"(Iceland) let its three larg­est banks fail, instead of bail­ing them out. It ensured that domestic depositors got their money back and gave debt relief to struggling homeowners and to businesses facing bankruptcy."

ICELAND BOOMS AS THE WORLD STRUGGLES

For a country that four years ago plunged into a financial abyss so deep it all but shut down over­night, Iceland seems to be doing surprisingly well.

It has repaid, early, many of the international loans that kept it afloat. Unemployment is hov­ering around 6 percent, and fall­ing. And while much of Europe is struggling to pull itself out of the recessionary swamp, Ice­land’s economy is expected to grow by 2.8 percent this year.

“Everything has turned around,” said Adalheidur Hedin-sdottir, who owns and runs the coffee chain Kaffitar, the Star­bucks of Iceland, and has plans to open a new cafe and start a bakery business. “When we told the bank we wanted to make a new company, they said, ‘Do you want to borrow money?’” she went on. ‘We haven’t been hear­ing that for a while.”

Analysts attribute the surpris­ing turn of events to a combination of fortuitous decisions and good luck, and caution that the lessons of Iceland’s turnaround are not readily applicable to the larger and more complex econo­mies of Europe.

But during the crisis, the country did many things dif­ferent from its European coun­terparts. It let its three larg­est banks fail, instead of bail­ing them out. It ensured that domestic depositors got their money back and gave debt relief to struggling homeowners and to businesses facing bankruptcy.

Iceland also had some advan­tages when it entered the cri­sis: relatively few government debts, a strong social safety net and a fluctuating currency whose rapid devaluation in 2008 caused pain for consumers but helped buoy the all-impor­tant export market. Govern­ment officials, who at the height of the crisis were reduced to beg­ging for help from places like the Faroe Islands, are now cau­tiously bullish.

“We’re in a very comfort­able place because the govern­ment has been very stable in fis­cal terms and is making good progress in balancing its books,” said Gudmundur Arnason, the Finance Ministry’s permanent secretary.
But not even Arnason says he believes that all is perfect. Infla­tion, which reached nearly 20 percent during the crisis, is still running at 5.4 percent, and even with the government’s reliefWindow shoppers stroll in Reykjavik, Iceland, on June 21. Iceland’s economy is expected to grow by 2.8 percent this year, and the jobless rate is 6 percent and dropping. programs, most of the country’s homeowners remain awash in debt, weighed down by inflation-indexed mortgages in which the principal, disastrously, rises with the inflation rate. Taxes are high. And with the country’s currency, the krona, worth between about 40 and 75 percent of its pre-2008 value, imports are expensive.

Strict currency controls, imposed during the crisis, mean that Icelandic companies are forbidden to invest abroad.

Link:
http://itmakessenseblog.com/2012/07/09/iceland-booms-as-the-world-struggles/