Iceland manages to make a success of failure

FOUR YEARS ago Iceland broke all the rules. Unlike so-called “austerity poster child” Ireland, and many other European countries, it let its banks fail.

And rather than making its taxpayers liable for banking debts, it pushed losses on to the banks’ creditors. So how is this contrarian stance working out for the tiny Nordic island?

Not too badly at all, according to the International Monetary Fund’s mission chief to Iceland, who recently described the country’s recovery since the financial crisis as impressive. Its unemployment rate has fallen below 5 per cent and its economy is set to grow by 2.8 per cent this year.

Clearly the old joke that the only difference between Iceland and Ireland is a letter is no longer accurate – unemployment here is almost 15 per cent and the growth forecast for the economy is a dismal 0.5 per cent.

Of course, Iceland also differs in that it had the ability to devalue its currency – the krona fell 80 per cent against the euro in 2008. This helped the country achieve a trade surplus that year, but it also sent inflation soaring. Over the past year, Iceland’s central bank has been raising interest rates to protect the krona from any further weakening as the country prepares to unwind controls put in place to prevent foreign repatriation of capital.

Five interest rate increases have been implemented since last August, bringing the benchmark rate to 5.75 per cent. This approach appears to be working. In July the inflation rate had eased, which takes the pressure off the central bank to announce a further hike when it makes its next interest rate decision on Wednesday.