Sigrún Davíðsdóttir's Icelog

The cost of the Icelandic financial meltdown: 20-25% of GDP

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I’ve earlier pointed out that Iceland can’t quite be taken as an example of a country that didn’t bail out its banks. True, the three largest banks failed – but the cost of financial assistance to other banks and of setting up the new banks is substantial. Together with Thorolfur Matthiasson professor of economics at the University of Iceland I’ve written an article on the cost, published today on EconoMonitor.

Our concluding remarks are:

We are aware that the final cost, accrued from supporting the Icelandic financial system, to the Icelandic State will not be clear for some time to come. But there is a cost – and as we have shown above it is possible to plausibly calculate the potential cost. Since Iceland has become a popular comparison for economists studying crisis-stricken European countries we feel it merits this attempt. Our calculation shows that Iceland cannot be taken as an example of a country, which did not bail out its banks.

Compared to the UK, Icelandic taxpayers will pay 5 to 7 times more for government interventions in the financial market than is the case in the UK. Hence, the widely held belief that Icelandic citizens did force bondholders, bankers and shareholders of financial firms to shoulder the burden of the collapse of the Icelandic financial sector is wrong. Icelandic taxpayers used what amounts to almost a year’s worth of taxes to recapitalise the domestic part of the financial sector. Whether these bailouts were necessary or not can be debated but the cost of 20-25% of GDP is, according to our calculations, a reality.

However, a major difference, in terms of costs to UK and Icelandic taxpayers is that foreign creditors carry the bulk of the cost of the Icelandic collapse – as the three big banks failed in October 2008 these creditors lost what amounts to 5 to 6 times the Icelandic GDP.  But that is a wholly different saga.

Here are four blogs I’ve written earlier about this myth that Iceland didn’t bail out its banks, also comparing Iceland to Greece and Ireland.

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Written by Sigrún Davídsdóttir

December 5th, 2012 at 7:11 pm

Posted in Iceland

2 Responses to 'The cost of the Icelandic financial meltdown: 20-25% of GDP'

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  1. You and Thorolfur managed to completely confuse one mr. Egill Helgason, a trigger happy political commentator, with your article:

    He seems unable to distinguish between the total cost of the melt down and the cost of rescuing the system.

    By the by, you compare the total cost in Iceland with cost of rescue operations in the UK (cost to the UK taxpayers of saving UK banks). I assume you have established that there were no other costs are borne by the UK in relation to the bank meltdown over there?


    11 Dec 12 at 12:18 pm

  2. What we did was to use data provided by the two countries’ National Audit Offices, ie cost they deem to be born by the state. This means we ourselves didn’t define the cost, ie what cost could be related to the bank meltdown. We used this data. – Single payments can be debated. The EconoMonitor article is an indication of cost, not an exact calculation.

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