Iceland Finacial Crisis - Is There a Link Between the Us Subprime Crisis and the Icelandic Financial Crisis?

Iceland’s financial crisis.

Is there a link between the US Subprime crisis and the Icelandic Financial Crisis?

The economic situation in Iceland before 2008 was one of prosperity and flourish. With such a low population and land that provides so many different natural resources, many saw Iceland as a sort of Eldorado of the Scandinavian world. Many Icelandic investors became known as “Vikings” as they acquired huge companies such as Woolworths and West Ham United. In 2007 as stated in the text Iceland was ranked first in the United Nations Human Development index and was listed as the 5th richest country in the world in terms of GDP per capita. The 1990’s and 2000’s saw a boom in the financial sector as privatization became the center fold of any governmental financial plan. Iceland was one of them as it abandoned its fisheries and hot springs in exchange for private and commercial banking. This was certainly a bad idea. The subprime crisis meant that huge banks went bankrupt as homeowners defaulted on their payments. These payments were never really possible as some banks gave loans out to borrowers that didn’t even have jobs. These banks relied heavily on foreign investment and as the American homeowners defaulted so did their banks. This lead to a huge snowball effect across the financial world, as assets were intertwined from one bank to another. For Iceland this was bad news. Icesave one of Iceland’s biggest banks had accumulated foreign deposits that were worth 70 per cent of Iceland’s GDP. Iceland depended heavily on foreign capital and foolishly trusted the availability of global credit. Similarly to Greece Iceland’s borrowing quadrupled between 2000 and 2007. People were spending more that they had and at the same time banks were running short on investors whom had lost faith and trust in the system. What makes this setback harder for people to stomach is that while Iceland's banks borrowed heavily overseas in recent years, they bought virtually none of the American mortgage-backed investments that have contaminated the books of U.S. and European banks.

How could the Icelandic financial Crisis been avoided?

One of the main issues in which the Icelandic crisis could have been avoided is regulation. Similarly to Greece, Iceland was spending more than it had in its pocket. Foreign investment meant that the government could not have a clear idea of the money ties as they adopted the famous laissez faire approach to the Icelandic financial system. It is clear that in times of economic boom one might not necessarily question the capitalistic ideology as currencies and states prosper. But just like any other economic boom comes an economic downturn. Firstly although Iceland was not directly involved, it is clear that the main culprit is the Subprime mortgage crisis. This definitely could have been avoided