2008–2011 Icelandic financial crisis

It involved the default of all three of the country's major privately owned commercial banks in late 2008, following problems in refinancing their short-term debt and a run on deposits in the Netherlands and the United Kingdom.

This led to the 2008–2013 Icesave dispute, which ended with an EFTA Court ruling that Iceland was not obliged to repay Dutch and British depositors minimum deposit guarantees.

The international bailout support programme led by IMF officially ended on 31 August 2011, while the capital controls which were imposed in November 2008 were lifted on 14 March 2017.

[37] Influential BBC business editor Robert Peston published an opinion piece on the banks, stating that debt insurance for Kaupthing required a premium of £625,000 to guarantee the return of £1 million: "the worst case of financial BO I've encountered in some time" was his graphic description.

"[39] These articles spooked investors discussing Icesave (the brand name of Landsbanki in the UK and the Netherlands) in online forums and many started moving their savings out of the Internet bank.

[74] The Finnish Financial Supervision Authority, Rahoitustarkastus, announced having taken control of Kaupthing's Helsinki branch already on 6th, to prevent money from being sent back to Iceland.

[76] A second licence was issued on 13 October,[77] when the Bank of England provided a £100 million secured loan to Landsbanki "to help maximise the returns to UK creditors".

[80] One of the banks, Sparisjóðabanki (SPB, also known as Icebank), stated the next day that it could not provide new collateral for its 68 billion krónur (€451 million) loan, and would have to turn to the government for help.

However the agencies believed that the government would have to issue more foreign currency bonds, both to cover losses as the banks' overseas operations are liquidation and also to stimulate demand in the domestic economy as Iceland goes into recession.

Russian deputy finance minister Dmitri Pankin said that "The meeting took place in a friendly atmosphere.... We are working thoroughly on the issue to take a final decision".

[citation needed] The króna, which was ranked by The Economist in early 2007 as the most overvalued currency in the world (based on the Big Mac Index),[113] has further suffered from the effects of carry trading.

In response to the rise in prices – 14% in the twelve months to September 2008,[12] compared with a target of 2.5% – the Central Bank of Iceland held interest rates high (15.5%).

The UK Financial Services Authority (FSA) was aware of the risk, and was considering imposing special liquidity requirements on Icelandic deposit-taking banks in the weeks before the crisis.

[124] Glitnir and Kaupthing, shorn of their Icelandic operations, obtained moratoria on payments to creditors (similar to USA Chapter 11 protection) from the District Court of Reykjavík on 24 November.

[136] The €400 million loan from the central banks of Denmark and Norway is sufficient to pay for a month's imports,[12] although on 15 October there was still a "temporary delay" which affected "all payments to and from the country".

[citation needed] However, Prime Minister Jóhanna Sigurðardóttir, who was elected in April, had promised to bring Iceland into the EU to help stabilize its economy.

During the Social Democrat-Left Green coalition (2009-13) the crisis was blamed on corruption and a lack of transparency; in reaction to this the government attempted to reform the constitution and protect the welfare state.

[163] On 27 February 2009, The Wall Street Journal reported that Iceland's new government was trying to raise $25 million by selling its ambassadorial residences in Washington, New York, London and Oslo.

Initially opposed in June, the bill was passed after amendments were added which set a ceiling on the payment based on the country's gross domestic product.

However, the government argued that if the bill failed to pass, the UK and the Netherlands might retaliate by blocking a planned aid package for Iceland from the International Monetary Fund (IMF).

[171] Former Prime Minister Davíð Oddsson has claimed that Iceland needs to investigate "unusual and unconventional loans" given by the banks to senior politicians during the years before the crisis.

This was cited as an example of how politicians and businessmen, who traditionally held a tight grip over the Icelandic media, have lost this control and that dozens of similar blogs have been created.

[226][227] In October 2008, the UK PM Gordon Brown used provisions in part 2 of the Anti-Terrorism, Crime and Security Act 2001 to freeze Landsbanki holdings in the United Kingdom.

[234] Prime Minister Geir H. Haarde announced on 23 January 2009 that he would be stepping down as leader of the Independence Party for health reasons: he had been diagnosed as having a malignant oesophageal tumour.

The leader of the Social Democratic Alliance, Foreign Minister Ingibjörg Sólrún Gísladóttir, was also unwell, undergoing treatment for a benign brain tumour since September 2008.

[239] After these discussions, Ingibjörg Sólrún Gísladóttir of the Social Democratic Alliance and Steingrímur J. Sigfússon of the Left-Green Movement were asked by the President to negotiate the formation of a new coalition government.

[242] Geir was strongly criticized in the April 2010 report of the Special Investigative Commission into the financial collapse, being accused of "negligence" along with three other ministers of his government.

While views on the feasibility of EU membership are quite mixed in Iceland, this action has served to enhance the credibility of the country on international financial markets.

[253] Iceland has undertaken recapitalization of lenders such as injection of ISK 33 billion (2.1% of 2010 GDP) into Housing Financing Fund at the end of 2010, under a restructuring plan approved by the EFTSA.

Tryggvi Thor Herbertsson, a member of parliament, noted that adjustments via currency devaluations are less painful than government labor policies and negotiations.