From a New York Times editorial – Iceland’s Way:
In the go-go years leading up to the financial crisis, Iceland’s banks were hugely irresponsible, luring foreign depositors with high interest rates and putting the money into risky loans. When Iceland’s big banks went under in 2008, they were 10 times as big as the country’s economy.
The government of Iceland failed to rein in bankers’ excesses. But its refusal to take on bank debts, forcing creditors to take losses and share in the pain, looks increasingly smart as Iceland’s economy begins to recover.
The European Union and the International Monetary Fund — their bailouts of Greece and Ireland were designed to make creditors whole — should learn from Iceland’s example. As they negotiate a rescue for Portugal, they should realize that taxpayers cannot bear the entire cost of the banks’ misdeeds…
The government of Iceland wasn’t intentionally daring or smarter than others. It couldn’t afford to bail out its banks, so it let them fail…
Iceland has felt considerable pain. Its currency lost half of its value against the euro in 2008. A $2 billion loan from the I.M.F. managed to stave off a complete meltdown, but the economy still shrank 7 percent in 2009 and the unemployment rate quadrupled. Government debt is expected to peak at about 100 percent of G.D.P. this year — up from 42 percent three years ago.
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