iMFdirect
October 26, 2011
When I traveled to Reykjavik in October 2008 to offer the IMF’s assistance, the situation there was critical. The country’s three main banks—which made up almost the entire financial system—had just collapsed within a week of each other. The sense of fear and shock were palpable—few, if any, countries had ever experienced such a catastrophic economic crash.
There was a lot of concern that a disorderly depreciation of the exchange rate would be ruinous for households and companies if nothing was done or that deposit runs would cripple what was left of the financial system. The scale of the uncertainty was staggering―the three banks had assets worth more than 1,000 percent of GDP, and no one knew at that point how large the losses would turn out to be and how they would be divided between Icelanders and foreigners.
Today, three years later, it is worth reflecting on how far Iceland―a country of just 320,000 people―has come since those dark days back in 2008. Growth has returned to the economy, and new jobs are being created: unemployment, although still unacceptably high for a country used to near-full employment, has dropped below 7 percent of the work force. In June this year, the government successfully issued a $1 billion sovereign bond, marking a return to international financial markets.
And while public debt, currently at around 100 percent of GDP, is much higher than before the crisis, an impressive consolidation program has put the country’s finances back on a sustainable path during the past couple of years. As for the banks, they have been shrunk to about 200 percent of GDP, and are now fully recapitalized.
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