Why Iceland? (2009)

 Why Iceland?: How One of the World’s Smallest Countries became the Meltdown’s Biggest Casualty (2009) is a book by Asgeir Jonsson, head of research and chief economist at Kaupthing Bank in Iceland. As the title suggests, the book deals with the collapse of Iceland in the face of the latest economic crisis. Accordimng to Jonsson, the impact of the crisis on Iceland has led to a “quiet transformation” of the society- a “Scandinavian-model economy” has replaced “free-wheeling Anglo Saxonian capitalism”, a “state-owned banking system” has been installed, and “capital controls” have been reinstated. Socially, “the consumption of Icelandic food is up, the birthrate is up, the sale of books has skyrocketed, theater tickets are selling in record numbers, and so on”. Iceland’s relationship with foreign countries has also changed, with Britain invoking terrorist laws against Icelandic banks, US not helping Iceland in the way some expected, and the (potential) role of the European Union being questioned within the country. (Click here to read a Business Week story about “the stunning collapse of Iceland“).

How did Iceland get into such a mess in the first place? After all, even until the 1980s, “Iceland’s economy revolved around little else than a semi-robust cod-fishing industry”. In the 1990s, however, Iceland turned its attention “from fish to finance”, adopted “Thatcherite, free-market reforms of Britain”, and became a “banking country”. By the time the global financial crisis started, Iceland’s banking system was more than 10 times its GDP. Then, as Jonsson describes it, “Iceland’s banks were taken down by a systemwide bank run that was touched off when the financial system lost the confidence of foreign creditors and analysts”, the central bank “could not serve a lender of last resort”, and “the state’s taxing power was also insufficient to provide bank support by recapitalizing the banks or guaranteeing their deposits abroad.” The result was that “a developed country…utterly collapse[d]”. [Click here to watch a video about “why Iceland is going broke” made in 2007 before the country actually collapsed!]

Jonsson’s book provides an in-depth analysis of how things in Iceland went from okay to boom to bust. His position at the Kaupthing Bank provided him an insider perspective of events and incidents. The fact that Jonsson is a native Icelander writing about his own country provides refreshingly different  insights into why and how things happened. Though it is tough to keep up with Icelandic names (!), I thoroughly enjoyed reading the book and recommend it to those interested in better understanding the dynamics and impact of the financial crisis.  As Jonsson warns us, “Iceland is not the anomaly that many would like it to be” and many countries that are “small” in size, with “large, internationally exposed banking sectors”, a currency “that is not a global reserve”, and “limited fiscal capacity” (think, Britain and Switzerland) may be vulnerable to “the twin menance of a currency and banking crisis, and the subsequent loss of confidence”.