Here are the reasons for the Icelandic economic crisis.
Incapable banks to refinance their obligations.
When the financial industry in Iceland was deregularized in 2001, banks began to upload debts. This occurred at a time when foreign businesses were accumulating. By 2008, three prominent Icelandic institutions had accumulated debts totaling 50 billion Euros. Compare this to Ireland's GDP of 1,9 Billion Euros, and it becomes apparent that there is a disparity.
Inflation due to development
The majority of Iceland's expansion activities in the new economy were financed through the interbank lending market. External debt played an important role in financing the expansion as well. The fact that household obligations were approximately 200 percent of the average family's disposable income drove up the price of essential goods. This resulted in inflation, which was bolstered by the Central Bank of Island issuing loans to banks against uncovered bonds.
Miscalculation of the Kronur
Up until September 2008, prices increased by 14%, representing the steepest price increase in Icelandic history. The Central Bank of Island attempted to compensate for this by charging a 15% interest rate. These rates were unheard of in European nations, where the maximum interest rate is 5 percent. Such a high interest rate resulted in a number of countries investing in Iceland. This resulted in a gross overvaluation of the Kronur, indicating that a bubble was just about to explode.
Incomplete action on bank loans has resulted in a free-fall for banks.
The majority of Icelandic institutions refused to make new loans. As their creditors demanded repayment, it was also challenging for the larger banks to turn over their loans on the interbank market. In such a difficult circumstance, banks approach the largest bank, which they did by contacting the Icelandic Central Bank. The problem was that the Central Bank of Iceland refused to accept ownership, and the Icelandic government could not guarantee repayment of debts because, institutionally, the Central Bank of Iceland is significantly larger than the Icelandic government. All of this resulted in a precipitous decline for banks, as credit was simply not readily available.
Icesave, a subsidiary of Landsbanki, exacerbates the problem.
Icesave should have technically functioned as an independent entity, but it did not. It operated under the name Landsbanki and was dependent upon it for emergency funds. Consequently, Icesave could not rely on Bank of England. Plans to alter this situation were formulated, but they never materialized. The Icelandic financial crisis was a systemic malady, but only affected the banking sector, unlike the subprime crisis, which involved the real estate and finance sectors. However, for a small economy like Iceland, a hit to the financial sector implies a blow to the economy at the worst possible time.
" - https://www.affordablecebu.com/
