In the build-up to the global crisis of 2008, tiny Iceland was a canary in the mine, a leading indicator of wider vulnerabilities. Now, amid growing optimism about global recovery, Iceland may again be a leading indicator of trouble ahead.
In the space of a few days last October Iceland’s whole banking system collapsed and was taken into public ownership, including the three banks which went from nowhere in 2002 to rank among the world’s 300 biggest by 2007. These three now make it into a less glorious league – Moody’s list of the 11 biggest financial bankruptcies in history. The country’s average income fell from 160 per cent of the US’s in 2007 to 80 per cent this year.
Yet, walking around Reykjavik and other cities this summer, one sees no signs of economic distress. The country looks amazingly prosperous. Traffic density has fallen a little, but only to 2005 levels. Unemployment has risen to 8 to 9 per cent, nearly twice the previous postwar record – but is still below that of several other high-income countries. Applications for free food from charities have increased, but numbers remain small. Four out of five households have been affected only at the margins.
The government of Social Democrats and Left-Greens elected in April 2009 has got into gear after a slow start. Progress is being made on some of the most difficult issues, including the Icesave agreement on treatment of foreign depositors, the creation of new banks from the wreckage of the old ones, and the prosecution of financial wrongdoing. The paralysis that gripped the country for six months after September 2008 is over.
However, appearances are deceiving. This is a postponed crisis. When the government brought in the International Monetary Fund in late 2008 the IMF prescribed deferring the pain for a year. Now the pain is coming.
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