A summary of the causes and effects of the icelandic financial crisis

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A summary of the causes and effects of the icelandic financial crisis

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A summary of the causes and effects of the icelandic financial crisis

In retrospect Iceland was essentially operatinglike a firm with a highly unviable growth model. However, the political relationship between Iceland and Britain also greatly added to the economic downturn and financialcrisis.

Although without a doubt the primarycause of the Icelandic financial crisis was economic, political factors such as therelationship and interdependence between Iceland and Britain exacerbated the alreadydire situation. Iceland began as an isolated, fairly impoverished country whose survival was based largely on its fishing trade.

At one point Icelanders wereecstatic and celebrated the fact that their tiny country of aboutpeople had 3 banks in the worlds largest banks.

The large inflow of foreign capital associated with suchmass foreign investment caused the krona to greatly appreciate. Since the krona wasgreatly overvalued it made all imports in both goods and services very inexpensive for Icelanders; the overvalued krona also made it a lot easier for Icelanders to borrow moneyfrom abroad.

This economic boom encouraged Icelanders to borrow from abroad and many failed toforesee that such economic prosperity was limited and that a bust is inevitably going tofollow a boom.

October 2008

The lack of government oversight on the banking system also was an economicfactor that led to the financial crisis. One large problem with the Icelandic banking sector is that the banks became so large that the Icelandic government was unable to operate asa lender-of-last-resort simply because Iceland with its merepeople has a verysmall tax base.

It would have been less of a problem for the banks to be solarge if they had not remained domiciled in Iceland. It was perhaps too large and ideal of a goal for such a small country like Iceland to become an international financial center.

Iceland was essentially acting like a firm when indeed they should have been lookingafter the economic stability of their whole country.

The Icelandic government simplylacked the ability to financially sustain their banks in times of economic crisis.

If some of the banks in Iceland had foreign lenders-of-last-resort they might have been able toweather out the economic storm. However, due to the global economiccrisis foreign capital ceased coming in and when it did the myriad of public and privatedebt became quite evident.

Since Iceland does not have an effectual currency to manipulate they are largely unable to support the banks andhave no practical ways to bring down the inflation and interest rates, which have beenstaying in the double digits.

This is just one of the many economic situations currentlyaffecting Iceland. Iceland andBritain once had a very mutually beneficial friendship, which could be seen in that theywere NATO allies and frequent trading partners.

However, as the global economic crisis began to take hold this friendship became tenuous at best. The problems between Icelandand Britain began in late when Britain, in an attempt to protect its financial assets inIceland, invoke its anti-terrorism laws to freeze the British assets of a failingIcelandic bank.

In many Icelanderseyes and certainly in the eyes of the Icelandic government Kaupthing was the last of theMohicans and its demise signaled the end of the Icelandic banking system?The financial crisis of –, also known as the global financial crisis and the financial crisis, is considered by many economists to have been the worst financial crisis since the Great Depression of the s.

Nov 21,  · Iceland's three biggest banks grew to 10 times the size of their economy by offering people overseas, especially in the Netherlands and Britain, higher interest rates than they could get . Causes of the Collapse of the Icelandic Banks - Responsibility, Mistakes and Negligence CAUSES OF THE COLLAPSE OF THE ICELANDIC BANKS – RESPONSIBILITY, MISTAKES AND NEGLIGENCE 3 RANNSÓKNARNEFND ALÞINGIS lending started at about the same time as the liquidity crisis in the interna-tional financial markets began.

The increase was so. Iceland’s Financial Crisis and Level of Living Consequences Social Research Centre, University of Iceland December 2 Summary The financial crisis in Iceland came as a major collapse of the country’s financial system in October External debt escalated and excessive risk behaviour became predominant in the Icelandic financial.

What was the cause of the Icelandic financial crisis?

The Icelandic financial crisis and recovery could be seen as the most expensive group therapy of all time. The Icelanders had five years to come together and ask themselves: Who are we, and what. Without a doubt the prime cause for Iceland’s financial crisis is largely theeconomic circumstances previously discussed.

A summary of the causes and effects of the icelandic financial crisis

However, political factors such asIceland’s relationship with Britain also played a role in exacerbating the crisis and preventing Iceland from .

Iceland rises from ashes of banking crisis – timeline | Business | The Guardian