Lessons From Iceland Since Iceland’s banking system

Lessons From Iceland

Since Iceland’s banking system collapsed in late 2008, the small island state has served as a pioneering counter example to Europe’s way of handling a debt crisis. When Icelandic banks, which had grown to 10 times the country’s annual income, could no longer refinance their debt, Reykjavik did three things. It restructured the banks, letting creditors fight for the scraps while new banks continued to serve the local economy; it let the currency plummet; and it imposed foreign exchange controls, preventing foreigners from repatriating their investments en masse. Eurozone leaders took a different course on all three counts. First, they chose to bail bankers out instead of writing down debts. The second policy, devaluation, was not available to them short of leaving the euro. And third, except for Cyprus, they avoided controls on capital flows. http://ow.ly/Okmqk


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