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Business & Economics
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Frozen Assets: The Story of How Iceland's Entire Banking System Disappeared in One Week
In 2008, Iceland's recently privatized and deregulated banks, swollen to over 10 times the nation's GDP on foreign debt, collapsed within one week when global credit froze. This catastrophic failure forced the country to seek an emergency IMF bailout to survive.
In the early 2000s, Iceland was the poster child for economic miracles. A tiny Nordic nation of just over 300,000 people, it was experiencing an unprecedented boom. Its financiers were dubbed the new 'Viking Raiders,' acquiring foreign companies with audacious ambition. But in October 2008, this miracle imploded. In the span of a single week, Iceland's three largest banks, which collectively held assets more than ten times the size of the country's entire economy, defaulted. The financial system didn't just crack; it vanished. How did this happen?
The Making of a Banking Bubble
The story begins with deregulation. In the late 1990s and early 2000s, Iceland privatized its state-owned banks and embraced a free-market, low-regulation philosophy. Freed from previous constraints, the three main banks—Kaupthing, Landsbanki, and Glitnir—embarked on a massive international expansion. They fueled this growth not with domestic savings, but by borrowing cheaply on international money markets.
A key strategy was attracting foreign capital through high-interest online savings accounts. The most famous of these was Landsbanki's 'Icesave,' which became wildly popular in the United Kingdom and the Netherlands, promising interest rates that high-street banks couldn't match. Billions of euros and pounds flowed into Iceland. By the end of 2007, the combined assets of these three banks had ballooned to over 14 trillion Icelandic krónur—more than 11 times Iceland's GDP. The country had effectively become a giant hedge fund.
The Week the World Froze
This entire structure was built on a fragile foundation: the continuous availability of cheap foreign credit. When the global financial crisis erupted in September 2008 with the collapse of Lehman Brothers, that foundation crumbled. The world's credit markets froze solid. Suddenly, no one would lend to Icelandic banks, which desperately needed to roll over their massive short-term debts.
The collapse was swift and brutal:
- Monday, September 29th: Glitnir, the third-largest bank, facing a liquidity crisis, was nationalized in a desperate 600 million euro rescue attempt.
- Monday, October 6th: The situation was dire. Prime Minister Geir Haarde addressed the nation with a chilling warning.
There is a very real danger... that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy.
- Tuesday, October 7th: Iceland's Financial Supervisory Authority took control of Landsbanki. In response, the British government took the extraordinary step of using anti-terrorism legislation to freeze Landsbanki's UK assets to protect British savers in Icesave accounts, creating a major diplomatic incident.
- Thursday, October 9th: Kaupthing, the largest bank, was also placed into state receivership.
In less than a week, a banking system that was the pride of the nation was gone. The Icelandic króna plummeted, wiping out savings. The stock market was suspended after falling over 75%. Iceland was facing national bankruptcy.
The Aftermath: IMF and a Reckoning
With its currency worthless and its financial system in ruins, Iceland had no choice but to seek help. In November 2008, the International Monetary Fund (IMF) approved a $2.1 billion loan, the first time a developed Western nation had required an IMF bailout in decades. Additional loans from other Nordic countries brought the total rescue package to around $10 billion.
What followed was a period of intense pain and reflection. Icelanders took to the streets in the 'Pots and Pans Revolution,' demanding accountability. Unlike in many other countries, Iceland pursued criminal charges against the executives and bankers deemed responsible for the crisis, leading to dozens of convictions and jail sentences. The country also held two national referendums where citizens voted overwhelmingly against using public funds to repay the UK and Dutch governments for the Icesave depositor losses, a decision that further strained international relations but asserted national sovereignty.
Iceland's journey from boom to bust and back again serves as a stark cautionary tale about the dangers of a financial sector growing disproportionately large relative to its country's economy, fueled by debt and light-touch regulation. It was a crisis that, in one week, changed a nation forever.