February 28th, 2012
05:17 AM GMT
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(CNN) - Greece may be known for its tragedies and Iceland famous for its sagas but recent history tells us these stories may turn out to have very different endings–from an economic point of view at least.

In October 2008, Iceland became one of the earliest victims of a credit crunch whose ugly effects many Europeans are still living with today.

The North Atlantic island was the first entire country to almost go under, sunk by the weight of a banking sector whose debts amounted to more than six times Iceland's entire economy.

However, three years on, Iceland is poised to re-emerge from economic purgatory.

The Organization for Economic Co-operation and Development not only expects the country to return to growth but to put on a performance which would make many of its European neighbors envious.

The OECD’s latest estimate sees Iceland expanding a healthy 2.4% for 2012.

So, as the Greeks endure an endless cycle of austerity and (quite rightfully) fret about their future, how does their predicament today stack up with Iceland's uncertain times at the end of the last decade?

Tough talk vs. tough actions

Things were harsh for Iceland in 2008, as I remember first hand, having been promptly dispatched to its cold climes after the nation's broken banks were swiftly nationalized.

I remember standing on a frozen lake outside Iceland's ancient parliament - the Althing - as the chiefs of the stock exchange and central bank, one after another, battled furiously to prevent the foreign cash on which their island depended from fleeing its shores.

Iceland's winter of discontent was closing in, but the money was flowing out like water.

The country became embroiled in a diplomatic spat with its neighbors –such as the UK and the Netherlands– amid concerns no one would get their money back and emerging markets - like Russia - predictably made their usual empty promises of financial support.

In the end, as so often is the case, the knight in shining armor rode in to save the day in the form of the International Monetary Fund, bearing a $2.1 billion bailout.

Hefty conditions were requested and there was much squabbling about the rate of interest.

So far, so familiar...

Public debt vs. private debt

Yet Iceland and Greece do not offer an easy comparison.

What is more: many of the solutions available to the former are not applicable to the latter - because of its size and political and monetary affiliations.

True, Iceland's unemployment skyrocketed to a record of 7.6% at the height of its crisis but that still pales in comparison to the 21% we see in Greece today. And the 320,000 people living in Iceland's is but a fraction of the population of Greece with nearly 11 million people.

What is also different between the two scenarios is a different proportion of public borrowings.

Prior to propping up its overburdened lenders, Iceland was not a country known for its big sovereign obligations.

Greece, by contrast, has arrived at today's scary 160 percent debt-to-GDP ratio, and will be lucky if it reaches its target of 120.5 % by 2020 in accordance with the terms of its second bailout.

Eurozone,  or 'no Euros' zone?

Back when Iceland nearly went broke, I remember its fishermen openly extolled the euro's virtues.

Families with euro mortgages faced crippling monthly payments. To them, adopting the single currency would have been a blessing.

Years later, the OECD still reckons a eurozone entry for Iceland would be a good idea.

I'm not so sure.

Had Iceland been part of the monetary union, it wouldn't have been able to inflate its way out of its debt mountain and devalue its currency. These tactics are often employed by struggling economies to press the reset button. Mind you, they are not open to eurozone members.

Some say Iceland's policy response was 'textbook stuff' in terms of its speed and efficacy.

Barely two weeks after the country's crisis erupted, its central bank slashed rates to 3.5% from a record of 15.5%.

A month after that, inflation had also reached a record: 17.1%.

A shock, certainly, but a relatively brief one at least when stacked up against Greece's longtime languishing.

Greece enjoys the mixed fortunes of being tied to other eurozone members that are rich enough to help zero its credit card whilst being stuck with the wrong monetary policy: one designed to keep price rises at or around 2%.

That's way below where Greece should be given its current predicament.

Though Iceland, like Greece, may be a republic these days the Icelanders' currency - the Crown– may have turned out to be their saving grace.

Capital flight vs. Capital controls

Iceland's money is now worth half what it was before 2008.

And though that does make the country's exports more competitive, the sudden plunge in its value required brusque action at the time.

In 2008 foreign assets took flight and Iceland's money dropped like a stone.

To stem the tide, authorities swiftly imposed capital controls, designed to safeguard what was left following the banking sector's implosion.

Non-Icelanders were told the government would not automatically recompense them, prompting roars of outrage similar to when Greece's investors were told to kiss goodbye to more than half of their holdings last year.

Yet Iceland did deal with its financial demons to some extent in its own way without seeing its sovereignty threatened.

Greece, on the other hand, must publicly swallow its medicine or face going without dinner.

The result: Iceland was relegated to junk bond status but even in the depths of its depression the country never actually defaulted on its debts. Its financial sector problems were ring fenced and it was able to put its people first and deal with its creditors later.

That's something to consider as Greek bonds are cut to 'selective default' by Standard & Poor's.

Iceland, on the other hand regained its investment grade from Fitch two weeks ago.

soundoff (42 Responses)
  1. carol

    Truelly Things were harsh for Iceland in


    February 28, 2012 at 6:56 am |
  2. Nick

    Tragedies, commedies, theatrical culture, philosophie, democracy and all this greek stuff is more useful than any saga, don't you think? So, when you talk about greek tragedy, just consider what this country has offered to world culture. And where we would be now if the Greeks had kept them only for themselves.

    February 28, 2012 at 7:39 am |
  3. Floyd Burgoz

    Iceland should stay the course and by all means do not join the Euro Currency Debacle.

    February 28, 2012 at 8:23 am |
  4. Nuno

    ... and so iceland returned to its insignificant little cold corner of stinking fisherman as it has always been

    February 28, 2012 at 8:46 am |
  5. James

    Greece tried to be a country it wasn't , they envisioned themselves as Germany when they aren't. The entire economy was booming on debt and nothing else. Greece needs to accept reality and default, go bankrupt and recover in few years. Iceland is doing really well now when they followed that strategy.

    February 28, 2012 at 8:57 am |
  6. TradeWithGermany.com

    Icelanders were wise and independent enaugh to protect their citizens first yet they did it in clever, professional way. Thanks to this they were able to bear huge pressure from foreign investors aka advisors, medias and negotiate as a partner. Their story is a praise of Independence!

    February 28, 2012 at 9:53 am |
  7. wirk

    The comparison is really badly misguiding. Iceland was and is well ordered and organized (tiny) Nordic country. Greece was and is a total mess: imagine a country where there is no land register or there is massive pension fraud due to inability (or cheating) to register deceased. The problem with Greece is NOT euro, the problem is much deeper: how on earth Greece could enter the EU at all? Nobody is even thinking about EU membership for country like Albania and Greece is not far from Albania in state organization. So how on earth Greece could exist in the EU for such a long time?

    February 28, 2012 at 9:55 am |
  8. Frank

    Obama did not have the guts to nationalize the banks, and he should have; he could have turned the economy around faster, and locked up some really evil bankers (Goldman-Sacks for starters). But, he lacked vision, or Big Eggs. The Super Rich in America are sucking the last life blood out of the Middle Class. Instead of being in jail, they are going on extended vacations and looking for investment properties; the ones middle class families used to live in. Lesson learned?

    February 28, 2012 at 10:07 am |
  9. Pritka

    No riots, no angry rhetoric, they just rolled up their sleeves, gritted their teeth and muddled through with the help of the IMF. You gotta admire that stoicism. So they are a tiny cold country, they have a high standard of living and they did not default. Things were tough but they are prevailing. They can be proud of themselves and their country.

    February 28, 2012 at 10:17 am |
  10. CommonSense

    If you take must take anything from this article it is this quote

    "it was able to put its people first and deal with its creditors later."(Iceland)

    BINGO! Greek politicians should be ashamed, they are slaves to the banks and the euro.

    February 28, 2012 at 10:18 am |
  11. AuDaVinci Uzoigwe

    As an economics student,i think greece and iceland should sit up now and join hands together to remedy the situation in their countries.Not only that they should spend less and invest more in their economies.

    February 28, 2012 at 10:22 am |
  12. Pritka

    Nationalize banks? If O'bama had tried to do that, he would never have gotten it through congress and the conservatives would have screamed socialism so loud it would have drowned out any attempt to have a logical discussion about it.

    February 28, 2012 at 10:27 am |
  13. Gian

    Comparing Iceland with private debt and Greece with public debt is a no-sense.
    Iceland had huge problem because few bank investors simply where unable to handle the mony crunch crisis, but was private money and the government in the end refused to have all people to pay for few "bad ones".
    Greece is a totally different story. Public money spent without control, a better comparison would have been between Greece and Enron.

    February 28, 2012 at 10:28 am |
  14. Chris

    The Greek Politicians with the help of the Banks have destroyed Greece. Iceland saw the scam(a bit late, but better than never) and kicked them out. The end game being taking economic control of all the countries in the EU...with Germany it's capital.

    I hope the Greek People can eventually take control of their country.

    February 28, 2012 at 10:56 am |
  15. Robert

    I still don't understand why people keep saying the Euro currency policy is in the way.

    Maybe someone could explain to me what the difference is between:

    A) Devalueing a country's currency to half its original value
    B) Maintaining a common currency and halving all wages, pensions and debts

    Seems like simple math to me: The result is the same, in both cases the people's buying power is halved, as is the debt. Why do people insist that inflation is the only way?

    February 28, 2012 at 11:33 am |
  16. Martijn

    But the Netherlands has had to stump up for Icesave...the "own people first, creditors later" still means other governments have to cough up, adding to our budget woes.
    Blaming that on the Euro (a favourite passtime here) makes totally no sense.

    February 28, 2012 at 12:24 pm |
  17. Nick

    @wirk: Have you ever lived in Greece and Albania? Not for holidays, have you ever really lived in these places? If you haven't so, how can you say that there is the same mess in both countries? We survived because of Greece and Europe, you should know. The alphabet we are using right now, the latin, comes from the greek. Do you know how meny greek words we use everyday? It's impossible for these people to make a mess, they have such an experience in science and education for 3.000 years. I think all this is nothing but a plan from USA and EU. They need to control the borders of Europe. How do you think Arabic and African immigrants get to European countries? All of them pass from Greece. And also you should know something; Parthenon is located in Greece, there is no such symbolic building in the whole world.

    February 28, 2012 at 12:41 pm |
  18. Henk

    The Euro is a brand new currency that requires time to grow and strengthen. Stepping out at a first hurdle is what small children do. The US started this global financial crisis and all the US has done is increased borrowing. Where are your articles about that CNN? Austerity is needed at times. Otherwise your just being naive.

    February 28, 2012 at 12:45 pm |
  19. Morad

    he bad thing about Europe is...well: Europe! The good thing about Europe? yup you guessed it right: Europe!
    So... Europe: plz stop trying to be the United States, it will not work. Stop comparing countries, they are different in their own beautiful (or sad) little ways. The first day I have heard about the Euro I said , the Eu who?? bad bad idea!!! In the United States, you could travel from Boston to San Diego thousands of miles away and things will continue to be relatively the same. The United States is ONE country, Europe is not. Either make Europe one country (yes I am talking about the political element) which is impossible or let Europe be Europe and find a way to exploit that as a strength. This Euro nonsense makes no sense to me and I am no economic genius: I don't understand why it continues to make sense to the economic geniuses at the IMF, ECB, and the like... I just don't understand this one...

    February 28, 2012 at 12:46 pm |
  20. power4things

    "The Euro is a brand new currency that requires time" – what's the weak US Dollar's excuse?

    February 28, 2012 at 1:43 pm |
  21. Paul Johnston, PhD Economics

    The Euro Zone has been a FRAUD and FARCE from the beginning just to take away poorer nations independence putting in the Euro to imprison them... Greeks need to get out and do it FAST or come election The Greek People will REVOLT!

    February 28, 2012 at 1:56 pm |
  22. KJMU

    The mess now with Greece is also concerning the option of having a conflict with Turkey. Turkey prime minister, Mr Erdogan has said that Turkey will make its presence felt in the eastern Mediterranean Sea and use its capabilities at a time when Greece and Cyprus are looking to exploit recently discovered enormous gas fields off its coasts and partner with Israel to build energy facilities. Turkey, which does not recognize Cyprus's Greek government (Turkey occupy large part of Cyprus in the 70’s in a brutal operation), has bitterly complained about recent Cyprus-Israeli energy deals. This huge natural gas fields have the potential to save Greece from its economic disaster situation…but the Turks like to take it by force and the western world does neither help the Greeks nor the Cyprus's Greek government!

    February 28, 2012 at 3:39 pm |
  23. LukeS

    @Nick Forget trying to pretend the world owes Greece anything in order to get itself out of this mess caused by its 3rd rate govt standards. Credit is the real evil. Once upon a time people saved then bought what they needed when they had the full amount. But like a junkie, the world cannot survive without credit today and thus there lies the dilemma.

    February 28, 2012 at 3:58 pm |
  24. Tassos_gr

    @LukeS – Spot on

    February 28, 2012 at 4:51 pm |
  25. Yiannis K.

    Greek politicians, and useless civilians who were asking job in government without the proper requirements on the one hand, and foreign speculators and opportunists on the other hand, are the ones who destroy Greece and Greek Economy.
    Greeks are very proud to be insulted and humiliated. Greece offered the democracy and civilization to the world. Greece was the main reason for the failure of Hitler to conquer Europe. Greece saved and supported many countries when they had difficulties. So now try to save Greece. Try to buy Greek products, hire Greek people, invest in Greece, come for holiday in Greece and try to save the Greek Economy.
    Good courage Greece. We are with you. Greetings from Cyprus and Nicosia- the only divided capital in Europe!

    February 28, 2012 at 7:42 pm |
  26. lila kakaletri

    thank you CUPRUS for your support we love you!FREEDOM TO CUPRUS!

    February 28, 2012 at 7:48 pm |
  27. scriss

    Things were difficult in 2008 – but with that past them, staying away from the Eurozone, and the Euro, might be the best way to go, for long-term stability.

    February 28, 2012 at 8:02 pm |
  28. rightospeak

    You say that IMF bailed Iceland to the tune of $2.1 billion ? Is that right ?

    February 28, 2012 at 8:17 pm |
  29. Philip Dugay Acob

    The people of Iceland used their democratic powers peacefully to iron out all the economic crisis that was happened last 2008! All the leaders in the government and the banking sectors who are responsible enough in the collapse was removed through the peaceful power of the people and now the Iceland government, economy and its people are now enjoying the benefits of economic recovery. The Greek government and its people must do the same what the Iceland people did.

    February 29, 2012 at 2:52 am |
  30. jakson

    Strangest way to the marriage application


    February 29, 2012 at 8:49 am |
  31. Mogotsi Mpshane

    Both countries are in deep sh@# but I think Greece is worse

    February 29, 2012 at 9:29 am |
  32. Robert Smirnow

    Between 1981- March 1990 I was employed by ICAO in the JF section of the ATB branch. My duties included clerical duties related to the administration of the Danish and Icelandic Joint Financing Agreements, which provided safety for aircraft crossings of the north-atlantic, the busiest international corridor. In those days the value of the Icelandic Krone was dropping like a rock versus the US dollar. Eventually it was agreed to do accounting in US dollars.

    While on this job, I had the pleasure of vacationing in the greek islands for extended periods of a couple of months. on my first vacation in 1984 i brought $4000 and came back after 7 weeks with almost half of my money. On my last trip in 1990, I brought $6000 but ran out with 2 weeks to go. My last 2 weeks there were handouts from fellow travellers who were there also for extended periods.

    Now for fun I listen to cajun music

    March 1, 2012 at 6:29 am |
  33. Req Uired

    Good for Iceland, but has Iceland paied back to Britain yet? Lots of British people lost a lot of money because of failing Icelandic banks. Has the country lending money to Iceland (primarily Scandinavian countries I think) gotten their money back yet? Just curious. Or will Iceland once again live way above its means? Has Iceland learned anything from its previous mistakes? I hope so. Congratulations to Iceland then!

    March 2, 2012 at 12:36 am |
  34. Þorsteinn Halldórsson

    Don´t believe the hype, as an icelander who is about to lose his house and unemployed for 2 years this article on Iceland is bull. 45% of icelandic homes have negative value in them due to wage and price indexing of there loans, basically technically bankrupt. The so called new banks are still owned by the same criminals who bankrupted the country. The growth you see is people taking loans – overdraft to pay for items. So please cut the crap that we are better off, we´re f....ed.

    March 3, 2012 at 12:36 pm |
  35. Þorsteinn Halldórsson

    I´ll say it again, this is stupid and irresponsible reporting on CNN behalf – Nina should do her homework and not listen top banking hype presented to the business world. God this make me angry and is not the first time this kind of careless reporting takes place. Our currency is killing us financially except of course the banker and the safe 10% who are wealthy. Additionally our unemployment rate is mostly down due to people leaving the country to work elsewhere. My god I´m sickened by this kind of careless reporting , Nina do your homework.

    March 3, 2012 at 12:44 pm |
  36. Spyros

    things are going harder and harder here in greece, check the economy, the politicals, the gas price evrything...check a link for gas for example ygraeriokinisi

    March 8, 2012 at 4:54 pm |
  37. joesixpack31

    Didn't Iceland kick out all the foreign "money changers" and jail its crooked politicians? They probably would've done the world a favor by hanging both.

    July 23, 2012 at 4:49 pm |
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    November 4, 2012 at 1:43 pm |
  41. themetroculturalist

    I agree with CommonSense. Look for the themes – not the physical structure- that are similar between the two countries. Politicians looking after themselves and their own status, and who are willing to put their people through the mud to maintain their own status and power. That's the common denominator here. I think that Greeks can turn this around for themselves if they get a bit organised, demand to get out of the euro and start to take more responsibility of their own economy. They will have to bear a few years of difficulty like Iceland did, but they are bearing burdens already. Oh, and to Nick up there – can you get over yourself please. I've heard the Greeks singing that same old tune forever...that was then and this is now. Part of the problem is the Greek arrogance which blinds them to the reality of today's world. Wake up.

    November 2, 2013 at 12:12 pm |
  42. themetroculturalist

    Halldorsson, so are you saying Iceland continues to be a financial wreck? Do you have a blog that maybe talks about this? I, for one, would read your blog on the matter. Thanks for sharing.

    November 2, 2013 at 12:18 pm |

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