Iceland Allowed Banks To Fail, and Has Prospered As A Result

By Douglas V. Gibbs

The American liberal Democrats claimed that to save our economy the banks, or at least the ones "too big to fail," had to be bailed out, rather than be allowed to fail. However, Conservatives argued that doing so does not solve any problem, but actually prolongs it by allowing a failed entity to continue to poison an already struggling economic system. The better plan, according to Republicans, would have been to allow the banks to fail, and for the more stable banks to fill the void. In other words, allow the Free Market system to adjust and heal the failing economy by allowing the failures to vanish, and the achievers to grow. By letting the strong survive, and allowing the failed entities to be removed from the equation, the economic downturn would be shorter, and the recovery would be stronger. . . without the danger of allowing the government to intrude into the private sector.

Iceland’s President Olafur R. Grimsson came to the same conclusion as conservatives in America. He felt his country would be better off if they allowed the failing banks to fail. As a result, Iceland is weathering the worldwide economic storm much better than expected, and significantly better than her European counterpart, Ireland, thanks to the government’s decision to allow the banks to fail two years ago, which prevented their currency from devaluing.

“The difference is that in Iceland we allowed the banks to fail,” Grimsson said in an interview with Bloomberg Television’s Mark Barton. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”

Ireland pumped money into their banks, as did the United States, and Ireland is now requiring an 85 billion-euro ($112 billion) bailout from the European Union and International Monetary Fund as a result. The United States continues to fight a failing economy, high unemployment rates, a struggling stock market, and out of control government spending.

Ireland’s banks, though they still owe creditors about $85 billion, were split to create domestic units needed to keep the financial system running, while foreign liabilities remained within the failed lenders.

As a consequence, “Iceland is faring much better than anybody expected,” Grimsson said. “How far can we ask ordinary people -- farmers and fishermen and teachers and doctors and nurses -- to shoulder the responsibility of failed private banks? That question, which has been at the core of the Icesave issue, will now be the burning issue in many European countries.”

Iceland is relying on a $4.6 billion IMF-led loan to rebuild its economy. Grimsson has indicated the government may not need the entire amount.

Bondholders of European banks should be prepared to accept losses because voters are becoming increasingly unwilling and unable to fund bailouts.

Iceland has not joined the European Union, though talks are ongoing.

-- Political Pistachio Conservative News and Commentary

Iceland Is No Ireland as State Free of Bank Debt, Grimsson Says - Bloomberg