Even the largest of corporations can go bankrupt, and the Third World has many countries that constantly teeter on the verge of insolvency. But the financial cataclysm that brought the proud little nation of Iceland to its knees in 2008 shocked the world.
This volcanic island in the North Atlantic with a population of just 320,000 people became an independent republic in 1944 after severing formal constitutional ties with Denmark. Following World War II, Iceland was almost entirely dependent on fishing, a resource fiercely defended during the ‘cod wars’ with Britain from the 1950s to the 1970s, before the country started to evolve a more broadly based free-market economy. Pre-eminent among the new commercial activities were financial services, with a low-tax regime and light-touch regulation encouraging spectacular growth. By 2007 Iceland not only had an enviable welfare system, but was also an extremely prosperous country. There would be a vicious sting in the tail.
The global economic crisis of 2008 revealed severe structural weakness in the Icelandic economic powerhouse. The country’s banks had liabilities of over 80 billion euros – an awesome sum compared with Iceland’s annual GDP (gross domestic product) of around 15 billion euros. When the world’s financial markets went south, this imbalance was bound to end in tears – floods of them.
Emergency legislation enabled the government to take control over the operation of Iceland’s three largest banks – Glitnir, Kaupthing and Landsbanki – and renege on international debts. This caused huge losses to resentful overseas investors, but wasn’t sufficient to rescue the economy. A bailout loan was received from the IMF (International Monetary Fund), interest rates reached 18 per cent and Iceland appealed to its fellow Nordic countries for additional aid. The Icelandic krona was devalued by two-thirds and by late October the country was bankrupt.
When: October 2008
Toll: Apart from unfortunate international depositors who lost billions when the banks went bust, the most immediate casualty of financial mismanagement was the Icelandic government, which was forced out of office and replaced by a new left-wing administration. Its first act was to request the resignation of the Central Bank of Iceland’s governors.
You should know: Riches to rags? In 2007, just one year before financial Armageddon, the United Nations ranked Iceland the wealthiest country on earth, with the highest per capita income – and also put it high on the list of the world’s most productive nations.