ABSTRACT
The quick onset of the economic crises in Iceland in 2008 was perhaps its defining feature. While it would be an exaggeration to say that things fell apart overnight, it wouldn’t be all that far from the truth. In the span of a few days Iceland’s three largest banks were placed into receivership and every day appeared to bring a new batch of bad news.1 Icelanders felt the consequences of the collapse of the banking system immediately. People who had invested in the banks’ stocks saw their savings wiped out. While perhaps not significant in itself there was no way to get money in or out of the country for a few days, which bred feelings of isolation and helplessness among many. Most importantly, the banking crisis was accompanied by a significant devaluation of the Icelandic krona. On October 8, 2008 a dollar traded for 126 krona – a year earlier the exchange rate was 60 krona to the dollar. While a fall in the value of a currency has substantial effects on consumption in countries that really heavily on imports, there were additional complications in the Icelandic case. Interest rates had been kept very high in Iceland and, as a consequence, taking out mortgages and other loans in foreign currency – at substantially lower rates – had become quite common. The devaluation of the Icelandic krona meant that many people faced mortgage payments twice what they had been at the origination of the mortgage – in effect, the principal now far exceeded the value
of the properties. This, along with restriction on the ability to trade currencies freely, also meant that for a little while Iceland became a net exporter of luxury cars – without any production of cars taking place in Iceland.
