Iceland. Doing the unthinkable.
Iceland let its three biggest banks collapse in 2008 and 29 bankers went to prison. Everyone asks why other countries didn't. Iceland never had a choice.
THE GIST ON ICELAND: "Iceland and the Bank Collapse"
Why did Iceland let its banks fail?
In 2008, all three of Iceland's biggest banks collapsed within one week and the government let them go. 29 bankers ended up in prison, and ever since people have asked why other countries didn't do the same. The answer is that Iceland didn't have a choice.
Iceland has a population of about 320,000 people, basically Coventry. In about seven years, the three biggest banks grew until their assets were about 10 times the size of the nation's economy. It was the biggest banking system relative to its own country anywhere in the world.
Switzerland took three centuries to get to eight times. So bailing them out was literally not an option, because the bill was 10 times everything Iceland produced in a year.
What did Ireland do differently?
Ireland had exactly the same crisis at exactly the same time, but its banks were big, not that big. Ireland could afford to guarantee them, so of course it did.
It cost about 64 billion euros and turned a banking crisis into a national crisis.
What did it cost Iceland?
It still knackered them. The currency was slashed in half, inflation hit 19%, unemployment went up to 10% and capital controls stayed on for nearly nine years.
But a cheap currency makes a cheap holiday. Tourism went from a sideline to about 40% of the economy, and today Iceland is the seventh richest country in the world per person.
What was the choice, really?
Iceland had what's known as a Hobson's choice: one option, no alternative. Everyone else had a real choice, and every government said letting the banks go would be unthinkable.
Iceland is the only country to find out that doing the unthinkable is survivable. It worked, and nobody else copied it.
Should governments let failing banks collapse?
Your take. One tap, then see how everyone else voted.
Quick answers
Why did Iceland let its banks collapse?
The three biggest banks had grown to about 10 times the size of the economy, so a bailout would have cost 10 times everything the country produced in a year.
What did Ireland do instead?
Ireland guaranteed its banks, because it could afford to. It cost about 64 billion euros and turned a banking crisis into a national crisis.
How did Iceland recover?
A cheap currency made for a cheap holiday. Tourism grew to about 40% of the economy, and Iceland is now the seventh richest country in the world per person.
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