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Iceland Crisis Essay

2998 words - 12 pages

DEEP FREEZE

International Trade Assignment Case Study of Iceland FinancIal Collapse MBA in Marketing&Communication

“The most spectacular bankruptcy of the 2008 financial crisis was the collapse of Iceland's financial system. This collapse is especially intriguing as Iceland is not an underdeveloped country!” ---EHMAN BROTHERS

Introduction
Iceland is an independent Nordic European island country situated at the confluence of the North Atlantic and Arctic Oceans, on the Mid-Atlantic Ridge. Its traditional industries are fishing, processing of fish, aluminum, and strong energy industry. During several years of economic boom, the Icelandic financial system expanded considerably. A ...view middle of the document...

But there's no such thing as a free lunch! The strings attached include fiscal tightening and some cutbacks in welfare spending. Negotiating the payback to British and Dutch government for a guarantee is also a contingency. With the development of crisis and recommendations of IMF, the economic collapse became a political issue. Even as the member of EFTA and EEA, Iceland has still many complex issues to trade off, such as the Icelandic fishing territory, and the right to exploration for oil in the Atlantic Ocean.

1.Is there a link between the US sub-prime crisis and the Icelandic financial crisis?
Yes, there is the link between them. As US is the leader of world economy, it led to the late 2000 global financial crisis. We can say that, the US sub-prime is an incentive of the Icelandic financial crisis. A fatally over-leveraged banking sector, the banks were dependent on borrowing aggressively in international capital markets and attracted the foreign funds with Iceland’s high interest rates and strong sovereign rating. They grew, to begin with, mostly in foreign markets; via buying financial companies and institutions, opening branches and by increasing their international trade. So Iceland was deeply influence by the US sub-prime crisis.

The U.S. dollar is the currency most used in international transactions and is one of the world's dominant reserve currencies. So the depreciation of U.S. dollar affected the whole global economy and increased the prices of global energies and raw materials. As that Iceland’s agriculture and manufacture is limited and most consumer goods are imported, Apparently, Iceland will be negatively influenced. The depreciation of U.S. dollar also put inflation pressure on Iceland. The Icelandic Krona is weaken by 35% in the six month prior against us dollars cause by the capital flight, the result of downgrade in sovereign debt rating. Lehman Brother ́s fall down led to widespread crisis of confidence. According to Ingimundur Friðriksson, former Icelandic Central Bank ́s director; it can even be stated that the Lehman Brother ́s melt down is partly related to the collapse of the Icelandic Banks. The Icelandic financial crisis and the US sub-prime crisis are both bubble economic: can’t pay the high debt--->bubble burst--->bankrupt. Both of them have three folded. “First there is a presence of an extreme use of credit; second there is a noticeable lowering of credit standards; and third, heavy dependence on leverage.”(According to Henry Kaufman) The US sub-crime crisis and the Icelandic financial crisis are all deeply influenced by the economic concept high privatization, deregulation etc . free market

2.How could the Iceland financial crisis have been avoided?
1)To avoid the malinvestment Those misdirected resources and entrepreneurial errors need to be liquidated. Prolonging their existence prevents the economy from moving production and consumption patterns to those that are conductive to long-term growth....

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