The initiative came about following protests by Icelanders in 2008-2009 who were angry at the country’s leaders and bankers for its fiscal and economic collapse. At one point, protestors gathered around the parliament building and pelted it with rocks.
In the ensuing months, Iceland banks have forgiven loans equalling 13% of the country’s annual gross domestic product, which has eased the debt burden for more than 25% of Iceland’s population, according to a February 2011 report published by the Icelandic Financial Services Association.
You could safely say that Iceland followed the textbook example of what is required in a crisis. Any economist worth his salt would agree with this.
The country’s slow ascent out of the economic abyss began in 2008, following an $85 billion default by the country’s banks.
Its economy in 2012 surpassed that of the entire eurozone, as well as the developed world on average (including the world’s largest economy, the United States, whose economy grew at an anaemic 2.2% in the first quarter of last year), according to an estimate by the Organisation for Economic Cooperation and Development (OECD).
And, while the rest of the continent continues to drown in debt, most polls now indicate Icelanders don’t want to join the European Union, which is in its fifth year of debt crisis.
The island’s households were helped by an agreement between the government and the banks, which are still partly controlled by the state, to forgive debt exceeding 110% of home values.
On top of that, a Supreme Court ruling in June 2010 found loans indexed to foreign currencies were illegal, meaning households no longer need to cover krona losses which is the Icelandic currency.
The lesson to be learned from Iceland’s crisis is that if other countries think it’s necessary to write down debts, they should look at how successful the 110% agreement was.
Iceland’s $13 billion annual economy declined 6.7% the following year, in 2009, but has since rebounded and will expand by 2.4% in 2013, the OECD estimated.
Meanwhile, in the rest of debt-ridden Europe, the economy will collectively expand by a paltry 0.2% this year and only 1.6% the next, OECD estimates said in November.