Iceland’s lessons on how to fix a bank crisis

I’m slowly working my way through the material that’s coming out of World Economic Forum in Davos. I tend not to take too much attention of what is said at this particular conference as, in my opinion, it tends to be full of self-serving tripe in the most part.

I did, however, notice a small interview with Icelandic President, Olafur Ragnar Grimsson, which was quite interesting.

There are two  reasons why this is such an interesting interview.

Firstly, Mr Grimsson raises some very good points about the effect a large financial services industry on the rest of the economy. He also asks the important question as to why exactly a private bank should be treated differently from any other private enterprise even if has some strategic importance and why exactly national citizens should suffer due to poor business practices. In that regard, Iceland, much like Sweden, has become a model of what should be done after a banking crisis. In short, the aim of the game is to save the banks, but not the bankers.

There is, however, one small problem with Mr Grimsson’s points. He appears to be doing some fairly large historical revisionism in the account of what actually happened. The Icelandic government was not ‘wise’ in it’s implementation of a non-orthodox approach at all. It actually attempted to keep some of the banking system alive, including giving them money along with ‘un-lawful’ loans and part of the IMF program that came later was used save a number of building societies.

It is correct to state that Iceland didn’t bail out its three large banks that collapsed in October 2008, but this was simply because at 900% of GDP it was absolutely impossible. The Government did initially attempt to save Glitnir, but it became apparent very quickly that the central bank did not have the foreign reserves available to keep the banking system alive.

In the end Iceland did become a lesson for the rest of the world in how to best manage the crisis, but the initial response certainly wasn’t planned and certainly wasn’t due to the wisdom of the government. If you are interested in reading some future information I recommend you start here and here.

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  1. When you see a deal that looks too good to be true then you can bet your house it is… the rates that Icesave were offering were just unbelievable.. all from a country that has nothing but puffins, dried fish and some geothermal energy to offer where could the money be coming from??

    maybe as there are about 30% of the population who believe in Elves.. perhaps they were thinking that Lord Elron would guarantee such fantastic returns..

    they even have a school for those poor souls.

    • I counsel against smugness. Australia has plenty of weird beliefs.

      Judging from recent posting on a thread about the ‘housing shortage’, it seems clear that a lot of folks round here are still in thrall to the Efficient Markets Hypothesis.

  2. “It is correct to state that Iceland didn’t bail out its three large banks that collapsed in October 2008, but this was simply because at 900% of GDP it was absolutely impossible.”

    “too big to be saved”?

  3. The Ironborn, who believe in the Drowned God, would drown a man and then bring him back to life. The near death experience would mark him one of the holy Drowned Men.

    “What’s dead may never die.”

    Maybe we aught to do the same to our banks. Make them, as well as the nation, stronger.

    Not all men are successfully revived though.