Why+Iceland

Why+Iceland - Dow Jones Reprints: This copy is for your...

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See a sample reprint in PDF format. Order a reprint of this article now OPINION AUGUST 19, 2009, 12:59 P.M. ET Dow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit www.djreprints.com The Making Of a Meltdown The saga of Iceland's boom and bust. By DANIEL W. DREZNER It is an odd question but a fitting one: Why Iceland? It's boom-to-bust saga—one of the wilder stories of the Great Financial Crash of 2008—is almost as dramatic as a tale from Norse mythology. To help liberalize its financial sector, Iceland privatized its largest banks roughly six years ago and then allowed them to go on a leveraged-buyout spree across Scandinavia and Britain. When Iceland's central bank raised interest rates, the country became an epicenter of the carry trade, in which money managers borrow from one country with a low interest rate and place deposits in a country with a higher one. The purchasing-power effects were extraordinary. In the span of three years, Iceland's per-capita income tripled, and its stock market capitalization increased by a factor of eight. Then the credit bubble burst. Iceland's overvalued currency plummeted, and there was a run on the country's banks. As bad as the crisis was in the U.S., in Iceland it was worse. By October 2008, the financial sector had racked up debts equivalent to eight times the country's gross domestic product. The government had no choice but to seek financing from the International Monetary Fund. Meanwhile, Iceland's politicians seemed almost clueless. After a weekend in October 2008 when the
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This note was uploaded on 12/31/2009 for the course BIZ 178 taught by Professor Meford during the Fall '09 term at Berkeley.

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Why+Iceland - Dow Jones Reprints: This copy is for your...

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