International business group project editing phase

International Business ADM 3318D
Iceland vs. Ireland and the Economic Crisis of 2008: Too Big to Fail? What a Load
of Baloney!
Presented to Professor Pranlal Manga, Ph.D, M.Phil.
Written by:
Tessum Weber 5414170
Connor Welsh 5673719
Preston Williams 5684725
Monilla Umubyeyi 6081768

Table of Contents
Introduction……………………………………………………………………………………...1
Information on each Country before Financial Crisis……………….………………………..1
Ireland’s Financial Standing in 2007……………………………………………………1-3
Iceland’s Financial Standing in 2007…………………………………………………...3-5
The Global Financial Crisis of 2008….…………………………………………………………6
Specific Weaknesses in Economies around the World……………….………………...6-8
The Ripple Effect………………………………………………………………………8-11
The Impact of the Crisis on Ireland and Iceland……………………………………………..11
Immediate Impact of Crisis on Ireland……………………………………………….11-12
Immediate Impact of Crisis on Iceland……………………………………………….12-13
Comparison of Various Factors between both Countries…………………………….13-15
Comparison Looking at the Survival Plan between Iceland and Ireland…..………………16
Ireland’s Proposed Survival Plan…………………………………………………….16-17
Iceland Proposed Survival Plan………………………………………………………17-18
Comparison between both Countries..………………………………………………..18-20
Where Are They Now? ...............................................................................................................21
Economic Standing of Ireland and Iceland in Present Day……………………………...21
Comparison Based on Data and Charts………………………………………………21-22
Outlook of Future for the Countries………………………………………………….23-25
Conclusion………………………………………………………………………………………25

Economy of Iceland before the Crisis
Before the financial crisis that hit Europe in 2008, Iceland had one of the strongest countries in
terms of economic prosperity. Iceland adopted a Scandinavian-type social-market economy
combining a capitalist structure and free-market principles with an extensive welfare program,
which as a result, ranked Iceland in 5th
in the 2006 Index of Economy Freedom. (EUbusiness,
2010)
Iceland’s economy depends heavily on the fishing industry, due to its geography situation. Prior
to the crisis, the fishing industry provided 40% of export earnings, more than 12% of GDP, and
employed 7% of the work force. (EUbusiness, 2010)
According to the Central Bank of Iceland’s 2005 report, the country has extensive hydro and
geothermal resources, the only country in Western Europe to do so. Electric power potential
from hydro and geothermal sources created a positive impact in the country’s economy. As a
result, Iceland is a world leader in the use of geothermal energy for domestic and industrial
purposes, not only for generating electricity. This factor has led to the growth of Iceland’s
manufacturing sector. In 2004, manufactured products represented 36% of the total products
exported. Many small and medium-size companies had emerged in export-oriented
manufacturing; areas such as medical equipment, pharmaceuticals, capital goods for fisheries
and food processing, and most of these companies are founded on product innovation. (The
Central Bank of Iceland, 2006)
The largest manufacturing industry in Iceland is the aluminum smelting. This industry is mainly
based on competitive costs and a highly educated and skilled labour force. With the Abundant
geothermal sources in Iceland, the country attracted a lot foreign investment in the aluminum and

hydropower sectors and boosted economic growth before the financial crisis. (The Central Bank
of Iceland, 2006)
The Central Bank estimated that about one-fifth of the total land of the country is suitable for
agriculture and farming. About 6% of this land area is cultivated, with the remaining ones
devoted for factory farming or left undeveloped. Due to the country’s small land mass, meat and
dairy products are mainly kept for domestic consumption. The principal crops have been hay,
potatoes and other root vegetables. Vegetables and flowers are mainly cultivated in greenhouses
heated with geothermal water and steam. However, the agricultural sector went under several
structural changes in recent years before the economic crisis. The demand for traditional
products, such as lamb meat, beef and root vegetables, has declined or remained constant while
consumption of white meat (pork and poultry) has risen in line with changes in taste of the
population and relative international market prices. This had led the government to replace the
price support and export subsidies for the traditional products of sheep and dairy farming with
subsidies in the form of direct income payments to farmers in these segments. The Central Bank
pointed out that Icelandic agriculture is the most heavily supported and subsidized in the world.
However, the support is very uneven and nearly all goes to the dairy and sheep segments in order
to help the local traditional industry maintain its practice. The Central Bank proved this fact by
pointing out that in 2004, direct payments from the state amounted to an estimated 46% of
farmers’ income in lamb and mutton production and 46% of the producers’ price for milk
production. The total on-budget transfers to the farmers amounted to about 1.9% of GDP in
2004, compared to 1.25% in the EU and 1.2% in the OECD. The government wants to protect
the local traditional agricultural industry and consumers, the importation of meat, dairy products
and vegetables that compete with domestic production are subject to high tariffs, controls to

prevent diseases, and quotas. Imports are likely to increase as tariffs go down in line with WTO
agreements on trade in agricultural products. (The Central Bank of Iceland, 2006)
Iceland’s banking system played a central role that led to the financial crisis. Prior to the crisis,
Icelandic banks expanded aggressively overseas (following financial deregulation), acquiring
assets far in excess of the country's GDP and therefore of the government's capacity to rescue
them in the event of a run on accounts. Consumers and businesses also borrowed heavily in
foreign-currency loans, following the privatization of the sector in the early 2000s. These factors
eventually led to the depreciation of the country’s currency, the Icelandic kronur, in 2008.
(EUbusiness, 2010)
In an overview of the country’s economy before 2008, the GDP in terms of purchasing power
parity was 12.85 million with a GDP per capita of $42,600, and a real GDP growth of 6%. The
Icelandic labour market had been one of the highest participation rates among OECD countries.
Over the past 10 years before 2007, it had consistently been, well above 80%. The
unemployment rate before the crisis was only 1.6%. The exchange of Icelandic kronur was
62.982 in 2005, 70.195 in 2006, 63.391 in 2007, per U.S. dollar. Since the crisis in 2008, the
exchange rate raised to 85.619 and 128.417 in 2009. (EUbusiness, 2010)
The Economy of Ireland, before the 2008 Crisis
Ireland has been a member of the European Union since 1999, which as a result, dictates the euro
as it’s monetary currency. From 1990 until 2007, Ireland experienced a huge economic growth.
This economic growth period was given the name “Celtic Tiger”. According to the Travel
Document System, during this period, mainly from the years between 2004 and 2007, the Irish
economy generated roughly 90,000 new jobs annually, attracting over 200,000 foreign workers,

mostly from the new EU member states; in an unprecedented immigration influx. The
construction sector played the main role in this increase of employment, as one-quarter of these
jobs was construction related. Also during this same period, a strong relationship with the United
States played another big factor. In 2007, U.S. exports to Ireland were valued at $9 billion, while
Irish exports to the U.S. totalled $30.4 billion (according to the Bureau of Economic Analysis).
To explain this rapid growth of economy, many economists praised the Irish government for
imposing a low corporate tax rate. According to economists, the country has pursued a low
taxation policy since 1956 because the government wants to encourage more foreign direct
investment and promote free trade. (Travel Document Systems, 2009)
According to the US tax journal Tax Notes, due to the low corporation tax rate, Ireland is the
world's most profitable country for US Corporations. This statement is supported by the fact that
the profits made by US companies in Ireland has doubled between the year 1999 and 2002, from
13.4 billion euro to 26.8 billion. In 2005, US companies accounted for 61% of Ireland’s total
exports. Other than the low tax rate factor, the flexibility of English-speaking workforce;
cooperative labour relations; political stability; pro-business government policies; a transparent
judicial system; strong intellectual property protection; and the pulling power of existing
companies operating successfully, are also important factors that explained the creation of the
“Celtic Tiger”. (Travel Document Systems, 2009)
The main sector that excel in Ireland’s exportation, is the mining industry. Since the discovery of
the giant ore deposit at Tara Mine in 1977 and two other underground mining operations in
Lisheen and Galmoy, the country now ranks as the seventh largest producer of zinc concentrates
in the world, and the twelfth largest producer of lead concentrates. The combined output from
these mines, three of Europe’s most modern and developed mines, make Ireland the largest zinc

producer in Europe and the second largest producer of lead. According to Irish Natural
Resources, Tara Mine produces over 2.6 million tons of ore every year, while Galmoy mine
produces 650,000 tons of ore annually, and 330,000 tons for Lisheen. In 2007, the exportation of
mining products represented 19% of Ireland’s exports, and a major exporter of zinc in EU. (Irish
Natural Resources, 2008)
Another sector that Ireland excelled in exportation is the software industry. According to Spiegel
International, the country exported software products that worth 14 billion euro in 2003. What
made the country became the world’s software export champ is once again, the low corporate tax
rate, plus the friendly business environment that attracted several foreign IT companies, notably
Microsoft, to invest in the country, thus given the country this honorific title. (Spiegel
International, 2005)
Agriculture represented 8.4% of the export, mainly to the United Kingdom.
Beside export, the government’s welfare benefit programs also contributed to this economy
growth before the crisis. According to Finfacts, Ireland’s net unemployment benefit was the third
highest of the OCED countries (Finfacts Ireland, 2009).
In an overview of Ireland’s economy before the financial crisis, in 2007, the country’s nominal
GDP was $186.2 million, real GDP growth is 5.3%, nominal GDP per capita was $43,100,
agriculture represented 5% of GDP, industries, such as construction, mining, computer,
represented 46% of GDP. Exports accounted for $115.6 billion, while imports accounted for
$84.2 billion. (Travel Document Systems, 2009)

The Global Financial Crisis of 2008
In the year 2008, the world experienced a severe financial crisis so devastating that it was
described by the International Monetary Fund (IMF) as being “by far the deepest global
recession since the Great Depression” [IMF]. The financial crisis was truly global, affecting a
multitude of countries in various ways and with diverse levels of magnitude. The crisis was not
the cause of a single, sudden event but rather a series of events spaced throughout nearly a
decade. It was the unfortunate combination and sequence of these events that ultimately caused
the global economy to tumble. In identifying the main sources of the crisis, experts have
recognized particular causes that attributed to the development of the financial disaster seen from
the time of the outbreak in 2008 to present day [The Global Financial Crisis]. As the causes
occurred, their negative effects continuously grew and their overall impact increased
exponentially. “Many observers portrayed the turmoil in financial markets in terms of a ‘domino
effect.’ ”[Journal of Balkan & Near Eastern Studies]. This sequence of negative events
dramatically impacted numerous countries, including Ireland and Iceland, on a national level by
causing them to enter a recession cycle. The Financial Crisis of 2008 is one that will be felt for
years to come ….. [add some sort of thesis statement]
The Domino Effect
Both literally and figuratively, it is possible for a small spark to ignite a roaring fire. It is
a common characteristic among human-beings to label the “spark” that “ignited the fire” as being
the most prominent factor or the leading cause of a specific result. In the financial crisis, the
actions of the USA were essentially the “spark” that “ignited the fire” of the global financial
crisis.

The roots of the crisis began in the world’s largest national economy, the USA. During
the early years of the 21st
century, the American population began to invest heavily in houses. As
more and more individuals purchased houses using borrowed money, the overall value of the
housing market grew and questionably grew too much. Price inflation of this type is often
referred to by economists as a “bubble”. William Watson stated in the Gazette in 2006, that: “A
bubble... is a run-up in prices going beyond anything that reasonable economic calculation can
justify.” Watson added that “when enough people do finally recover their senses... [the] bubble
bursts” [The Global Financial Crisis]. Essentially, Watson described the exact situation that
occurred in the USA in the subprime mortgage crisis of 2007. Banks in the USA were now in an
unstable situation. The banks had provided the funding to the Americans who invested in the
housing market. With the drop of house values and slowing down of the economy, these
individuals were now unable to pay their mortgages and went bankrupt. The strain from these
unpaid mortgages caused major banks in the USA to fail. Specifically, Bear Stearns, Fannie Mae,
Freddie Mac, Washington Mutual, AIG were among the major banks and corporations to fail
during the subprime crisis [The Global Financial Crisis]. The IMF described this subprime
crisis as being severe enough to cause the “global economy [to bend] but [not enough to] buckle”
[IMF]. The subprime mortgage crisis was the first major event that would eventually lead to the
global financial crisis a year later. The actions of the USA would become the “spark” that would
later “ignite the fire” of the Global Financial Crisis of 2008.
The subprime mortgage crisis that occurred in 2007 caused the ‘domino effect’ process to
begin, and soon led to the appearance of a series of events around the world. Investors and banks
around the world had invested money in the US housing market. When the housing bubble

popped in the US, the housing bubble is several countries almost instantly popped as well. Thus
many banks around the world felt the same strain as those in America. “As a result, in October
2007, the German government was forced to spend $50 billion to prop up the bank Hypo Real
Estate. Around the same time, Iceland nationalized, or imposed government control of, the
country's second largest bank. In February 2008, the British government also had to nationalize
one of its major banks.” [The Global Financial Crisis] The bank crisis that now transpired in
several countries across the world left the general public in a state of confusion and uncertainty
and would lead the global market through another step in the progression cycle.
Liquidity Crisis
Another element during the financial storm that erupted from the years 2007-2008 dealt
with a notion of liquidity. Liquidity is the ability to convert an asset into cash to use in other
transactions. Around the world, businesses rely on banks as a method for liquidation. But, as
Chris Arnold noted in an October 2008 story for National Public Radio (NPR), “banks are
already short of cash because of losses in the housing bust, so they're a lot less willing to lend
money to everybody else.” [The Global Financial Crisis] As businesses now face numerous
problems stemming from an inability to liquidate, they begin to fail. As businesses fail, workers
around the world are laid off and universal unemployment rises. A liquidity crisis is not only
dangerous because it causes credit to dry up, but also because it poses the threat of transforming
into a solvency crisis. This crisis was demonstrated in late 2007 when the American mortgage
lender, Country Wide Financial, went bankrupt and the British Mortgage lender, Northern Rock,
had to be bailed out by a loan from the Bank of England.

From Bad to Worse
On September 15th
, 2008, the global financial crisis reached the boiling point. The date
marks the failure of the American mid-sized investment bank Lehman Brothers. This single
failure alone unleashed a feeling not only on Wall Street, but across the globe. “Stock prices
plunged, interbank markets dried up again, the commercial paper market came to a standstill and
even money market funds experienced serious problems.” [Fighting Financial Fires] The
tumble of the Lehman Brothers caused the global market to dive deeper in an already desperate
time. Mentioned earlier, it is said that a single “spark” can ignite a “roaring fire”. On September
15th
, 2008, the failure of the Lehman Brothers marked the beginning of the global financial crisis.
Although it is only one of the small causes for the global crisis, the event concerning the Lehman
Brothers will be remembered as being the spare that ignited the roaring fire.
“Financial markets operate in a climate of uncertainty in which – as is well known –
greed and fear battle for the upper hand.” [Fighting Financial Fires] The global economy was
now in a time when fear dominated and it showed simply by the mass amount of confusion,
uncertainty, and the lack of faith, by people in various economies. It can be accepted that the
main causes of the crisis were triggered directly in the subprime mortgage crisis a year prior.
However, it must also be noted that it was not the only cause. The global financial crisis was
ultimately a sequence of unfortunate events. As a result of the financial crisis, banks and other
financial institutions demonstrated a tendency to follow each other. Their actions can almost be
compared to those of lemmings, who in a time of fear will simply panic and follow the herd…
even if it means running directly off a cliff. Although this behavioural quality is interesting, it is
constantly expressed throughout human beings from the past, present, and likely the future. The

blame of the financial crisis cannot be limited to a single event. Ultimately, it was the result of a
‘domino effect’ that led one event to another. The domino effect led the overall global economy
from a time of prosperity to a time of poverty.
The 2008 Financial Crisis - What were the effects on Iceland and Ireland?
Iceland and Ireland have been overwhelmed by the impact of their respective financial crisis. In
order to make a comparison of the impact of the crisis, it is important to recognize the size of
both countries in discussion. Iceland is a minuscule country compared to Ireland, with
populations of around 300,000 and 4.47 million, respectively. In regards to the burst of their
asset, property, and banking bubbles, the people of Iceland used foreign currency to capitalize on
foreign places. On the other hand, the Irish decided it was a better strategy to use foreign
currency to take over Ireland.
Iceland:
Compared to the country’s extravagant situation before 2007, Iceland underwent a paramount
downturn. Accordingly, Iceland was forced to withstand and recover from serious effects from
the burst of its asset bubble followed by the rapid collapse of its three largest banks-
Islandsbanki, Kaupthing, Glitner- by mid-October 2008. The impact was enormous and was felt
throughout the country.
After the fall of the Lehman Brothers in the U.S., the Central Bank of Iceland and the Icelandic
banks themselves began to realize the vulnerability of the banks. The strength and size of the
bank’s assets were extremely large in relation to the size of Iceland’s economy. In the first half
of 2008, the króna - Iceland’s currency – experienced vast depreciation relative to the euro and

the U.S. dollar and continued to do so more prominently after July 2008. According to Poul
Thomsen, IMF's mission chief for Iceland, , the króna's value dropped by more than 70 percent,
and the stock market lost more than 80 percent of its value within a week of the collapse of the
three banks. The króna continued to depreciate to nearly 100 percent after that. An immediate
depreciation in currency for a small country such as Iceland, which relies heavily on trade,
increases the costs of its imports and threatens to drive domestic inflation in one direction:
upwards. In fact, inflation rose to nearly 12% in the first half of 2008, and to 17.1% by
November, and peaked at 18.6% at the year’s end (U.S. Department of State, 2011; BBC, 2009).
Consequently, the extreme devaluation of the króna effectively doubled foreign currency
denominated debt while inflation increased the pressures of debt in Iceland’s economy.
For Iceland’s three largest banks, this collapse in short-term borrowing meant that they found it
was too difficult to finance their debts or find funding from the international market. Therefore,
they turned to their last resort, the Central Bank. At this period of time, the three banks had a
debt that amounted to ten times the country’s gross domestic product (GDP), which was €14.7
billion in 2007. Nationalization was no longer an option because the government and the Central
Bank could not guarantee the whole balance sheet of the three banks, whose pre-crisis total was
€110bn, as reported by the Iceland Chamber of Commerce in 2009. Naturally, investors
recognized the dangers and began to flee the banks. There was no doubt that the three major
banks in Iceland were too big to rescue. Moreover, a new emergency law that was passed on
October 6 had the three banks nationalized. They were to be taken over by the Icelandic
Financial Supervisory Authority (FSA), which is an independent state authority whose
responsibilities are to regulate and supervise Iceland’s credit, insurance, securities, and pension

markets (Jackson, 2008). Furthermore, the FSA were given powers to suspend payments in
order to safeguard value and protect depositors, and powers to establish “new” banks- new
Glitner, new Landsbanki, new Klaupthing- to overtake domestic deposit obligations and assets
from the three failing “old” banks. Additionally, controversy between Iceland and the U.K.
sparked negative media coverage around the time of the banks’ downfall. Before the crisis, in
Iceland’s prime, net government debt was close to zero. Afterwards, deposit insurance from the
failing banks proved to have a massive impact. The cost of insurance of international deposits of
Icelandic banks became greater than €4 billion (Iceland Chamber of Commerce, 2009). It was
reported that the amount owed to UK taxpayers' alone in failed Icelandic banks was near £1bn
(BBC, 2009). In early October, the British government approved anti-terrorism legislation
against Iceland- including the three banks, the Central Bank, and the Icelandic government- in
order to freeze Icelandic bank’s U.K.-based assets.
Citizens took to the streets with pots and pans, set fires and protested in order to express great
outrage with their government because of the mass layoffs and unemployment, reaching as high
as 9% at the time which greatly affected disposable income (Benediktsson, Karlsdóttir, 2011).
Moreover, export sectors continued to perform well and as a result, are more competitive after
the crisis; employment levels in the fisheries communities- seen as a last resort during the asset
bubble- stayed high despite the crisis, but the situation was slowly worsening. Likewise,
construction and service-based jobs have been harmed. The banking crisis, along with the
depreciation of the krona and inflation, has taken a toll on Iceland’s household market, leaving
families and individuals, many of whom are unemployed, with a debt that costs more than the
value of their house. According to data from the Central Bank, approximately one-third of the

home-owners will have debt worth more than their houses, and out of the 67,000 homeowners
with króna denominated mortgages, 11,200 households are in negative equity. Thereof 2,600
have more than 5 million króna in negative equity . The data also states that out of the 8,900
households with foreign currency mortgages (in full or partly), 3,400 are in negative equity.
Thereof 2,400 have more than 5 million króna in negative equity (Central Bank of Iceland,
2009). 90% of Icelandic families own their homes; however, as a result of the heavy loan burden,
many will not keep ownership and may be forced to flee. Evidently, mortgage debt constitutes the
largest share of household liabilities. Houshold liabilities have more than doubled for 43% of households
with foreign currency mortgages and risen more than 50% for half of households with mixed mortgages
(Ólafsson, 2009).
Ireland:
Among the many European countries that have experienced a financial crisis, Ireland is a top
contender for having gone through the worst. Similar to Iceland, Ireland was experiencing
prosperity before the crisis. As with Iceland, the bankers and the government did not properly
asses the strength and size of their banking debts. In late September 2008, the Irish government
had assured investors that the banks were strong and liable for their actions by guaranteeing the
deposits and debts of the six largest financial institutions. This guarantee covered all types of
debt ranging from retail and corporate deposits, and interbank deposits to covered bonds and
senior unsecured debt. This guarantee created a liability for the state of approximately 200% of
GDP (Connor, Flavin, O’Kelly, 2010). Unfortunately, one of the principal banks in Ireland, the
Anglo-Irish bank, was in a hopeless position and clearly unable to refinance its short-term
liabilities at that date. It faced astonishing losses amounting to €34 billion. The Anglo-Irish bank
made large-scale commercial loans mainly to Irish property developers, nearly reaching €72
billion. Evidently, they had lost nearly half of their investments and so they were forced to resort

to borrowing from the European Central Bank (ECB). Two other major banks, Bank of Ireland
and Allied Irish Banks (A.I.B), were also experiencing a bust; however, there was less talk about
them. They loaned large sums to Irish property developers and homebuyers, and as a result, their
losses were also large. In total, the losses of all the Irish banks approached €106 billion.
Although already in a formal recession, it was only until 2009 that Ireland nationalized the
banks. The National Asset Management Agency was created to purchase their mountain of debt.
Consequently, the budget fell deep into deficit for the next two years and forced the public to pay
through increases in taxes, social welfare cuts, and pay cuts for the entire public sector.
With property value declining and unemployment on the rise, the Irish citizens furiously began
to occupy the streets. Unemployment levels were up to around 11% by February 2009, and still
continue to rise (BBC News, 2011). The previously ruling party, Fianna Fail, had already begun
to see its support decline and was eventually ousted. As has happened in the past, many of the
Irish had decided it was a good time to leave their homeland. Ireland’s Central Statistics Office
predicted that 100,000 people will emigrate from 2011 to 2012; this is more than twice the
emigration in 2009 and 2010 and will exceed their historical peak in 1989 when 44,000 people
decided to abandon Ireland (Chazan, 2011). This sharp increase in emigration of Irish nationals
marks the occurrence of yet another “brain drain”, where the educated Irish will have to seek
their fortunes elsewhere.
After analyzing the impacts of the two crises, it appears that they both suffered enormously
because of the burst of their asset, property, and banking bubbles. Instead of being too big to
fail, the banks in Iceland and Ireland were clearly too big to rescue. Arguably, it may seem that
Iceland had to deal with worse effects as it is the smaller player with the amount of debt fit for a

massive country; however, Ireland’s situation is not to be taken lightly and this can still be
debated.
The Survival Plans of Ireland and Iceland: How did the two countries survive the economic
crisis?
Ireland:
Ireland, once dubbed the “booming economy; the celtic tiger” (“How the Celtic Tiger lost its
roar”, The Vancouver Sun, July 2nd, 2011), had to come up with a plan to survive the onslaught
brought on by the 2008 financial crisis. As the reader will see, Ireland’s survival plan differed
greatly to that Iceland’s. Although both countries did rely on loans from the IMF and various
countries (as we will see later on), their methods in handling the crisis differed greatly. In these
two cases, the ideology of “too big to fail” was put to test.
The government of Ireland’s survival plan was to spend. Immediately after the collapse
of the Lehman Brothers, on september 30th 2008, the government of Ireland
implemented a massive spending program. The first order of business was to guarantee
the liabilities of six Irish-owned lending institutions as well as one foreign owned bank.
The guarantees covered “440 billion euros of liabilities”. (The Telegraph, “Ireland’s
banking crisis: timeline”, March 31st 2011). Furthermore, massive bank injections and
nationalizations were then routinely performed during the crisis, including:
- €5.5bn to the country’s three main lenders (December 21st 2008) (The Telegraph,
“Ireland’s banking crisis: timeline”, March 31st 2011)
- €7bn into Bank of Ireland and Allied Irish Bank, and a 25% stake in both banks
(February 11th 2009) (The Telegraph, “Ireland’s banking crisis: timeline”, March 31st 2011).

- Ireland announces the creation of a “bad bank” to absorb the toxic loans from Ireland’s
financial institutions, worth €77bn at an average discount of 30% (Aril 7th 2009). (The
Telegraph, “Ireland’s banking crisis: timeline”, March 31st 2011)
The total bailout costs amount to €45bn by Septmeber 2010. (BBC News, “Ireland
Timeline”, October 31st 2011).
During this turbulent time, unemployment hits 11% (february 2009) and The Irish
Republic looses its AAA credit rating (March 2009). Looking for “foreign” assistance, the
Irish government agreed to an €85bn rescue package from the IMF and the EU (BBC
News, “Ireland Timeline”, Monday, October 31st 2011).
The €85bn rescue package was composed of the following contributions:
- A €17.5bn contribution from the Republic of Ireland, stemming from cash reserves and
controversially, the National Pension Reserve Fund.
- A €22.5bn contribution from the IMF
- A comparable amount from the EFSF (The european financial stability facility)
- Contributions stemming from bilateral loans; from Sweden, the UK and Denmark.
(BBC News, “Q&A: Irish Republic bail-out”, November 29th 2010)
Although the bailout was eventually implemented with a 6% interest rate, the rate was
lowered to 3.5% on July of 2011, effectively lowering borrowing costs by €600m -
€700m per year. (BBC News, “Ireland’s bailout interest rate reduced by EU leaders”,
July 22nd, 2011).
Iceland:

Iceland’s approach to deal with their massive debt was significantly different. When the
2008 crisis hit the Icelandic economy, “the banking sector had grown to ten times the
size of the economy” (BBC News, “Waking up to reality in Iceland”, January 26th 2009,
Jon Danielsson). Iceland had effectively become banking economy. With a over $62 billion of
foreign debt in the three largest icelandic banks (The New American, “Lesson from
Iceland’s 2008 Financial Crisis: Let Banks Fail”, Bruce Walker, 9 November 2011),
Iceland adopted the completely different survival approach: Let’s “Bankrupt our way to
recovery” (BBC Radio 4, “Could Iceland be a model for debt-ridden Europe?”, Justin
Rowlatt, July 30th 2011). Instead of investing massive levels of capital into the economy,
the Icelandic government chose to default on the majority of foreign debt, and use
IMF backed injections to keep the economy afloat while a restructuring took place.
Starting in 2008, the government immediately took action:
- In the fall of 2008, the government took control of the Icelandic banks, who faced short
term funding problems. (BBC News, “Timeline: Iceland economic crisis”, February 2nd
2009).
- By October 2008, the three largest banks defaulted on $62 billion of foreign debt, then
went into bankruptcy, not bailed out by the iceland people. (The New American,
“Lesson from Iceland’s 2008 Financial Crisis: Let Banks Fail”, Bruce Walker, 9
November 2011)
- On October 20th 2008, the Icelandic Financial Authorities announced the “re-
establishment or new” top three banks (Glitnir, Landsbanki and Kaupthing). (BBC News,
“Timeline: Iceland economic crisis”, February 2nd 2009).

- By December of 2008, the IMF worked with Iceland to develop of loan package
consisting of; $2.1 billion from the IMF, $200 million from Poland, $500 million from the
Faeroe Islands, and $2.5 billion from several nordic countries, including Finland.
(Youtube video from the IMF, “The Iceland Financial Crisis Explained, posted Dec 24th
2009)
From 2008 - 2011, The IMF backed program aimed to “Stabilize the krona”, in order to
stop defaults in “corporate and household sectors”, assist the Icelandic government to
restructure it’s banking sector and stabilize the economy. (IMF, IMF Survey Magazine:
Interview, “Iceland Gets Help to Recover From Historic Crisis”, Camilla Andersen,
December 2, 2008). The program was broken into capital injections on regular intervals.
Each injection was subject to a review by the IMF, to ensure that Iceland was taking all
the necessary measures to ensure appropriate economic recovery. (IMF website,
“Iceland and the IMF”, a timeline of all the communications between the IMF and
Iceland). Strict capital controls were also put into place to ensure the krona remained
stable. (Canadian Business, “Will Iceland get loonie?”, November 2nd 2011, Joe
Castaldo).
Who’s plan worked better?
By 2009 - 2010, after both the Irish government and Iceland implemented their
respective survival programs. The following graphs, show changes in GDP and
employment over the 2007 - 2010 period:

(The New York Times, The Opinion Pages, “The Icelandic Post-crisis Miracle”, Paul Krugman,
June 30th 2010, http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-
miracle/)

(The New York Times, The Opinion Pages, “The Icelandic Post-crisis Miracle”, Paul Krugman,
June 30th 2010, http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-
miracle/)
The graphs both show that Iceland’s real GDP and employment levels witnessed less
damage during the recession than Ireland. Iceland is clearly recovering quicker than
Ireland, which faces greater levels of unemployment and GDP reductions. Adding to Iceland’s
apparent success in dealing with the recession, Iceland (recently) successfully returned to the
private debt market through the issuance and sale of 5 years bonds, at just above 3%. This sale,
which successfully raised $1 billion, is proof that “financiers approved of Reykjavik’s handling
of the financial crisis and the country is on the road to recovery.” (The Wall Street Journal,
Opinion Pages, “Iceland’s Banks Come in From the Cold”, Asgeir Jonsson, June 16th 2011)

Ireland has yet to prove this level of success.
Where are they now?
Ireland
Economic performance
According this year’s report, the centre piece of the financial sector effort is the creation of the nation
asset management authority generally known as NAMA. NAMA has helped the bank to remove non-
performing assets on their books so that they can be able to work with right assets and increase more
functionality. Ireland's economy expanded suddenly in the first half of 2011, with adjusted GDP growth
of 1.9% in the first quarter and 1.6% in the second. Moreover, growth in the first two quarters of 2011
easily outpaced the EU average (0.8% in the first quarter, 0.2% in the second)1
. The recent transfers’
balance, which reflects international flows such as payments to and from the EU and overseas aid, posted
a deficit of 1.5bn euros, compared with a deficit of 2bn euros in January-June 20102
.
Comparative economic
With deflation in place, social benefit is falling in cash terms to keep the same real value compared to the
cost of living. For workers with low salaries, unemployment benefits are reaching temptingly high levels
compared to wages3
. For those out of work, there is a high risk that unemployment can become permanent
unless the government encourages to return to work as the economy recover. This sector can produce both
economic and social benefits by creating jobs, provide training, and by building local capacity4
.
Outlook for the next four years to come
The USA investment has helped the Irish economy to create new jobs and with a great association with
great brand companies such as Google and Apple. These emerging companies are going to help to recover
the lost jobs during this year. By preventing high employment rate, the Irish government is planning to
engage the employment services more actively with job seekers, providing proper training. By reviewing
the work incentive effects of other welfare benefits, the government will be able to cut governments
spending, thus reducing the national debt. The government is planning to extend the current cut in
1 http://portal.eiu.com/report_dl.asp?issue_id=378509222&mode=pdf
2 http://www.oecd.org/document/9/0,3746,en_33873108_33873476_45269961_1_1_1_1,00.html
4 http://www.nibusinessinfo.co.uk/bdotg/action/detail?
itemId=5000233539&site=191&type=RESOURCES

employers’ social security contributions. Enhance the quality of education, so as to increase research and
development in the country. The country is planning to restore its competitiveness in the international
market.
Data chart
As this chart shows the Ireland GDP growth is improving, thus giving hope that it will recover from its
financial crisis5
.
Conclusion
In short, the Public of Ireland will continue to improve and take adjustment programs to reduce the deficit
and restore the banking system. As the domestic demand stabilizes, the output is expected in the course of
2011, with some quickening in 2012. Although the unemployment is still high, people will set up
innovative social enterprises that meet particular needs in the communities6
. In order to arrest the
accumulation of public debt and restore fiscal sustainability, it is by improving competitiveness through
income as the structural stays the priority.
Iceland
5 http://www.tradingeconomics.com/ireland/gdp-growth

Economic structures
According to the OECD, the Iceland economic structure has improved considerably since 2008 financial
crisis. In this interview the economics ministry made a statement that, "Supply-driven sustainable growth
means emphasis on increased investment in not only traditional machinery, tools and construction, but
also on social aspects such as service sector, research and development, IT and training to create more
jobs," on Monday7
November 14th
2011. The collapse of banking sector has brought Iceland to its knees;
however, the Iceland fishing industry which provides 40% of the export and tourism sector has helped the
country to stay strong during the financial crisis.
Domestic Economy
The measurements reveal that unemployment is on a slow downward trend after having shown a small
seasonal spike at the beginning of the year. Even though the numbers show that seasonal unemployment
is now at its lowest level since before the collapse in 2008. Unemployment is expected to fall more slowly
than previously forecast because of lower growth expectations. Wage growth following the national wage
bargain and weak economic activity are expected to contribute to a persistently high level of
unemployment. Labour-intensive sectors have still not regained their intended strength8
.
Outlook for the next four years to come
The new economic program has set six priorities including supporting the private sector, a sustainable
fiscal policy, increased emphasis in education in relation with employment, debt restructuring, businesses
and households to have access to a competitive and strong financial system and a step by step ease of
capital controls. The Iceland has strong hope to recover from its crisis; the country believes it has a strong
resource base: a well-educated and hardworking dynamic level force. The IMF agrees that the Iceland
economy will eventually turn the corner9
. The IT sector has turned out to be so strong owing to the
evaluation of the currency. Even though many people still experience downfalls of the crisis, the
government believes the Ireland is going to recover thanks to foreign investment, thus seeing
unemployment less than before. The IMF is planning to bailout the Iceland by giving $5.1 bn which is
going to be pay its debt and a recovery from the two banks that collapse.
Data Chart
7 http://global.factiva.com/ha/default.aspx
8
http://infotrac.galegroup.com/itw/infomark/681/769/167360461w16/purl=rc1_GBFM_0_A261897214
&dyn=4!xrn_5_0_A261897214?sw_aep=otta77973
9 http://www.youtube.com/watch?v=s-4AgjapG3A

Though the GDP growth of Iceland indicates ups and downs since 2008; however, there is hope that the
country will recover from the financial crisis10
Conclusion
In conclusion, prior to the 2008 crisis, Iceland had experienced high unemployment and great imbalances
in the banking system. However, the Iceland is projecting to recover and it is expecting foreign
investment to help restore the lost jobs for those who lost their employment during the crisis. Iceland is
considering joining the EU and take advantage of the Euro, although the country is in fear that the
European partners will have control over the fishing industry11
. The Iceland plans to cover the needs of
the banking system revealed by the recent stress tests so as to restore normal bank credit flows and
support the economic recovery.
References:
10 http://www.tradingeconomics.com/iceland/gdp-growth
11 http://www.eubusiness.com/europe/iceland

1) http://www.nibusinessinfo.co.uk/bdotg/action/detail?
2) http://www.tradingeconomics.com/iceland/gdp-growth
3) http://www.eubusiness.com/europe/iceland
4) http://global.factiva.com/ha/default.aspx
5)
http://infotrac.galegroup.com/itw/infomark/681/769/167360461w16/purl=rc1_GBFM_0_A261897214&d
yn=4!xrn_5_0_A261897214?sw_aep=otta77973
6) http://www.youtube.com/watch?v=s-4AgjapG3A
7) http://www.tradingeconomics.com/ireland/gdp-growth
8) http://www.oecd.org/document/9/0,3746,en_33873108_33873500_45269961_1_1_1_1,00.html
9) http://portal.eiu.com/report_dl.asp?issue_id=378509222&mode=pdf
12) http://www.nibusinessinfo.co.uk/bdotg/action/detail
13) Dimireva, I. (2010). Iceland: Economy Overview. EUbusiness, Retrieved on 2011-10-29
from
http://www.eubusiness.com/europe/iceland
14) Finfacts Ireland. (2009). Encouraging employment � OECD countries balance benefits,
wages and taxes; Net unemployment benefits third-highest In Ireland. Retrieved on 2011-11-05
from
http://www.finfacts.ie/irishfinancenews/article_1012100.shtml
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http://www.spiegel.de/international/spiegel/0,1518,348682,00.html
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Retrieved on 2011-11-02 from
http://irishresources.wordpress.com/2008/07/15/irish-mines-now-operating-tara-galmoy-
and-lisheen/
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from
http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=3363
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http://www.traveldocs.com/ie/economy.html
19) http://www.vi.is/files/1350175258Icelandic%20Financial%20Crisis.pdf, Iceland Chamber of
Commerce,”Iceland’s Financial Crisis”, 2009
20) http://www.sedlabanki.is/?PageID=287&NewsID=2067, Central Bank of Iceland, “The
effects of the financial crisis on Icelandic households”, November 03, 2009
21) http://journals1.scholarsportal.info.proxy.bib.uottawa.ca/tmp/17584939724083451400.pdf,
European Urban and Regional Studies, “Iceland: crisis and regional development – Thanks for
all the fish?” (April 2011), 18 (2), pg. 228-235, Karl Benediktsson, Anna Karlsdóttir
22) http://www.evropa.is/2009/11/10/iceland-and-the-current-economic-crisis/,
Evrópusamtökin, “ICELAND AND THE CURRENT ECONOMIC CRISIS –POLITICAL
IMPLICATIONS AND THE WAY FORWARD”, Jón Baldvin Hannibalsson, November
10,2009
23) http://www.state.gov/r/pa/ei/bgn/3396.htm, US Department of State, “Bureau of European
and Eurasian Affairs, Background Note: Iceland”, November 8, 2011
24) http://www.imf.org/external/pubs/ft/survey/so/2008/int111908a.htm, International Monetary Fund,
“Iceland Gets Help to Recover from Historic Crisis”, Camilla Andersen, December 2, 2008

http://www.heritage.org/research/reports/2011/05/president-obama-visits-the-irish-financial-crisis, The
Heritage Foundation, “President Obama Visits the Irish Financial Crisis”, Theodore Bromund ,
J.D. Foster, May 20, 2011
25) http://www.policyarchive.org/handle/10207/bitstreams/18921_Previous_Version_2008-11-
20.pdf, CRS Report for Congress, “Iceland’s Financial Crisis”, James K. Jackson, November 20,
2008
26) http://online.wsj.com/article/SB10001424052748703803904576152422920009948.html, The
Wall Street Journal, “Irish Remedy for Hard Times: Leaving”, Guy Chazan, February 24, 2011
27) http://news.bbc.co.uk/2/hi/europe/1038669.stm, BBC News, “Ireland Timeline”, BBC,
November 14,2011
28) http://news.bbc.co.uk/2/hi/7851853.stm, BBC News, “Timeline: Iceland economic crisis”,
BBC, February 2, 2009
29) http://www.irisheconomy.ie/Notes/IrishEconomyNote10.pdf, Irish Economy Note No. 10, “The
U.S. and Irish Credit Crises: Their Distinctive Differences and Common Features”, Gregory
Connor, Thomas Flavin, Brian O’Kelly, March, 2010
30) http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103, Vanity Fair,
“When Irish Eyes Are Crying”, Michael Lewis, March 2011
31) http://online.wsj.com/article/SB10001424052702304319804576387572241329838.h
tml?mod=googlenews_wsj , The Wall Street Journal, Opinion Pages, “Iceland’s
Banks Come in From the Cold”, Asgeir Jonsson, June 16th 2011
32) http://www.canadianbusiness.com/article/54872--will-iceland-get-loonie , Canadian
Business, “Will Iceland get loonie?”, November 2nd 2011, Joe Castaldo
33) http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-miracle/ , The
New York Times, The Opinion Pages, “The Icelandic Post-crisis Miracle”, Paul
Krugman, June 30th 2010
34) https://www.cia.gov/library/publications/the-world-factbook/geos/ic.html , CIA
Factbook, Ireland
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IMF”, a timeline of all the communication between the IMF and Iceland
36) http://www.imf.org/external/pubs/ft/survey/so/2008/int111908a.htm , IMF, IMF
Survey Magazine, Interview: “Iceland Gets Help to Recover from Historic Crisis”,
Camilla Anderson, December 2nd 2008

37) http://www.youtube.com/watch?v=jgQNOL3LL4Q , Youtube video produced by the
IMF
38) http://thenewamerican.com/world-mainmenu-26/europe-mainmenu-35/9710-lesson-
from-icelands-2008-financial-crisis-let-banks-fail , The New American, “Lesson from
Iceland’s 2008 Financial Crisis: Let Banks Fail”, Bruce Walker, November 9th 2011
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BBC News, “Could Iceland be a model for debt-ridden Europe?”, Justin Rowlatt, July
30th 2011
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Iceland”, Jon Danielsson, January 26th 2009.
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November 14th 2011.
43) http://www.telegraph.co.uk/finance/financialcrisis/8419616/Irelands-banking-crisis-
timeline.html , The Telegraph, “Ireland’s banking crisis: timeline”, March 31st 2011,
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bail-out”, November 29th 2010
45) http://www.vancouversun.com/business/Celtic+Tiger+lost+roar/5039965/story.html ,
“How the Celtic Tiger lost it’s roar”, Pat Carney, July 2nd 2011

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