An Introduction to the Icelandic Crisis

Iceland is a relatively small country in the North Atlantic Ocean measuring approximately 39,770 square miles in area. Iceland’s population as of April 2012 is 320,000 inhabitants and its capital and largest city, Reykjavik , amounts to approximately 118,000 persons, (World CIA Factbook).

Iceland was primarily known for its fishing industry which accounted for over 90 percent of exports back in the 1960’s. However, as with most primary industries, the fishing industry was in decline due to realizable profits to be made in various tertiary sectors, primarily the financial sector. Today, Iceland’s fish exports accounts for approximately only 40 percent of exports, (World CIA Factbook).

From 2000 on-wards, Iceland’s Financial Sector has been expanding due to an expansion of credit and  especially high interest rates which attracted large amounts of foreign capital to Iceland’s three largest banks. These banks namely, Kaupthing Bank, Landsbankinn Bank and Glitnir Bank accounted for 75 percent of the country’s stock market capitalisation. The largest being Kaupthing Bank, increased its assets from 208 billion Kronur to 6.6 trillion Kronur by the middle of 2008, (Vidar Ingason, 2012).

Other notable expansions were within the energy sector of the country. Since Iceland sits on the mid Atlantic ridge, it is a haven for geothermal energy. Foreign investment facilitated the development of infrastructure to capture this energy source and along with hydro power  which now accounts for over 80 percent of the island’s energy supply.

Iceland within the space of 7 years was one of the world’s richest nations per capita right before the crash in 2007. They were also ranked with the highest living standards according to the United Nations in that same year. The country also had excellent infrastructure,  low unemployment, and  low Government debt. As with other countries experiencing the 2008 financial crisis, Iceland also experienced a housing bubble.The problem worsened when many fishermen now turned to banking especially speculative banking to earn higher returns as compared with traditional fishing. Luxury goods were now heavily sought out and consumption and inflation increased. The video below taken from the movie "Inside Job," 2010, best summarises what took place in this island nation.