Iceland’s Foreign Minister Speaks on Nation’s Economic Recovery

How does a country recover from a devastating economic crisis? Iceland foreign minister Lilja Alfredsdottir discussed her country’s recovery from its 2008 economic collapse at a talk cosponsored by the Program for Economic Research and the Center for Global Economic Governance on September 21.

From 2005 to 2007, Iceland experienced robust economic growth characterized by little national debt, increased capital inflow, and an AAA rating. All that changed, however, after the global financial crisis of 2008, which saw 97 percent of the country’s banking system—which had net assets totaling 11 times GDP—collapse in a month’s time. The result was high rates of unemployment and a current account deficit of 26 percent of GDP.

“We were in the same situation that Greece and Cyprus are in now, and the severity of the economic depression we were facing forced the government to take unprecedented actions to stabilize the economy,” Alfredsdottir explained.

These actions included the introduction of the Emergency Act, which nationalized Iceland’s banking system. The government then guaranteed all domestic deposits in Icelandic banks and imposed strict capital controls in an effort to stabilize the Icelandic króna, which had sharply depreciated. Lastly, Iceland secured $2.1 billion from the IMF and a $2.5 billion loan package from other Nordic countries to limit the socialization of losses from the collapsed banks and implement a multi-year fiscal consolidation program.

Ring-fencing the sovereign — separating the nation’s sovereign wealth from private banking assets in order to protect it — splitting banks into domestic and foreign operations, and not socializing the losses of the private sector proved to be a sustainable economic strategy. By 2012, corporate, government, and household debt had reduced significantly and Iceland is not experiencing economic growth of 4.9 percent and a current account surplus, said Alfredsdottir. She also credited strong political ownership of policies and extensive analytical work in policy making as factors which contributed to Iceland’s astounding recovery.

However, the unwavering determination of citizens may have also played a key role. When asked if the mindset of the Icelandic people during the crisis contributed to the country’s revival, Alfredsdottir simply answered: “We were determined to recover.”

— Serina Bellamy MIA ’17