Guest Post: The Icelandic Success Story

Tyler Durden's picture

Submitted by John Aziz of Azizonomics

The Icelandic Success Story

Emotionally, I love Iceland’s financial policies since the crash of 2008:


Iceland went after the people who caused the crisis — the bankers who created and sold the junk products — and tried to shield the general population.

But what Iceland did is not just emotionally satisfying. Iceland is recovering, while the rest of the Western world — which bailed out the bankers and left the general population to pay for the bankers’ excess — is not.

Bloomberg reports:

Few countries blew up more spectacularly than Iceland in the 2008 financial crisis. The local stock market plunged 90 percent; unemployment rose ninefold; inflation shot to more than 18 percent; the country’s biggest banks all failed.

This was no post-Lehman Brothers recession: It was a depression. 


Since then, Iceland has turned in a pretty impressive performance. It has repaid International Monetary Fund rescue loans ahead of schedule. Growth this year will be about 2.5 percent, better than most developed economies. Unemployment has fallen by half. In February, Fitch Ratings restored the country’s investment-grade status, approvingly citing its “unorthodox crisis policy response.”

So what exactly did Iceland do?

First, they create an aid package for homeowners:

To homeowners with negative equity, the country offered write-offs that would wipe out debt above 110 percent of the property value. The government also provided means-tested subsidies to reduce mortgage-interest expenses: Those with lower earnings, less home equity and children were granted the most generous support.

Then, they redenominated foreign currency debt into devalued krone, effectively giving creditors a big haircut:

In June 2010, the nation’s Supreme Court gave debtors another break: Bank loans that were indexed to foreign currencies were declared illegal. Because the Icelandic krona plunged 80 percent during the crisis, the cost of repaying foreign debt more than doubled. The ruling let consumers repay the banks as if the loans were in krona.


These policies helped consumers erase debt equal to 13 percent of Iceland’s $14 billion economy. Now, consumers have money to spend on other things. It is no accident that the IMF, which granted Iceland loans without imposing its usual austerity strictures, says the recovery is driven by domestic demand.

What this meant is that unsustainable junk was liquidated. While I am no fan of nationalised banks and believe that eventually they should be sold off, there were no quick and easy bailouts that allowed the financial sector to continue with the same unsustainable bubble-based folly they practiced before the crisis (as has happened throughout the rest of the Western world).  

And best of all, Iceland prosecuted the people who caused the crisis, providing a real disincentive (as opposed to more bailouts and bonuses):

Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.


Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.


That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown.

Iceland’s approach is very much akin to what I have been advocating — write down the unsustainable debt, liquidate the junk corporations and banks that failed, disincentivise the behaviour that caused the crisis, and provide help to the ordinary individuals in the real economy (as opposed to phoney “stimulus” cash to campaign donors and big finance).

And Iceland has snapped out of its depression. The rest of the West, where banks continue to behave exactly as they did prior to the crisis, not so much.

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newengland's picture

Offshore big banks based in London bankrupted Iceland. New Labour paedophile whore Brown, Mandelson and Blair used anti-terrorist law to force Iceland into paying for the banksters, and the New Labour local authorities who cynically got bigger interest rates by parking money with banks based in London who used Iceland - all totally unbeknown to Icelanders who were ruined by such antics, but well known to the few Iclelandic politicians who connived with Brits.

Valhalla: know this.

Die for banksters if you choose. Iceland is true to its community.

epwpixieq-1's picture

"write down the unsustainable debt"

It is not so simple, actually, it IS WRONG on the long run.

When you do that, assuming you collapse the unsustainable financial enterprises, banks and all connected with them entities ( because, you see, not only the banks are to blame but the ENTIRE FINANCIAL system, and the manipulated markets as well ), and prosecute all the financial "magicians, you incentivize the people who were not prudent and decided to go along and mount debt more than they can sustain. What about the people who WERE saving, consumed as much as they can afford, even less based on their income, just to save some money for the future and be more secure ( as if that were possible ).

With this decision all these prudent people are punished. How are you going to reward them if you are rewording the imprudent ones ? If you do not do that, you are NOT insentivizing the surviving of the fittest. It may sound cruel, but this is the Natural way, and everything in this world has to be balanced, otherwise the unbalances start to grow and at you will ALWAYS some king of crash type of events.

One thing for certainty will come out of such write offs, as it already started to cripple in the systems, is that, in order to save, the prudent ones will start using GOLD and SILVER, or any other type of tangible value storage.

boeing747's picture

HO HO, Let's do it VikingStyle! Iceland is the weakest link of banks' power grip because they are afraid of unpredictable volcanos next to bank towers.

newengland's picture


A small community that would defend its own people against hateful greed will propser, and live long after the hateful aggressors.

The Icelandic government heard the will of the people. The rest of the Western world politicos and bureaucrats seem content to serve the banksters.

No Valhalla for you, cheats and political fans of biggest banksters.

yellowsub's picture

Where's their sense of entitlement?

mt paul's picture

bet ..the iceland

still has twinkies too...

Hobbleknee's picture

"To homeowners with negative equity, the country offered write-offs that would wipe out debt above 110 percent of the property value."

Imagine you've been hating life because you've lived within your means in a shitty apartment, saving for years to buy a house, and then they do this.  Yes, it's better than bailing out banksters, but it's still unjust, and I would be pissed.

4exNinja's picture

The reason this doesn't happen elsewhere is because the politicians who could force these measures are BOUGHT SOCK PUPPETS.

And they're bough by the very same people who would receive a major haircut if everyone did as Iceland did. So what does Goldman & Co do if they don't want a haircut...they force the people of various countries (Greece, etc.) to suffer for their mistakes. And politicians go along, selling out their own people because they are BOUGHT.

Until money can't influence politics as it does at the moment, NOTHING will ever improve.

I applaud Iceland for doing the right thing...their politicians deserve a lot of credit and should be considered more patriotic than 99.99999% of politicians in the US, UK, and other sock puppet regimes.

If you're in the US, there are some guys who try to change this sock puppetry through a constitutional amendment...seems like a pretty good cause:

myptofvu's picture

I have too many problems with this article to even begin, so I won't. Not that I was in favor of TARP I wasn't but if I could default on everything and then tell my creditors what I was willing to pay them my balance sheet would look pretty damn good too. As far as legal actions I didn't see any names of politicians.

4exNinja's picture

Look at it this way:

What Iceland did equals you being in massive debt, and when your creditors say your entire family now has to pay up, you say "nope...I'm the one who has to pay, and clearly I can't you get a haircut". Those companies lend money to you and no one forced them to, so it's not as if they don't deserve any blame. It would be unfair for them trying to claw back money from your uncle...but that's EXACTLY what they demand when it comes to countries other than Iceland. Why should my kids have to pay for mistakes others have made??? 

I work in real estate and given all those bonkers LTVs I've seen I don't feel bad for banks receiving a haircut...their greed led them to make bad investment decisions. And contrary to private people, it's their business to differentiate between a good and bad investment. Regular people on the other hand mostly don't have a while it's still bad, you can argue that they entered investments based on a lack of education in the matter...banks don't have that excuse.

Iceland's way is ethically the corrrect one...and at least for now it seems it's also the right choice least for Iceland, not Godman & Co who sold them those bad investments pretending they're AAA rated ;)


Cosimo de Medici's picture

Iceland?  Please.  They were all guilty, but they decided going after the bankers somehow made that rancid shark flesh they love so much smell and taste better.  "Yea, it's their fault for giving me all that free money".

They all loved the bankers when the free money was flowing.  They all began to believe their legends and myths were becoming true, that Icelanders were finally somebodies.  Then the bottom fell out of their real estate market and their silly investments, and the average Icelander who borrowed up to the hilt couldn't repay.  Of course, it was somebody else' fault, not the pie-in-the-sky RE Mogol wannabes.  When the external depositors wanted their money back---which nearly every one of Iceland's 300K volk had been happy to take---they stiffed the UK municipalities, pensioners, and Scottish widows and orphans who had---admittedly foolishly---placed their deposits in the cold hands of the Icelanders.  Yet every last one of these sons of....dottirs were more than happy to believe themselves financial geniuses when money was free and Icelandic property started to feel like 1989 Tokyo.

Indeed, there's another apt Japanese analogy here, at least for those who understand Japanese culture.  Japan has designated bad guys, who take the scorn owed to all.  Mrs. Watanabe is mad at Mrs. Suzuki, but she directs her scorn to the one who is "ijime'd", not to Mrs. Suzuki.  "Civility" is maintained.  In Iceland, the ones "ijime'd" were the bankers, though the average citizen is just as guilty.

Let them all stew in their own hot tubs.  The typical Icelander makes that shark flesh smell good. They're all selfish hypocritical a-holes.

4exNinja's picture

In orther are for bailouts of banks. Because there are only 2 ways: Either you bail out the banks (making citizens pay), or you bail out the citizens (making banks pay). 

If you're a patriot, this should be the easiest choice in the world...

chaartist's picture

I want to see a movie about this unbelievable achievement.