How Iceland managed its financial crisis is often quoted as being a real alternative to the debt crisis in Europe. However, there are a lot of misunderstandings surrounding the icelandic case. I tried to clarify the truth in several posts. Here is a short summarize of what people should understand.
Iceland had no choice
First, one have to understand that the Icelandic management of the crisis was not a conscious rebellion against financial capitalism. If Iceland did write-off $80 bn of its external banking debts, this is simply because the tiny icelandic economy could not afford to do otherwise. Just figure this out: in 2008, the banking sector external debt represented more than 10 times the national GDP of Iceland! So, when talking about “doing what Iceland did”, one should be more careful about the consequences.
The referendums do not mean Iceland defaulted
A lot of people don’t get that Iceland did not default on its public debt when refusing by referendum to agree on the “Icesave deal” with UK and Netherlands. Rather, they refused a specific agreement that intended to transfer a private banking debt on the shoulders of the Icelandic State. Nevertheless, it does not mean this debt will not be repaid. It will.
Iceland’s economy is not shining again
Even though the worst was avoided and that the economy recovered a little bit, it does not mean that the country is on the path of a painless revival. The reality is that icelanders are among the most over-indebted people in Europe. Many of them are in financial distress because of inflation pressure and the increase of their mortgage rents. Moreover, the icelandic banking system has not been reformed and the krona’s weakness is a big issue for the economy. Is there a dark side of Iceland’s revival? Unfortunately, yes.