The Icelandic Response to the Collapse of the Financial Sector in October 2008

The debt-relief measures taken by the Icelandic government have proven to create a win-win situation for the financial sector, the business sector, families and the Icelandic economy in general. By taking a concerted effort to clean out the bad firms and correct the balance sheet of liveable firms a signal was sent to all suppliers to Icelandic firms: Bankruptcy risk has been minimalized. Thus, write downs of debt helped to rebuild trust that had been lost as a consequence of the collapse of the Icelandic banks. Other measures taken by the Icelandic government with the help and approval of the IMF has also alleviated the adjustment to the post-collapse realities. Emphasis on social services, health and education has been helpful in enhancing investment in human capital. The fact that the Icelandic unemployment rate has fallen below 5% can serve as an illustration that those endeavours have not been in vain. The Icelandic economy still faces problems. Capital controls are in place and will be hard to lift. Icelanders disagree on how to organize their currency policy in the future. Lastly, productivity is still very low in many sectors.