Iceland's Financial Crisis

On March 6, 2010, Icelandic voters overwhelmingly rejected a proposition to pay back more than 5.3 billion to the British and Dutch governments incurred during the financial crisis. The British and Dutch governments had expended the funds to cover the losses of British and Dutch depositors, respectively, when Icelands major banks failed and were nationalized in the fall of 2008. The issue has continued to strain relations between Iceland and Great Britain and the Netherlands and could complicate Icelands remaining efforts to join the European Union and to replace the krona with the Euro. Following the collapse of the banks, Iceland and the International Monetary Fund IMF finalized an agreement on November 19, 2008, on a 6 billion economic stabilization program supported by a 2.1 billion loan from the IMF. Following the IMF decision, Denmark, Finland, Norway, and Sweden agreed to provide an additional 2.5 billion. Icelands banking system had collapsed as a result of a culmination of a series of decisions the banks made that left them highly exposed to disruptions in financial markets. The collapse of the banks raised questions for U.S. leaders and others about supervising banks that operate across national borders, especially as it has become increasingly difficult to distinguish the limits of domestic financial markets. Such supervision is important for banks that are headquartered in small economies, but operate across national borders. If such banks become so overexposed in foreign markets that a financial disruption threatens the solvency of the banks, the collapse of the banks can overwhelm domestic credit markets and outstrip the ability of the central bank to serve as the lender of last resort.