Topics: Iceland, Economy of Iceland, 2008–2009 Icelandic financial crisis Pages: 8 (3004 words) Published: March 3, 2013

International Trade Assignment Case Study of Iceland FinancIal Collapse MBA in Marketing&Communication Wang xiaoya YANG chen SHEN xiaoling

“The most spectacular bankruptcy of the 2008 financial crisis was the collapse of Iceland's financial system. This collapse is especially intriguing as Iceland is not an underdeveloped country!” ---EHMAN BROTHERS

Iceland is an independent Nordic European island country situated at the confluence of the North Atlantic and Arctic Oceans, on the Mid-Atlantic Ridge. Its traditional industries are fishing, processing of fish, aluminum, and strong energy industry. During several years of economic boom, the Icelandic financial system expanded considerably. A nation with a slight population erected a banking system whose total assets were 10 times the size of the country's GDP. Greedy bankers, inexperienced upstairs, corrupt political elite, the deregulation of the financial system, make the banking sector grew faster than any other sector of the Icelandic economy. Following the global financial crisis in 2008, Iceland became the most dramatic economic meltdown. The key problem with the banks essentially owning all the bankrupt highly leveraged business (that were and are essentially good ocean harvesting fishing business) and the downgrade in sovereign debt rating led to capital flight. With the collapse of exchange rate of Krona, 3 main banks (Landsbanki, Kaupthing and Glitnir) are nationalized because of the serious liquidity problems of banks. By the end of 2008 rate of price inflation reached 18 percent. The government instituted the exchange rate regulations and controls to limit the use of foreign exchange rate regulations. The limitation of purchase of precious imports as food, drugs and oils are limited made the situation worse than ever. In order to deal with the crisis, the Iceland would adopt several solutions such as appeal to IMF for help, receiving the helps from Northern European neighbors and application for joining European Union. But there's no such thing as a free lunch! The strings attached include fiscal tightening and some cutbacks in welfare spending. Negotiating the payback to British and Dutch government for a guarantee is also a contingency. With the development of crisis and recommendations of IMF, the economic collapse became a political issue. Even as the member of EFTA and EEA, Iceland has still many complex issues to trade off, such as the Icelandic fishing territory, and the right to exploration for oil in the Atlantic Ocean.

1.Is there a link between the US sub-prime crisis and the Icelandic financial crisis? Yes, there is the link between them. As US is the leader of world economy, it led to the late 2000 global financial crisis. We can say that, the US sub-prime is an incentive of the Icelandic financial crisis. A fatally over-leveraged banking sector, the banks were dependent on borrowing aggressively in international capital markets and attracted the foreign funds with Iceland’s high interest rates and strong sovereign rating. They grew, to begin with, mostly in foreign markets; via buying financial companies and institutions, opening branches and by increasing their international trade. So Iceland was deeply influence by the US sub-prime crisis.

The U.S. dollar is the currency most used in international transactions and is one of the world's dominant reserve currencies. So the depreciation of U.S. dollar affected the whole global economy and increased the prices of global energies and raw materials. As that Iceland’s agriculture and manufacture is limited and most consumer goods are imported, Apparently, Iceland will be negatively influenced. The depreciation of U.S. dollar also put inflation pressure on Iceland. The Icelandic Krona is weaken by 35% in the six month prior against us dollars cause by the capital flight, the result of downgrade in sovereign debt rating. Lehman Brother ́s fall down led to...
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