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Icelandic Financial Crisis 2008-2011

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1. What was the Impact of the Crisis, for example on Employment, GDP, the Banking Sector, International Financial Flows.

2. What could have been done differently, either to prevent the Crisis, or in the aftermath, what lessons do you think have been learned?



The current assignment aims to depict the effects of Icelandic financial crisis both within the internal boundaries of the nation and global arena. The Icelandic financial crisis has been a major political and economic event, which has included the default of the privately owned commercial banks in Iceland, UK and Netherlands (May 2014). Thus, the effects of this crisis have been enumerated with respect to GDP, employment and banking sector of the nation on one hand and global financial flows on the other. Finally, the assignment sheds light on the ways, which could be adopted in preventing such crisis along with the lessons learnt in the aftermath.

1.Impact of Icelandic Financial Crisis on Employment, GDP, Banking Sector and International Financial Flows:

The financial crisis of Iceland has long-term effect within both its internal boundaries and the global arena. The impact of this crisis on the following domestic and international factors is briefly demonstrated as follows:


The existing economic environment in Iceland has influenced many citizens and organisations of the nation. With the formation of Nyi Landsbanki in Iceland, the replacement of old Landbanski, nearly 300 staffs have lost their jobs because of fundamental restructuring of the organisation. As a result, it has minimised the global operations of the bank (Bergmann 2014). The identical job losses have been observed at Kaupthing and Glitnir. Such job losses could be contrasted with 2,136 registered unemployed and 495 advertising vacancies in the nation by August 2008.


The crisis has resulted in bankruptcy of Sterling Airlines on 29th October 2008. Along with this, Icelandair, the national airline, has witnessed a considerable slump in its domestic flight demand. However, the global demand has increased and there has been recruitment of additional staffs to carry out its global operations (Edvardsson and Teitsdóttir 2015).

Figure 1: Unemployment rate in Iceland based on each quarter from 2009-2016

(Source: Jónsson and Sigurgeirsson 2017)

The above figure denotes that the rate of unemployment in Iceland has increased massively in the second quarter; however, it has declined in third quarter with slight increase in fourth quarter in 2010. The same trend is observed in other years as well; however, the rate of unemployment has been falling in the fourth quarter of 2016, which implies that Iceland has recovered from the crisis slowly.


Gross Domestic Product (GDP):

Due to the financial crisis of Iceland, the pension fund assets of the nation have shrink by 15% - 25%. Due to such shrinkage, the association related to the pension fund assets of Iceland have reduced the likelihood benefits in 2009 (Karanikolos et al. 2013). The economy of Iceland has been expected to shrink close to 10% due to the crisis. In addition, the inflationary rate has climbed up largely by 75% in 2009, which has necessitated the Icelandic government to enforce some measures for minimising the negative impact of economic depression.

Figure 2: Growth rate of GDP in Iceland from 2007-2015

(Source: Raza, Zoega and Kinsella 2015)

Figure 3: GDP per capita of Iceland for the years 2007-2015

(Source: Zoega 2016)

According to the above figure, the GDP of Iceland has been 21.29% in 2007; however, after the financial crisis, the GDP growth rate has fallen to 17.53% in 2008 and 12.86% in 2009. The same trend is observed in case of GDP per capita of the nation and the lowest is observed in 2010 due to higher inflationary rate. However, the Icelandic economy has been started to recover from 2011, as the government has lowered inflation rate and increased debt from IMF to support the economy and spending power of the individuals.


Banking Sector:

The Icelandic financial crisis has increased the credit risks of the banks. Before the crisis, the default loans have been relatively small; however, it has increased manifold after its occurrence. In addition, the capital adequacy of the banks of Iceland has decreased; however, the performance has been better in contrast to the other EU nations, as it is over the statutory need of 8% (Ragnarsdóttir, Bernburg and Ólafsdóttir 2013). Furthermore, this crisis has minimised the dividend payments of the Icelandic banks and the banks have prevented in issuing new shares.

The banks have maintained adequate liquidity level during the crisis, which have helped in minimising their current debt burden. However, the fall in income has undermined the profit margin of Icelandic banks with rise in their financing costs. The premiums related to credit risk are specifically high for long-term financing and the price for such funding has increased. This is because the supply has exceeded demand during the crisis. However, with the passage of time, after the bankruptcy of many Icelandic banks, the new entrants have entered the market. In addition, the banks have adopted effective risk management strategies after the crisis, which has helped in quick recovery of their financial positions.

International Financial Flows:

The Icelandic banks have accumulated funds of around £840 million in cash from 100 local authorities of UK. Out of this, Kent City Council has made maximum investment of £50 million followed by Transport for London with an investment of £40 million. In addition, the government of Iceland has been responsible for maintaining the savings accounts of €20,887 of the Dutch citizens. However, the financial crisis has restricted the Icelandic government in repaying the debt. Therefore, in order to repay the debt amount, 4% of the GDP of Iceland would be paid to UK during 2017-2023 in pounds and 2% of the nation’s GDP to Netherlands in GDP for the same period.

2.Ways that could be adopted to prevent the Crisis or lessons learnt in the aftermath:

The following are the ways that the Icelandic banks and other firms could have adopted to prevent the crisis:

  • The organisations could develop a list of monthly or yearly expenses, income and tax-related information to gain sound knowledge of the financial position. The budget needs to be formed to develop investment plans, techniques of cost minimisation and auxiliary measures to combat with financial trouble.
  • Another negative impact of financial crisis is the issue related to employment. The individuals could hedge the risk of unemployment by developing unemployment insurance. In addition, the individuals could minimise their spending patterns to save more money. This is because in situations of job loss, they could start their own businesses during the crisis.

During the mid-half of 2012, Iceland has started to recover rapidly, which is considered as the leading European success story. The rate of unemployment has been reduced to 6.3% and the nation has been bringing immigrants for jobs. However, the wages of the employees have been minimised by 50% and there has been issuance of ten-year government bonds below 6%. Thus, it has been evaluated that Iceland has recovered from the crisis at a faster price; however, the government has experienced an increase in debt burden.



From the above discussion, it has been found that the Icelandic financial crisis has negative repercussions on the banking, GDP, employment and global financial flows. As a result, there has been fall in the growth rate of GDP and employment. The international financial flows have decreased, as Iceland has to repay the debt amount to UK and Netherlands by paying a certain portion of GDP per capita of the nation. The crisis could have been prevented by developing yearly budget and contingency plans. However, Iceland has recovered quickly from the crisis due to effective governmental measures in the form of issuance of new government bonds.



Bergmann, E., 2014. Iceland and the international financial crisis: Boom, bust and recovery. Springer.

Edvardsson, I.R. and Teitsdóttir, U.D., 2015. Outsourcing and financial crisis: evidence from Icelandic service SMEs. Employee Relations, 37(1), pp.30-47.

Jónsson, Á. and Sigurgeirsson, H., 2017. The Icelandic Financial Crisis: A Study into the World ?s Smallest Currency Area and its Recovery from Total Banking Collapse. Springer.

Karanikolos, M., Mladovsky, P., Cylus, J., Thomson, S., Basu, S., Stuckler, D., Mackenbach, J.P. and McKee, M., 2013. Financial crisis, austerity, and health in Europe. The Lancet, 381(9874), pp.1323-1331.

May, A., 2014. Financial Regulatory Shortcomings during the 2008 Financial Crisis: A Comparison between the United States, Canada and Iceland.

Ragnarsdóttir, B.H., Bernburg, J.G. and Ólafsdóttir, S., 2013. The global financial crisis and individual distress: The role of subjective comparisons after the collapse of the Icelandic economy. Sociology, 47(4), pp.755-775.

Raza, H., Zoega, G. and Kinsella, S., 2015. Capital controls, financial crisis and the investment saving nexus: Evidence from Iceland.

Zoega, G., 2016. 1 Icelandis financial crisis. Iceland’s Financial Crisis: The Politics of Blame, Protest, and Reconstruction, p.21.

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