The case of Iceland – the illusion of an amicable default

As Europe teeters once more, staring financial collapse and slump in the face, we provide an analysis of what happened in Iceland, the first country to go under as a result of the global crisis of capitalism.

Protests in Reykjavik in January 2009Protests in Reykjavik in January 2009. Photo: finnur malmquistIn 2008, Iceland suffered the biggest financial collapse any nation has ever had, if we consider the size of its economy. Even more striking is the fact that Iceland is no emerging country, mesmerized by the sirens of Western finance, but a modern, affluent nation with a Scandinavian welfare state.

Before the crisis erupted, Iceland, a remote Atlantic island, with the inhabitants of a medium sized European city, was a country famous for its natural wonders visited by many people from all over the world as well as for its music. The collapse of the country’s three major banks (Kaupthing, Landsbanki and Glitnir) led to financial disaster and street protests that toppled the government.

The popular anger and the size of the bankruptcy forced the country to refuse to repay the debts its banks had amassed abroad, earning the island a legendary status among left-wing activists across the world. Faced with the rising tide of national debt “do as Iceland did” has become an appealing alternative. As we shall see in this article, this could be the case only if one is prepared to draw all the correct conclusions from the Icelandic events. Otherwise it is a useless detour from reality.

The years before the collapse

The Icelandic economy in the past was based on fishing and its natural resources, and, in the last decades, on modern industries like aluminum and ferro-silicon as well as tourism. Although on a small-scale, Iceland had the appearance of a “Scandinavian democracy”, with a high standard of living and social peace. The previous significant political incidents dated back to 1949, when the island joined NATO, primarily to allow American planes to use it as a natural aircraft carrier.

All this changed when David Oddsson came to power[1]. A lawyer who also worked in the theatre briefly like Reagan, whose policies he deeply admired, first as mayor of Reykjavik then as Prime Minister. Oddsson decided that the country deserved more than the welfare state, cod and factories and it was about time to import the ideas of Milton Friedman and the Iron Lady to the glaciers.

Oddsson became Prime M inister in 1991, leading a coalition government with the Social Democrats, and soon put in place a broad plan of gradual economic liberalization. In 1994, he brought the country into the European Economic Area in order to encourage economic integration with Europe. To attract foreign capital, he cut taxes on profits and wealth, started large-scale privatization, and began to deregulate the labour market.

At the heart of the project of economic liberalization was the banking and financial sector. The solid and mostly publicly owned banks were privatized and deregulated. In 2001, the national currency (the krona) was free floated. Icelandic authorities became enthusiastic followers of the free-market religion, inviting banks to do what they wanted. The LTV of mortgages was taken from 60 to 90%, capital requirements of banks were reduced[2]. Everything had to bow to the superior interests of the markets.

Oddsson, having completed his Thatcherite mission, left the post of Prime Minister in 2004 and, after serving briefly as Minister of Foreign Affairs, became head of the Central Bank of Iceland (CBI) to ensure that his policies would continue.

For ten years laissez-faire policies seemed to have brought prosperity. From 1995 to 2005 the Icelandic economy grew at a rate of 5% per year, bringing the wealth per capita to fifth place in the world. Behind the glittering facade, however, those policies had turned a peaceful and prosperous community into a casino. The booming decade was based, as in other countries, on a financial, as well as real estate, bubble. The political excuse for setting in place the bubble was the same Clinton used in the US to start the subprime era: let’s give everybody a house.

In 1999 the Icelandic government modified a public fund using it to finance the purchase houses, burying the idea, considered too old-fashioned, of public housing at affordable prices. The fund began to dole out loans at a rapid pace. The increase was colossal. To remain competitive, Icelandic banks began to lower the criteria for granting a mortgage and to lower rates, exactly the same as what was happening in the US with subprime mortgages. The fund this the banks started to apply higher and higher LTVs, provoking a huge rise in prices. As many house loans were linked to inflation, the house price increase meant a spiralling of debt.

Despite the huge growth of Icelandic big banks, given the economic size of the country, their domestic expansion was limited. So they rushed towards European markets like hungry wolves, being able to benefit, paradoxically, from the fact that they had been until recently state banks and thus maintained a high rating. With an aggressive commercial policy, they gained significant market shares, particularly in the United Kingdom and the Netherlands. Before the collapse, they had almost 500,000 customers throughout Europe. To give an idea of what this meant in relative terms one only has to remember that the entire population of country is just over 300,000.

Although according to the IMF, the banks’ geographical diversification was positive (as noted during an official visit in 2004), it was not the only blatant folly in the country’s economic growth mechanism. Investment flocked from abroad, pushing up strongly the krona, which made it cheaper to import. The growing dependence on exports increased inflation, forcing the central bank to keep rates high, thereby making domestic financial assets even more attractive, thus leading to further capital inflows. The low-priced imports, rising house prices and booming stock market, gave the illusion of wealth. As in any bubble, the debt exploded. Net debt with foreign countries was 36% of GDP in 1980; it rose to 246% in 2007. Household debt as a proportion of income was just 21% in 1980; it rose to 227% by 2007. The debt of companies rose above 300% of GDP by 2007, more than four times the proportion in the United States. The trade deficit was also out of control: 30% of GDP in 2006.

Despite the imbalances, the authorities did not seem worried about this debt drunkenness. The central bank stated that the structural changes in the housing market and sustained economic growth were permanent. Financial speculation held sway. University students switched from fishing or engineering faculties to finance. Why bother getting your hands dirty in the fishing industry or producing aluminium when money was falling from the sky of finance? Whereas in 2001 2,000 new cars were registered, in 2008 the figure had shot up to 16,000. As in Putin’s Moscow, Icelandic oligarchs, the bosses of big banks, were seen in lavishly expensive cars, spending fortunes on parties and gifts. From 2003 to 2006 the stock index rose to the equivalent of the GDP of the country. In the four years preceding the collapse, the Icelandic stock exchange had risen by 900%. Anyone could get rich, or so it seemed! Even if wages were not keeping up with prices, debt seemed to square the circle.

If the growth of debt has been a global phenomenon in recent decades, in Iceland not only the pace of growth was folly but also its composition. In fact, given the high domestic interest rates, borrowing in foreign currency seemed convenient. When an Icelander bought a car, the salesman offered the option of taking out the loan in a foreign currency based system. Between 2002 and 2005, debt in foreign currencies increased by 550%. Just before the crisis, it was over two-thirds of the total debt. This was not just about individuals. Banks were heavily borrowing abroad, where most of their customers now lived. They had an easy way: their deposits and their bonds carried very high yields and excellent ratings. Everybody wanted them. International markets could not help but buy Icelandic bonds. Despite the fact that public finances were in good shape[3], in 2007 the government issued more than 5 billion euros, almost 40% of the GDP of the country, to meet the demand from abroad.

In this orgy of speculation, cracks began to appear and grow. In April 2006, the rating agency Fitch downgraded the country, causing a crisis (the stock market lost 25%), but it was quickly over. The global financial environment was favourable and the two main Icelandic banks began to grow even more rapidly, creating online banks to gain market shares in Europe by offering such competitive conditions that investors lined up to deposit their money. They did not imagine they would soon have to queue to try and get it back.

Enter “Kreppa”

International banking is a worldwide phenomenon. Big banks dominate the financial world intervening in dozens if not hundreds of countries, getting larger and larger. If financial concentration has created huge banks vis à vis the French or Swiss economy, one can imagine what it meant to Iceland. In 2007, the three major Icelandic banks had total assets amounting to eleven times the GDP of the country and held 50 billion euros of debt, against a GDP of 9 billion.

In practice, the Icelandic economy was being held up like an inverted pyramid by the continuous inflow of foreign capital and the real estate bubble. Even if more than half of the assets of the big banks were abroad, those within its national borders were still four times the GDP. Any slight gust of wind could destabilize the situation. The hurricane of the global financial crisis came instead.

By early 2007, The Economist pointed out that the krona was the most overvalued currency in the world, yet everything seemed fine. At the end of September 2008, the rating of the country was still very good, although declining. For example, Standard & Poor’s attributed the country an A-rating, the same as Italy now. Free-market ideology had completely poisoned the minds of Icelandic leaders. The CBI wrote in its report on financial stability of May 2008: “Critics have asserted that the Icelandic banks have grown too large. This might be true if a major financial crisis were imminent and the Icelandic Government were forced to resolve a critical situation affecting banking operations both in Iceland and abroad” and it continued by explaining why this was impossible[4]. And this months after the outbreak of the crisis! In August of 2008, the Banking Supervisory Authority published the results of its stress test[5] on the three big banks whose conclusion was that the banks were solid and could withstand considerable financial shocks. Six weeks after this statement, those banks no longer existed.

In 2008, world financial markets began to deteriorate. The international bubble was beginning to burst. When on 15th September Lehman Brothers, one of the largest investment banks in the world, announced its bankruptcy, it was like Armageddon. The fear that many other banks could collapse led to the total breakdown of the interbank lending markets, those where banks lend money to each other. The Icelandic banks, that were heavily dependent on them for funding, soon found themselves in dire straits. Within a few days they were bankrupt.

If the failure of the banks led to fiscal crisis in all countries, including the strongest, in Iceland it had connotations bordering on the ridiculous. How could banks be helped by a government that presided over an economy smaller than a tenth of their assets? The disproportion was striking. For example, the central bank reserves were not low compared to the economy in general (13% of GDP) but the currency debts of the banks exceeded that figure by more than fifty times.

Totally unprepared to face the crisis, the authorities were stricken by panic. On 6th October, the Prime Minister Haarde made a televised speech in which he admitted the problems and concluded with the words “God bless Iceland”, not exactly a call for calm. People started to visit bank branches. The krona plunged. Foreign workers were prevented from changing their pay in currencies. The same day, trading on the six banks’ shares was suspended on the stock exchange; on the 9th, the stock exchange was closed altogether and remained closed throughout the week. Obviously, this solved nothing: on its reopening it lost 77% in one day. Facing a bank run, the government decided to fully guarantee bank deposits. The thing itself was already an accounting trick, since deposits exceeded the size of GDP. However, this is was a detail because, with the interbank markets not working, Icelandic banks could not survive. There was no other way but to nationalize them. On 7 October, the government nationalized Landsbanki, and soon after, Glitnir. On the same days, the governor and former PM Oddsson issued passionate declarations swearing that the state would not pay for the debts of the banks. Obviously the markets took these warlike statements as proof of the total confusion that had overwhelmed the leaders of the country. The simultaneous collapse of the currency, the stock exchange and the banks worsened even further.

Panic stricken in the face of the crisis, the Icelandic authorities resorted to desperate moves. Faced with the collapse of the krona, on 7th October, the CBI decided to peg the krona to the euro at a rate which, however, was much higher than the real one, not even discussing it with other central banks. Within hours, the measure collapsed, proving to be probably what was the shortest peg in history. The central bank was then forced to switch to direct controls such as restrictions on the purchase of foreign currencies. At the same time, it increased the interest rates to curb the flight of investors, strangling the real economy.

The decision to shift bank losses to the state has been taken by governments across the world. However, on the island, it did not solve the problems. Reykjavik had just announced this measure when the British authorities called to know what the fate of UK citizens’ deposits was going to be. Having understood that Iceland was neither able nor willing to pay back British savers in full, in time and maybe at all, the Brown government decided to freeze Icelandic assets in the country using the Anti-Terrorism Act of 2001. This was how Iceland was finally rewarded for allowing, for decades, British ships to its shores.

The decision of the Labour government to equate Iceland to the Taliban was taken by the markets as a signal that the country was unreliable, not only financially but politically. Nobody wanted to lend money to Icelandic companies or banks anymore, and bankruptcy was inevitable. Across Europe, branches and subsidiaries of Icelandic banks were closed or absorbed by domestic banks. The absurdity of the choices of the government in Reykjavik and London was astonishing. Both were badly bluffing. Where the Icelandic government thought it could force its old friends to help, the Labour government needed an external enemy, with which to relieve the popular anger for internal economic difficulties. The issue was substantial. When the crisis hit, there were 4.5 billion pounds sterling at stake, two thirds of the GDP of Iceland. Interestingly, among the customers of Icesave (the main Icelandic internet bank) there were not only small savers. 20% (more than 800 million pounds) was from dozens of British local authorities. For example, Transport for London had 40 million pounds deposited in Icelandic banks. In the face of deep cuts to local authorities, this seemed a way bringing in more interest... with tragic results.

Ironically, given that Iceland has no standing army and the other NATO countries send in turn planes and ships to protect it, in December 2008 the Royal Air Force was to take over duty, but Iceland was not very eager on that so nothing came of it, a proof that clashes over banks’ interests are more important than military alliances. Apart from legal issues, English and Dutch governments’ claims that Iceland would cover the debts of its banks were foolish, considering that they exceeded by several times the Icelandic GDP. Even after the First World War, the victorious powers limited war reparations on Germany to 85% of GDP. What else could the Icelanders have done but to repudiate those losses? Articles in the financial press suggested the island could sell its natural resources and liquidate pension funds, but no amount of such perfidious advice could do the trick; the sums involved were such that even selling all Icelandic citizens off as slaves would not have raised revenues that could cover even a small fraction of the gaping hole. The steps taken by the Brown government also led to the failure of the only surviving big Icelandic bank, Kaupthing, which was also nationalized on October 9. British banks, for their part, were very happy that the government had just got rid of some dangerous competitors.

At the mercy of the crisis, the Icelandic government began to ask informally some old friends for help, but no one came forward, with all of them telling them to call the IMF. The President of the Republic Grímsson complained to diplomats of friendly countries that they had abandoned Iceland in its time of need, threatening that the country would seek alternative help. Sensing an opportunity, Russia declared to be ready to help Iceland! The Icelandic politicians were all too happy for the lifejacket. The PM’s statement was striking: “We have not received the kind of support that we were requesting from our friends. So in a situation like that one has to look for new friends”. This helped to put pressures on the EU and US. A few hours after the announcement, a Western loan started to materialize. On 19 November, the IMF granted a loan of 4.6 billion dollars, half of this coming from Scandinavian countries. Poland, too, and even the Faroe Islands, did their small bit, with 200 million and 50 million respectively. The next day, Germany, the Netherlands and the United Kingdom announced a further loan of $6.3 billion. However, the Icesave dispute caused enormous delay to this help. The UK and Netherlands government used their political influence to block them as long as the negotiation on Icesave was not brought to a satisfactory conclusion. Therefore, the first loan to the country was paid only in December 2009, more than 14 months into the crisis. This dispute caused a huge resentment in the population.

The largesse of creditors was only apparent. The lifeline served to cover the debts of the banks, not to lift the Icelandic economy which continued to plunge. In fact, the collapse of the krona resulted in a massive tightening of loans in foreign currency, thus provoking the virtual failure of most companies and households in the country. House prices started to fall. Foreign exchange reserves at end of 2008 were not enough to import goods but for few weeks.

In the face of economic meltdown, the government that was so fond of deregulation and privatization was forced to nationalize and regulate, moving to a war command economy. Buying currencies was restrained, the stock exchange was closed, bank shareholders were wiped out, deposits of foreign investors were ignored. In fact the government denounced globalization as a noose around the neck of the country, after having praised it for twenty years. “Kreppa”, Icelandic for crisis, had defeated even the most foolish of free-marketers.

Political crisis

The crisis shook the stagnant waters of Icelandic politics sparking fury[6]. On January 26th 2009, PM Haarde was forced to resign: a few hours before, he had been surrounded by a threatening crowd and was barely saved by the police. The collapse of the government, however, was mainly due to the fact that the Social Democratic Party, deeply divided, could no longer contain the pressure from below to quit the coalition government. The party failed to provide an alternative to the disastrous gamble that Oddsson had imposed on the the country. They even participated in two governments with him, from 1991-1995 and from 2007 up to the crisis. Once the crisis had broken out, the rank and file of the party pushed to break with the bourgeois parties.

Thus, a week after the ouster of Haarde, the first left government was formed, originally with the backing of the Progressives (a moderate bourgeois party) and after the election with its own majority. As its first act, it sacked the now chief of the CBI Oddsson, the man that had most contributed to leading the country into bankruptcy. But, apart from this gesture, the Social Democracy had no alternative solutions to the crisis. On several occasions the government tried to pass legislation (such as “Icesave Law”) aimed at paying the debts of domestic banks to Britain and the Netherlands for an amount that exceeded half the GDP of the country even before the collapse. According to the original agreement, 6% of Icelandic GDP, for 15 years, would be allocated to repaying British and Dutch depositors. The government also proposed joining the European Union, a proposal about which Icelanders – correctly – have always been sceptical. Bailing out the banks and abiding by the Maastricht Treaty, this was what social democratic policy was about.

The population, however, refused to be sacrificed on the altar of the banks. Thanks also to the feud between the government and Presidency of the Republic, the law on the terms of the payment of Icesave was subordinated to a referendum and soundly rejected. In March 2011, the second referendum results were clear and overwhelming: 93% of Icelanders confirmed their refusal to pay for the banks’ mess.

“After” the crisis

The end of the debt bubble has left deep wounds in the economy of Iceland. The sectors at the centre of speculation were the first to collapse: the stock market lost 95% from its peak in 2007 and house prices fell by 30%; construction also plunged badly. In 2009-2010, GDP fell by over 10% and unemployment shot up to 8%, when it had never exceeded 3% in the ten years before the crisis. Workers were fired or had to accept wage reductions and furthermore the collapse of the krona has made imported goods more expensive, leading to high inflation and the fall of living standards (by 20% in 2009 alone).

The crisis has also caused the most massive emigration since the nineteenth century. In 2009-2010, about 7,000 Icelanders emigrated, which is, as a percentage of the population, as if more than a million Italian or British citizens were to emigrate in one year; and one third of the population as well as many companies were considering relocation. Meanwhile, hundreds of useless SUVs filled the ports of Reykjavik, an illuminating monument to the greed of the Icelandic bourgeoisie.

To appease the popular fury, a commission of inquiry was established in April 2009 to investigate financial fraud and the behaviour of the banks. Although obvious for Marxists, interesting conclusions started to emerge, such as the fact that privatized banks were giving huge loans to friendly entrepreneurs, hence allowing these sharks to use the deposits of the population for their financial raids. Almost half of the loans made by the Icelandic banks were given to groups of companies related to the banks themselves. In the meantime, it seems that most of the oligarchs have fled the country, if only because champagne and caviar will not be common for some years in Iceland[7].

A key part of the attempt of the government to put the Icelandic economy back on its feet has been its so-called “cooperation” with the IMF, that is, applying the Fund’s classical anti-worker recipes: drastic cuts in public services, taxes on workers, while public debt was spiralling out of control (28% of GDP in 2007, 116% in 2010). The fall in living standards was brutal. Unemployment in 2010 was 7.6% (it stands now at around 8%). Inflation peaked at 8-10%, causing a huge increase in debt servicing for homeowners, while the devaluation of the krona and economic hardships dried up the flow of trade. The country had to export more and import less creating a trade surplus of around 20%. In this mayhem, the banks that had been created out of the ruins of the old ones, started to make big profits again. To calm the people’s rage, the authorities have had to adopt measures, agreed with the banks, that include procedures for reducing the burden on debtors such as writing down mortgages to 110 percent of collateral value (i.e. the house). Many people were forced to apply more than once, due to inflation.

Surprisingly, after few months from the default, the country managed to get back onto the international markets by issuing, in June 2011 $1 billion of government bonds. It is also worth noting that in 2011, the protection from the default risk of Iceland was less costly than that of Italy[8].

Witnessing the agony of Greece, it is only logical that many may consider the repudiation of debt, as an example to follow. The intention is correct but the analogy invalid. First of all, Iceland was allowed to repudiate the debt of its banks (not public debt) for two basic reasons: the small absolute size of the default (some billions euros, a drop in the ocean of world markets) and because it was impossible, even in centuries, that Iceland could ever repay a debt equal to 12 times its GDP. Secondly, the debts of Icelandic banks were passed to the state, as happened all over the world, from US TARP programme to European bail-outs, only it was not the Icelandic state that was asked to foot the bill but European taxpayers. In any case, the workers paid for it, even if not Icelandic ones. Moreover, public debt in Iceland is now at “Mediterranean” levels and we know what this means in terms of future economic policies. The Greek example shows that even joining the EU will not avoid savage cuts in the future, quite the contrary. What is different between Athens and Reykjavik is that the former cannot devalue, while the krona depreciation of 60% has definitely helped the economic recovery of the island. Greece should therefore repay the debt in euros with a drachma depreciated by at least 50%, which would mean losses in the order of 100 to 200 billion euros for the big banks. For Italy, this figure would exceed 1,000 billion. Moreover, even after a default, workers will be called on to make huge sacrifices, as is the case in Iceland now.

What is wildly simplistic in the arguments of those who glorify the Icelandic default, is the idea that it is possible to do such a thing on the sly, without offending anyone or, even better, with the agreement of the creditors and with automatic beneficial results for the working class. The proponents of a “guided default” in Greece or in Italy that seriously think that the market would welcome it as a curious detour, must be living on Mars. What is possible under capitalism is a debt renegotiation heavily paid for by the workers with the demise of welfare state, wage cuts and so on. Is such a measure really of any benefit for the workers? On the contrary, what is needed is a complete repudiation of the public debt in the hands of the bourgeoisie, the banks, etc. But this is possible only by waging an all-out war against the global financial markets. The idea that such a war is winnable with a mere stroke of a pen or a ballot box is as realistic as thinking a nice speech is all that is needed to stop a hungry tiger from eating you. Either we are ready for such a war against the markets, an absolutely sacrosanct idea for any genuine socialist, with everything that goes with it (quitting the European Union, nationalisation of banks and the big corporations, etc.) but simply talking about default without preparing the battle only serves to deceive ingenuous people.

In the end, like Italy of the 1980s, Iceland has delayed the problems with inflation, devaluation and public debt. Is this the policy of the left for the crisis? For their part, the markets warmly welcomed the return of Iceland as sovereign debtor, just like any casino manager would welcome the return of an avid gambler that has been away for a short break but who left a few drinks unpaid[9].

Although doing as Iceland did in Greece or in Italy will require a lot more than words, what happened there can, in any case, provide important political lessons. First, it has to be noted that a right-wing politician like Oddsson nationalized the banks in more punitive terms than those applied by the Labour government in Britain or Obama in the USA, confirming that the political “progressives” are even more slaves to the markets than conservative governments. Secondly, what saved the country, after years of infatuation with laissez-faire, were the measures taken against the markets: capital controls, nationalization of the banks and, in general, what remained of the Scandinavian welfare state. This, too, should be remembered by the “innovators” who infest the left parties and are always lecturing us on the need for “reform”.

Finally, the most important point to note is that it was neither the referendum nor the popular assemblies rewriting the constitution, but the mass protests that led to the default. At each stage, the spontaneous movement of the masses forced the Social Democrats to make some gesture on the left, to sack Oddsson, to renegotiate the terms of repayment and to repudiate the debt. The Icelandic workers and youth have shown that the struggle is what changes things. This is the main lesson to be drawn from these events. Obviously, the more is at stake, the more brutal the battles are. Icelandic workers did not have to organise general strikes to force the government to a referendum on the debt, but in countries like Greece or Italy, the working class should be prepared for a very different war. However, it is also true that the Icelandic labour movement has not managed to put its stamp on the course of events yet and this is clear now with the policies the government is implementing. An all-out class war is what is missing in Reykjavik as elsewhere.

Lastly, it is worth noting that, as before any major event since the First World War, the European Social Democracy is split along national lines. The spectacle of a Labour government comparing its Icelandic comrades to Mullah Omar is not as tragic as the vote in favour of the war in 1914, but it reveals the same nationalist and conservative outlook. For their part, the Icelandic Social Democrats, taking care of their banks (not of their own people) at the expense of the workers of the rest of the world have shown an equally nationalistic spirit. This financial protectionism is the music of the future and it has nothing to do with a left-wing policy.

Iceland, thanks to its bourgeois and Social Democratic leaders, jumped on the train of globalization in the past and then derailed painfully with the rest of the world. The courage of the island’s workers, who refused to pick up the pieces after the banks’ major shareholders had fled with the loot, is admirable, and saved them from even worse situation. But this is not enough to protect them in the coming years from draconian austerity, the contours of which appear increasingly gloomy with the aggravation of the crisis in Europe. For them as for all the workers of the continent, the only way out is to raise the level of the class struggle and fight for an international socialist solution.

[1] On these issues, see the article Iceland - what happened?.

[2]  The loan to value ratio (LTV) represents the maximum amount a bank can lend to a client as a percentage of the value of the property he is buying with the loan. A LTV of 60% means that a bank cannot finance more than 60% of the value of the house. Increasing the LTV is a way to encourage the growth of the mortgage market and with it, the risks incurred by banks. The capital requirement represents the proportion of equity capital that banks must hold against a certain asset. Again, reducing capital requirement is a policy to promote growth by increasing the riskiness of the banks.

[3]  That year, public debt/GDP ratio was only 28% and the state had a budget surplus of around 6% of GDP.

[4] The document is available at the Sedlabanki website, p. 7.

[5] The stress test is a tool used by banks and supervision authorities to estimate that maximum losses possible in a stressed (i.e. gloomy) scenario. Of course, before the crisis they had not anticipated that it was a really gloomy situation.

[6] On protests that led to the downfall of the government see the article Mass protests bring down government.

[7]  In April 2010, the Parliament has published the results of the investigation (a summary in English is available at the Althingi website).

[8] This risk is measured by the differences in the spread of the national credit default swaps. The Icelandic CDS shows a risk that is lower than that of all weak countries of the euro area (Greece, Portugal, Ireland, Spain and even Italy).

[9] A further confirmation of how the global economic establishment has welcomed the Icelandic default comes from the OECD report on Icelandic economy, released in June of 2011, where the default is often commented positively. They were well disposed also because of the low level of conflicts in the workplace. In fact, Icelanders made massive demonstrations for the island’s size, but the level of strikes was negligible, unlike the Greek case.