The Economy of Iceland

Dec 27, 2023 By Susan Kelly

The Icelandic economy persevered through the country's sovereign bankruptcy and the government's fall. However, a tourism-driven economic resurgence can again cause the economy to become unsustainable. This is because the tiny island's economy is susceptible to cycles of boom and collapse.

The country of Iceland had a GDP of $24.49 billion in the year 2017. Because only 343,400 people are living in the nation, this results in a prosperous gross domestic product per capita of $71,311. That is much more than the GDP per capita of the United States, which is $59,958, and the GDP per capita of Canada, which is $45,149. 2016 was the year that saw Iceland's GDP growth rate reach an all-time high of 6.6 percent. That is far higher than the healthy growth rate of two to three percent every year.

Fishing and aluminum production has always been the backbone of Iceland's economy. In 2017, the fishing sector contributed around 5 percent of the total GDP. It is susceptible to diminishing fish supplies across the world. Both overfishing and changes in the climate are to blame for the reduction.

After the eruption of Eyjafjallajokull in 2010, tourism became a significant contribution to the economy of Iceland. In 2016, there were 4.5 times as many visitors as permanent residents in the nation.

The Current Financial Crisis in Iceland and Its Root Causes

The government took over the three main banks in Iceland in October 2008. According to statistics provided by Thomson Reuters, Kaupthing Bank, Landsbanki, and Glitnir Bank have defaulted on a combined total of $62 billion worth of foreign debt. The failure of Iceland's banking system caused investors from other countries to withdraw their funds. Because of this, the krona's value dropped by fifty percent in only one week. The stock market saw a drop of 95%. Nearly every company in Iceland was forced to declare bankruptcy. While home values went down, mortgage rates increased by more than 100%.

The following explains how Iceland's banks caused the crisis: First, they offered interest rates of 15 percent on deposits, which enticed customers from the Netherlands and the United Kingdom to make financial contributions. They could offer these prices because of the high value of the Icelandic krona, the country's currency. It had developed into a significant commercial currency. Because of this, its value increased by a factor of 900 between the years 1994 and 2008.

Inflation was a direct result of it as well. The cost of housing went up. The Iceland stock market had a meteoric rise of 900 percent between 2003 and 2004. The typical Icelander had amassed wealth that was 300 percent more in 2006 than it had been in 2003. Many Icelanders took out additional mortgages to take advantage of the low prices of foreign currencies. Using customer deposits, the banks invested one hundred billion dollars in overseas businesses, properties, and even soccer clubs. The gross domestic product of Iceland in 2008 was just $17.8 billion; therefore, that quantity was a laughable comparison.

Then, in 2008, the worldwide financial crisis halted bank lending. Iceland's financial institutions failed, much like Bear Stearns and Washington Mutual in the United States. Because the government did not have the funds, it could not save them from their predicament. They were not too large to fail but rather too huge to be saved from failing. Because of this, the financial collapse of these institutions took the nation's economy down with it.

The Government Failed Completely

The fall of Iceland's government in January 2009 was directly attributed to the country's economy, which was on the verge of insolvency. The resignation of Prime Minister Haarde as a result of his disease was the reason for the failure. The minority political party demanded that one of its members reside in the vacant seat. It was at Haarde's request that Gisladottir accepted the position. The stress of the bankruptcy caused Commerce Secretary Bjorgvin Sigursson to retire from his position. In reaction to the rapidly increasing costs and the skyrocketing unemployment rate induced by the bankruptcy, demonstrators went to the streets.

Effects on the Ongoing Worldwide Financial Crisis

The collapse of the Icelandic economy has repercussions across Europe. This is because Icelandic banks have extended their retail service offerings across Europe. They have also invested in enterprises located in other countries. The Icelandic corporation Baugur was the most successful privately held business in the United Kingdom. During the financial crisis, IceSave, the online division of Landsbanki, stopped processing withdrawals. Depositors throughout Europe were impacted as a result of this.

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