Financial Crises of Iceland

Financial Crises of Iceland

Introduction

Historically Iceland was considered as one of the finest place to live and work, with its tremendous growth this small country with total population of approx 320000 people was expected to become most reliable place for international business entity to launch their ideas.

However, global financial crises of 2008 had a devastating effect on the country economy that was clouded with liquidity crises. Banks of Iceland distorted by enormous financial debt that was assumed to be double the size of Iceland economy. This situation has place the country into the state of chaos and its first evidence was the step down of government that was considered as the backbone of the growth (O'Brien, 2009).

Situation has become so worse the new caretaker government was forced to concern international monetary fund (IMF) to avoid the possibility of Bankruptcy, and currently majority of population is drowned in it and more than 50 percent of the educated people are migrating to other countries.

Discussion

What are the main causes leading up to the economic crash?

Global financial crises of 2008 had a devastating impact on most of the economies, however, the current situation of Iceland could be considered as a best learning experience for foolish errors that were made by government, banking industry and other authorities of the country to make financial crises more devastating (O'Brien,2009).

Banking crises

Financial condition of the country was going downwards much before the government decision of privatization of Banks. Decision of privatizing of banks was termed as the risky strategy by opposition, but government thinking was to share the risk taken by business community.

Further, government speculation was that with growing economy and stable financial condition it was worth to take certain risk to acquire future business opportunities. This policy increased the values of assets prices as money was easily available, which encouraged the people to acquire assets not considering of their financial situation (Sigurjonsson & Mixa, 2011).

As speculated by the opposition the negative aspect of this policy accumulated in 2007 in the housing economy of United States of America, that affected the trust in the financial market in addition, economic problems increased at a rapid pace in 2008 as financing was reduced due to surfacing of liquidity crises.

Lack of financing enforced central banks of several countries to step in and one of them was central bank of Iceland that was able to provide relief for temporary period by using its internal deposit and decreasing international loans. However, the banks of Iceland were heading towards the negative crises of government policy (Throp et al, 2009).

In 2008, the news surfacing of the bankruptcy of Lehman Brothers one of largest financial firm's shocks the entire world and question were raised that if a large firm can fall down without any intervention from authorities then how small countries would survive in these crises.

Bankruptcy of Lehman brother does not have direct impact on Iceland banking industry; however, their indirect impacts were considered as disastrous as various banking operation become ...