Iceland's Decision To Let Banks Fail Gaining Appeal - The Reykjavik Grapevine

Iceland’s Decision To Let Banks Fail Gaining Appeal

Published February 2, 2011

Some economics experts are looking at Iceland’s economy and coming to the conclusion that not rescuing failing banks might be a good thing.
Bloomberg, in explaining how Iceland’s economy tanked, notes that “Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion, 11 times gross domestic product.”
And while other countries have used terms such as “too big to fail” in reference to financial giants in need of capital to keep them from bankruptcy, Iceland’s decision to let their banks fail might have been the wiser move.
“Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks,” Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York, told Bloomberg. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.”
Minister of Economic Affairs Árni Páll Árnason has also defended the strategy, saying, “If we’d guaranteed all the banks’ liabilities, we’d be in the same situation as Ireland.”
The article notes that Iceland’s economy is already recovering, and it expected to keep moving towards growth. The piece in its entirety can be read here.

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