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Iceland strongly recovering from bankruptcy

Stephen Beard Aug 2, 2011

Iceland strongly recovering from bankruptcy

Stephen Beard Aug 2, 2011

Steve Chiotakis: Meanwhile, European countries could learn some lessons from the actions of one country that was sunk during the financial crisis: Iceland.

Marketplace Europe correspondent Stephen Beard reports.

Stephen Beard: Iceland never does anything halfway. And so when it went bust back in 2008, it really went bust.

Jon Baldvin Hannibalsson: It was a total collapse of the financial system.

Former Foreign Minister Jon Baldvin Hannibalsson.

Hannibalsson: All the banks and savings institutions — even insurance companies — went bankrupt in a day.

But three years on, says the President, Olafur Ragnar Grimmsen, Iceland is doing rather well.

Olafur Ragnar Grimmsen: We are coming out of this crisis earlier and stronger than anybody, including ourselves, could have expected.

Iceland is growing again — and faster than many countries in the Eurozone. That’s partly because it’s not in the Eurozone. It has its own currency. That fell like a stone after the crisis. And that, says economist Magnus Arni Skulason, made Iceland’s exports much cheaper and boosted its main industries.

Magnus Arni Skulason: Fisheries, aluminum exports and tourism. And those industries have been doing very, very well.

Another key to Iceland’s revival, says Jon Baldvin Hannibalsson, is that its government did not — could not — bail out its banks.

Hannibalsson: That meant that foreign creditors — mainly German, British, Dutch banks — took a huge loss.

They’d unwisely lent heavily to Icelandic banks and lost a sum five times the size of the whole Icelandic economy. But that is a loss that the taxpayers of Iceland won’t have to bear. Jon Danielsson of the London School of Economics says Ireland should have done the same thing when its banks got in trouble.

Danielsson: The Irish government should have refused to bail out these banks. Let them go bust. Let the foreign creditors take a hit. If they had done that, the government of Ireland would be in a much better situation than it’s in now.

The lesson from Iceland at this stage seems clear: when your banks are crippled with debt and the creditors are mostly foreign, you should swallow your national pride, and let the banks collapse.

In London, I’m Stephen Beard for Marketplace.

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