ABSTRACT
This chapter analyzes the Iceland's policy reactions to the crisis and their success. The Icelandic financial collapse was a major event by international standards. Iceland was not in a position to save the banks with a massive injection of capital. The crisis that followed was multi-dimensional, featuring not just a banking collapse but also a stock market collapse, a currency collapse, an economic crisis, and a political crisis of lost trust in institutions as well as in politicians. While the government was seriously restrained in applying welfare policies, due to an excessive public budget deficit by the end of 2008, it was able to redistribute expenditures and tax burdens to achieve its goals. The relative poverty rate of Iceland was fairly stable before the financial crisis about 10" of households having disposable earnings below 60" of median earnings. The government had pledged to shelter the households and had to provide some measures of debt relief.
