Iceland Econ Thriving
After Nixing Bail Out of banks and investors
Proving that the the
US-Irish model of bailing out the banks with taxpayer money was harmful unless
you were a wealthy bank investor.
Feb 1, 2011
On his second day as head of Iceland's
third-largest bank, Arni Tomasson
faced a crisis: The bank was out of cash. "Everybody was panicked --
depositors, creditors, banks around the world."
Unlike other nations, including
the U.S. and Ireland, which injected billions of dollars of
capital into their financial institutions to keep them afloat, Iceland placed
its biggest lenders in receivership. It chose not to protect creditors of the
country's banks, whose assets had ballooned to $209 billion, 11 times gross
domestic product.With the economy projected to grow 3
percent this year, Iceland's decision to let the banks fail is looking smart --
and may prove to be a model for others.
three banks had become the largest companies
in Iceland, creating
thousands of well-paid positions and controlling the top trade associations,
says Oddsson, who oversaw the privatization of Iceland's
state-owned lenders as prime minister. Their headquarters were the largest
buildings in Reykjavik,
dwarfing the parliament.
"Nobody wanted to listen
when the party was on," says Oddsson, 63, now
editor of Morgunbladid, one of the largest dailies in
the country, with a circulation of about 50,000.
It was Oddsson's
decision not to build up the central bank's foreign currency reserves from 2005
to 2008 that made a bailout impossible.
"They were collecting debt
in such a fast pace, it would be stupid for us to build a mountain they could
lean on if they failed," Oddsson says. "The
creditors that were lending to the banks recklessly had to face the
did the right thing by making sure its payment systems continued to function
while creditors, not the taxpayers, shouldered the losses of banks," says
Nobel laureate Joseph Stiglitz, an economics
professor at Columbia University in New
Knaap, who has advised Iceland's bank resolution
committees:. "Even Irish banks aren't too big to
Today, Iceland is
recovering. The three new banks had combined profit of $309 million in the
first nine months of 2010. GDP grew for the first time in two years in the
third quarter, by 1.2 percent, inflation is down to 1.8 percent and the cost of
insuring government debt has tumbled 80 percent. Stores in Reykjavik were filled with Christmas shoppers
in early December, and bank branches were crowded with customers.