Triple Crisis in Iceland

The year 2008 saw the collapse of the three largest banks in Iceland. Relative to the size of the economy this was the largest banking failure in the world.

The purpose of this tutorial is to discuss the details of the case, how it happened, the warning signals, and other case details.

Triple Crisis in Iceland

Iceland's economy was plagued by three crisis simultaneously, namely, Banking Crisis, Currency Crisis, and Public Debt Crisis. The extent of these crises was so huge that it leads to the collapse of the three largest banks in Iceland.

Let's discuss the extent of these crises:

Banking Crisis

The three banks being discussed are Kaupthing, Landsbanki and Glitnir. These banks mainly focused on Iceland, UK, Denmark, and Norway but had branches in more than 20 countries.

In March 2008, the book assets of these three banks stood at more than 1000% of the country's GDP.

The collapse of these three banks accounted for 85% of their banking system. As the crisis widened, all three banks had to write-down a high number of assets, the asset values fell and by October 2008, the values had fallen to 300% of GDP.

The percentage of non-performing loans for significantly high compared to others financial crises.

Currency Crisis

During 2008 the value of Icelandic krona declined significantly. This happened because of the market pressure to sell krona denominated assets. The free floating exchange rate collapsed.

This significantly affected the economy that depended on imports. Also affected were entities with foreign currency denominated loans.

For this reason IMF, as a part of their rescue package, recommended to stabilize exchange rates at a higher level.

In the off sure market, the drop in exchange rate was even bigger.

Public Debt Crisis

During this period the public sector debt increased substantially. This was attributed to the cost or rebuilding the banking system and  the large fiscal deficit.

Given these three crises, the crisis in Iceland can be called a triple crisis.

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