Boomerang

Iceland’s Meltdown

Iceland became a surprise entrant into the economic bubble that burst spectacularly in 2008. Iceland’s banks held only a few billion dollars in 2003, but by 2006-2007, their assets rose to nearly $150 billion, many times higher than the nation’s gross domestic product. This increase marked, “the most rapid expansion of a banking system in the history of mankind.” When the worldwide financial meltdown began, Iceland’s banks lost “$100 billion,” which was “roughly $330,000” for each citizen. The banks racked up liabilities equaling 850% of the country’s GDP.

Before 2008, Iceland’s economy soared as the value of its currency, the krona, increased. Icelanders made the fatal error of borrowing in foreign currencies, which carried lower interest rates, to finance their purchases. This worked fine as long as the krona kept rising. When the housing bubble popped and the krona fell, Icelanders’ repayments inflated, leaving them with “$500,000 houses with $1.5 million mortgages.” The nation’s dependence on imports meant more domestic spending, with a devalued currency, just to survive. This further damaged Iceland’s economy.

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