FINAL DOC - ADMS 4501 Section A ICELAND AND THE FINANCIAL...

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ADMS 4501 Section A ICELAND AND THE FINANCIAL CRISIS Prepared by: Polina Markova – 208877151 Anna Savelyeva – 209868183 Renata Bednarczyk 208562977
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EXECUTIVE SUMMARY – ICELANDIC FINANCIAL CRISIS The Icelandic financial crisis during 2008-2009 involves the downfall of its major banks due to their difficulty to refinance short-term debt. This is the largest banking failure in the economic history. Icelands’s banks are mostly exposed to market risk since they are hybrid between commercial and investment banks. Their debts were so large that the Iceland’s central bank could not guarantee the loans. Historically, Iceland’s economy mostly has relied mostly on marine and energy resources. Recently, it became stronger in the services sector- about 2/3 of the economic output. Many factors contributed to Icelandic’s financial crisis: “access to easy credit, a boom in domestic construction that fuelled rapid economic growth, and a broad deregulation of Iceland’s financial sector spurred the banks to expand rapidly abroad” (Jackson: 2008) Also banks did not ask for a proof of real estate purchase. Homeowners used this in their advantage and refinanced mortgages as well as had easy access to the equity in their homes for consumption purposes. This led house prices to soar. The national currency fell sharply in value as well as foreign currency transactions were suspended for a long time. The cost of this crisis equals to more than 75% of the country’s 2007 GDP. The value of the OMX Iceland 15 from January 1998 to October 2008. ( http://www.thestar.com , retrieved on 2009-08-04) Iceland’s national currency declined “more than 35% against the euro from January to September 2008” Inflation of consumer prices at that time was about 14% and interest rates- 15.5%.On “October 9 th , all trading on the exchange was frozen for two days by the government in attempt to prevent further panic spreading throughout the country’s financial markets” On the 14 th the OMX Iceland 15 fell 77% from what it was before the closure, due to the fact that the value of the three biggest Icelandic banks, huge part in OMX Iceland 15, had been set to zero.
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Background of Iceland and the major crisis it faced. Reasons for the crisis to happen Iceland, at one point was a thriving economy with a lucrative capital market. Foreign investors were eager to partake in the growth opportunities which the country boasted. For years it enjoyed a ‘stable democracy, a consumer driven economy, and low inflation before it suffered a meltdown in 2008. The turn in events was due to the banking sector collapse which caused the currency to deteriorate. It began when the economy had encountered an initial setback in 2006 and the stability of the major banks was questioned. However, the market eventually recovered once reforms were made in the banking sector by the government. Iceland had temporarily enjoyed some stability until the global crisis in 2007 hit. In spite of the nation not getting
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FINAL DOC - ADMS 4501 Section A ICELAND AND THE FINANCIAL...

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