Must-Read: Alan Shipman: Iceland’s Economy Miracle

Must-Read: Alan Shipman: Iceland’s Economy Miracle: “The country that suffered proportionally the world’s biggest financial collapse in 2008 is now set to boom again…

…Its overgrown banks were one of the causes of the global financial crisis, Iceland responded to their meltdown… allowed its currency to fall in value… nationalised the big banks… rescuing only the fraction that served the domestic economy. It imposed capital controls… tightened monetary policy… allowed fiscal policy to take the economic and social strain. In particular, public money was used to relieve households of the debt that would otherwise stop any spending recovery….

Until now, critics had one powerful riposte to this improbable ray of Nordic sunshine. They said it was a false dawn…. When the controls lift, the whole fairy-tale escape story will unravel…. Iceland’s currency (the kronur) will plunge as foreign funds flee, never to return. Interest rates will rise even higher to rescue the exchange rate, choking-off investment, without stopping the runaway inflation sparked by imports getting more expensive. The weaker kronur will leave the country struggling to service its remaining foreign debt, despite its recent reduction….

[But] the current account surpluses permitted by the devaluation, and the nationalised bank assets that regained value… have enabled the repayment of so much foreign debt that the rest will be manageable…. It’s a stark contrast to the eurozone and especially Greece, which had to ask its creditors for debt relief that will not begin until 2018. The chances of a kronur crash have diminished because the current account is back in surplus… foreign investors are again being attracted… [by] high interest rates, growth prospects and investment opportunities…. A remote island with a population of 300,000 and unique natural resources could be dismissed as a special case, Iceland’s remarkable renaissance make its remedies a serious challenge to the orthodoxy…

May 30, 2016

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