lord Geldoff in the wood chipper.   

smiler03's picture

Very interesting figures Dork, it does indeed look grim.

THE DORK OF CORK's picture

Yes well our population has also risen dramatically during that period so GNP per head is much lower again.

From 4,239,848 in April 2006 to 4,581,269 in April 2011 - a increase of 8.1% in 5 years.

Its all very Maltusian really.

We had similar problems when we lost our local parliament in 1801 - this was known as the act of Union and this destroyed some embryonic industrial activities.

By the 1820s there was considerable local strife in the countryside just north from where I lived as there was still a folk memory of wealth.

By the 1840s there was a famine.

If you use the European treaty of Maastricht in 1992 as a guide then we are entering the 1820s phase now.


AndrewCostello's picture

Despite the HYSTERIA at the time, the world did not end when banks were allowed to fail and fraudsters were prosecuted.  In fact, Iceland is now in the enviable position of being able to start fresh.



smiler03's picture

Andrew Costello selflessly says "Buy my book now!!!".

Tijuana Donkey Show's picture

Your all fired, where is the Charlie Sheen joke? Success through failure is WINNING man, winning. We're winning with fiat currency, just like Charlie is winning. 

Ned Zeppelin's picture

Speaking of spelling, it's spelled "you're", as the contraction of "you are."

steve from virginia's picture


You'll notice the first thing a country does when it gets its books in order after a massive crash is to get right back in debt ...

... to the same evil bankers.

How long before Latvia and Iceland are back in the bread-line?

Ireland never gets out of it!

Siggy's picture

Why is it so freaking hard to spell lose or losing correctly?

Divine Wind's picture

If you think it is bad here, consider how bad Kim Jung-un must be...

"I rike roose women!"

"I HATE roosing."

"Roosen the screw a rittle more."

"Why does our soccer team keep roosing?"


bank guy in Brussels's picture

losing not 'loosing'

... the power 'to bind and to loose', as Jesus of Nazareth the rebel Jew said ...

but losing is a different story

Divine Wind's picture

Few places in the world will prop up a legitimate business enterprise that is failing, regardless of the reason.

This is the beauty of the free market. If there is a dollar to be made, there will ALWAYS be a replacement if a business or enterprise folds. Even if the margins are as lean as a Kenyan goat.

A Free Market Courtesy Flush if you will.

Get the stink out of banking.


philipat's picture

Two other words come to mind: Moral Hazard.

cossack55's picture

Iceland was wise enough to turn down The Bernank's visa application.  Never introduce a lethal, corrupt, vile and odious virus into your population.

Georgesblog's picture

Allowing bankers to get their hands in the public cookie jar is always a mistake. Allowing private banks to control the issuance of currency was the first mistake, but that horse left the barn, a long time ago. The only remedy is to take that control away from them, after they fail.