Was Iceland's Recovery One Of A Kind?

Just this week Fitch (one of the top three rating agencies) upgraded Iceland’s credit rating to investment status (BBB-). This is a great boost for Iceland’s economy and gives other countries hope that they may too overcome the recent financial crisis. Therefore what lessons can other countries experiencing an economic crisis learn from Iceland? The most important message is to not allow taxpayers to suffer from the full impact of the crisis. Geir Haarde (Iceland’s prime minister during the crisis) believes that the Government were right to allow Icelandic banks to fail.  He assured that they “saved the country from going bankrupt” and hence commented that it is “evident if you look at our situation now and you compare it to Ireland or not to mention Greece”. Another valid reason to prevent insolvency is that governments need to overlook bank creditors and only save depositors. Professor Joseph Stiglitiz believes that “Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks”. In addition capital controls may need to be put in place if a country wants to overcome a crisis.

Then why are other nations still struggling to beat the present crisis?  Iceland is special for a number of reasons so other countries may find it harder to follow in Iceland’s footsteps.  For instance, unlike many of the other nations, Iceland was not part of the Euro zone. Iceland was able to undervalue the Krona but if European countries wanted to diminish their currency they would have to default and leave the Euro. Paul Krugman recalled that “Iceland’s economic rebound showed the advantages of being outside the euro” and thus he claimed Iceland had the Krona to thank for this. Also since Iceland is such a small state it could allow its banks to fail whereas, for example, if the U.K was to do the same it would greatly increase its national debt. However it could be argued that Iceland recovered, through bankruptcies, by using political power and this procedure is not allowed in nations which are part of the Euro zone. Paul Krugman commended Iceland for defaulting by saying “it’s better off than countries that followed the IMF/EU bailout model to solvency like Ireland did”. However this statement could be considered ironic as things would be a lot different for Iceland today if they had never received the loan from the IMF in the first place.

So what can other countries learn from Iceland’s crisis?  Probably the only worthwhile point that other countries should take on board from Iceland’s crisis is that there is no simple path to complete recovery and so there is no correct way to recover. However, unlike many other nations, little Iceland can smile with pride that it has overcame the recent financial crisis. Ultimately Iceland’s crisis was unique as it differed in many ways to the problems facing other countries. Therefore, to conclude, Iceland’s journey can most certainly be considered ONE OF A KIND.

I have thoroughly enjoyed researching the recent Icelandic financial crisis and sharing my views with my fellow bloggers. Gone fishing...