In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent. The 2008 world financial crisis was the coup de grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy.
Contrary to what could be expected, the crisis resulted in Icelanders recovering their sovereign rights, through a process of direct participatory democracy that eventually led to a new Constitution. But only after much pain.
What happened next was extraordinary. The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered, transforming the relationship between citizens and their political institutions and eventually driving Iceland’s leaders to the side of their constituents. The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that would have made Iceland’s citizens responsible for its bankers’ debts, and accepted calls for a referendum.
Well, it’s rather early to say that Iceland will never make the reimbursements. What has happened is that the diplomatic negotiations between Iceland and the UK/Netherlands have broken down, and the case will now likely go to court.
Wikipedia has a pretty good overview of the case: http://en.wikipedia.org/wiki/Icesave
Thanks for the insight, Guus!
Their debt went from 200x their GNP to 9x their GNP in 4 years? How in the heck did it get to be “200 times its GNP” in the first place?
@warren, Note that’s the “bank’s foreign dept”, not the government’s debt. If you add up the debt of all the private banks in the United States, I would bet it’s quite a bit more than our GNP too (just a guess).
@Tanner – that makes *way* more sense than how I had read it 🙂
@warren, no worries. I read it the way you did at first and was perplexed, but after reading the article I discovered my mistake.