25th May 2012
Contributing Writer for Wake Up World
The situation in Iceland is something those of us outside of the volcanic island nation hear about far too little, and when one examines the story of how Iceland triumphed over massive debts, it makes a lot of sense why this is the case.
Earlier this year, the Icelandic Financial Services Association published a report showing that since the end of 2008, Icelandic banks have forgiven the equivalent of 13 percent of the nation’s gross domestic product in loans.
This has directly lifted the crushing burden of debt form the shoulders of over one quarter of the Icelandic population, something which many people around the world – but especially in the United States, Greece, Spain, Italy and other nations struggling with massive debts – would likely appreciate greatly.
In 2008, Icelandic banks defaulted on a whopping $85 billion in loans, yet the nation has taken steps to recover and they are already proving to be effective.
“You could safely say that Iceland holds the world record in household debt relief,” Lars Christensen, the chief emerging markets economist at Danske Bank A/S in Copenhagen, explained.
“Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that,” he added.
Then why wouldn’t other nations follow a similar model instead of pouring even more money into the black hole of debt, hoping that it will somehow fix itself?
That is a question which cannot be answered with any degree of certainty, but Iceland has proven that endless bailouts are not the only way we can turn countries around from the brink of collapse.
The Icelandic economy will outgrow the eurozone in 2012 and is set to outgrow the entire developed world on average, according to estimates from the Organization for Economic Cooperation and Development.
This growth is reflected in the fact that many polls are showing that the people of Iceland have no interest in joining the European Union, which continues to be wracked by a debt crisis the likes of which have never been seen.
The solution Iceland implemented involved an agreement between the banks and the government, which entailed forgiving debt exceeding 110 percent of home values.
This is commonly known as “under water” mortgages (or more technically “negative equity”), which have become far too common place, especially in the United States.
Indeed, a CNBC article from November of last year stated that one out of two U.S. mortgages is effectively underwater.
In addition to the debt forgiveness, the Icelandic Supreme Court ruled in June 2010 that loans indexed to foreign currencies were legal, which means that Icelandic households were no longer expected to cover krona (the Swedish currency) losses.
The most important factor of their approach, however, is that every step of the way they have put their own people before the markets. This is essentially the polar opposite of what we have seen so many other nations do in response to debt crises.
The Icelandic government basically left international creditors to deal with their failed loans on their own, removing all responsibility from their own people.
Now Iceland is proceeding to actually prosecute some of their formerly most powerful bankers and the Icelandic special prosecutor has stated that it very well may indict some 90 people.
Meanwhile, over 200 people, including the former chief executives of Iceland’s three biggest banks, face criminal charges for their activities.
Maybe some other nations should take a page out of Iceland’s book and think about their people before the banks that caused the crisis in the first place.
About the Author
Madison Ruppert is the Editor and Owner-Operator of the alternative news and analysis database End The Lie and has no affiliation with any NGO, political party, economic school, or other organization/cause. He is available for podcast and radio interviews. If you have questions, comments, or corrections feel free to contact him at [email protected]