The major implications of the
Icelandic financial crisis was widespread, to say the least. Many companies have declared bankruptcy. Even the Crown, the currency of
Iceland, has been very successful because of Iceland's economy is in a complete
mess. Total debt of Iceland is d about 9500000000000 of Kronur. Compare this
with the assessment of Iceland's GDP to be 1900000000000 Kronur, and you know
that Iceland is neck deep in debt.
Here are the causes of the Icelandic financial crisis
Here are the causes of the Icelandic financial crisis
1. Banks unable to refinance their debts
In 2001, when the banking sector was regulated in Iceland die, debts began to be sent by banks. In 2008, three banks in Iceland, all the big names, running debts worth 50 billion euros.
2. Inflation due to expansion
Iceland conducted most of its expansion activities in the new economy, borrowing on the interbank market. External debt also played a key role in financing the expansion. The fact that household debt was 200% of average household income, boosted prices of essential goods to rise. This led to inflation, which has been certified by the Central Bank of the securities lending emission island will be for banks.
3. The overestimation of the Kronur
Running until September 2008, prices rose 14%, considered the increase to higher prices in the history of Iceland, ever. The Central Bank of the island tried to cover this by having a higher interest rate (15%). These rates were absolutely unknown in European countries where interest rates are at 5%. The high interest rate which resulted in many countries to pump money in Iceland.
Iceland conducted most of its expansion activities in the new economy, borrowing on the interbank market. External debt also played a key role in financing the expansion. The fact that household debt was 200% of average household income, boosted prices of essential goods to rise. This led to inflation, which has been certified by the Central Bank of the securities lending emission island will be for banks.
3. The overestimation of the Kronur
Running until September 2008, prices rose 14%, considered the increase to higher prices in the history of Iceland, ever. The Central Bank of the island tried to cover this by having a higher interest rate (15%). These rates were absolutely unknown in European countries where interest rates are at 5%. The high interest rate which resulted in many countries to pump money in Iceland.
Most banks in Iceland have refused to make new loans. In a difficult scenario, banks are approaching the largest bank, what they did in the approach of the Central Bank of Iceland. The problem was - The Central Bank of Iceland refused to take possession and the Icelandic government could not guarantee the repayment of debts, and institutionally, the Central Bank of Iceland is much higher than the Government of Iceland. All this has led to an absolute freefall for banks, credit was not only easily accessible to banks.
5. Icesave, working as a subsidiary of Landsbanki worsening issue
Technically, Icesave must have worked as an independent entity, but it did not. Icesave could not rely on the Bank of England due to this restriction. Basically, the Icelandic financial crisis was a systemic disease, although only concerned about the banking sector, unlike the subprime crisis, which was a joint effort of real estate and finance. That said, for a small economy like Iceland, the financial sector to be hit means the country's economy to be hit in the worst possible place.
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