Question

a. One of the countries hardest hit by the global financial crisis of 2008 was Iceland. Deliberate on the cause and events that led to the crisis in Iceland.

b. What are the measures taken for Iceland to recover its economy?

c. How can you relate on what you have learnt from Money and Banking course to what has happened in Iceland?

Answer 1

Iceland financial crisis hit the financial base of Iceland economy. There was a systematic collapse of the commercial banks played an important role in crisis. Central bank of Iceland can’t act as a lender during the crisis. The receivership of the banks and its liquidation leads to the loss of shareholders and foreign creditors. The crisis leads to huge fall in the value of currency, suspension of foreign currency transactions and the market capitalisation. The GDP of Iceland fall almost 10% in real terms.
Causes of the crisis:
Deregulation of the banks affects the refinance of debts.
High rate of inflation by Central bank’s liquidity loans to banks basis of their issues. It is also due to raising housing prices.
Luring of deposits from Netherland and UK offering 15 percent of interest rates.
2) Recovery measures taken by Iceland government; The Icelandic parliament imposed an emergency legislation, minimise the impact of crisis. IMF introduced Stand By Arrangements include medium term fiscal consolidation, resurrection of domestic banking system and enactment of capital control and restoration of normal financial linkages. Iceland tried to be a member of European Union.
3) On the basis of the theories of Money and Banking, the banking activities played an important role as the cause and recovery of financial crisis. If banks failed to impose proper banking decision leads to bankruptcy and also affects the sustainability of the market. If bank increase its liquidity ratio through reducing the reserve rates will create inflation in the economy. Banks are the most important intermediary between monetary authority and people. If they can’t do their functions properly it will affect the policies of authority and also the people. Increasing liquidity rates will leads to inflation in the economy. High interest rates to its deposits will affect the future growth of the banks. Housing price rising was one of the most important reason of the financial crisis.