Interview with Sam Knigth,

an American journalist based in Washington, DC, in preparation for this article of his:



-In your opinion, why do you think that the Icelandic economy is doing better than some might have expected it to be doing?

First things first: The financial collapse of Iceland in 2008 was, by several indications, the costliest such crash on record. First, the financial damage inflicted on creditors, shareholders, and depositors abroad as well as at home is estimated to equal about 7 times Iceland’s GDP, a world record. Second, the fiscal cost of the crisis, including the cost of recapitalizing the failed commercial banks as well as the technically bankrupt central bank, is considered by the IMF to equal 64% of GDP, breaking the previous world record held by Indonesia whose fiscal cost of the financial cleanup after the East Asian crisis of 1997-1998 amounted to 52% of GDP. Third, the three “big” Icelandic banks’ collapse in 2008 would, had they been American, make the list of the 10 largest bankruptcies of all time in the US, a remarkable result in view of Iceland’s population of 318,000. Fourth, the Icelandic stock market was complete wiped out, virtually in one swoop.

In view of all this, it is remarkable that Iceland’s GDP fell by only 10% following the crisis and that unemployment has remained below 10% of the labor force. There are two main reasons for this outcome as I see it. First, the collapse of the Icelandic banks was so complete and the hole they left behind so deep that it would have been completely impossible to bail them out and compensate their creditors and other victims; in Iceland, in other words, the Irish way out was blocked. Second, some of the funds borrowed abroad by the Icelandic banks and not paid back were invested, and remain, in Iceland. For example, Iceland’s new and shining concert hall and conference center, Harpa, recently opened in the heart of Reykjavík, was financed by one of the three failed banks. In view of this, Icelanders should think twice before banging their chests and declaring victory over the crisis. Less hubris is called for, in view of events, and more humility.

-Do you think the economic situation in Iceland is as rosy as the New York Times claims it is? Or do you think that the worse could be yet to come?

The situation is far from rosy. It will take a number of years for Iceland to regain economic parity with the Nordic countries in terms of national income per person measured in euros. Iceland’s heavy burden of debt will inevitably weigh the economy down. Even so, the situation could have turned out much worse. Twenty years ago the Faroe Islands, an autonomous Danish dependency in the North Atlantic, collapsed for reasons in many ways similar to the ones that brought Iceland down, including bankers and politicians in bed together, big time. The Faroese saw their national income decrease by a third and lost a fifth of the population to emigration, but half the emigrants returned a few years later. Nothing of this magnitude has happened in Iceland.


-What do you make of the New York Times' claim that the Icelandic government “refused to take on bank debts”? 


“Refused” is perhaps not the right word. The magnitude of the shortfall was such that honoring the debts of the Icelandic banks – they were private banks, remember – to their foreign creditors was completely impossible. Had the scope of the problem been manageable, Iceland would have had a choice, and would then have been free to opt for the Irish way out. Whether Iceland would actually have done so if it could have is anybody’s guess.


-Are you at all concerned that selling the banks to foreign creditors – instead of just using the old banks' assets and some of the new banks' revenue to pay them off – might produce a result unfavorable to Icelandic debtors and entrepreneurs? In other words, are you concerned that the foreign owners of Arion and Islandsbanki might implement policies unsympathetic to the plight of regular Icelanders (despite the fact that it might hard to be more callous than the Icelandic bankers were)?

Many observers have expressed the concern that the foreign creditors who own two of the three failed banks are short-term oriented profit maximizers who have little long-run interest in establishing a foothold in Icelandic banking by winning the confidence of the local customer base. Many observers have commented that the banks have done too little – in fact, almost nothing – and too late to accommodate their most distressed customers, both households and firms.

-Similarly, are you concerned that the government is too enthusiastic about rebuilding the banks to the extent that they will either completely dominate the economy again or at least crowd out industries that have the potential to be more beneficial in the long term?

As I see it, the government’s lack of enthusiasm for a lot of things, including a proper and full accounting for what went wrong and proper prosecution of those who broke the law, is more of a problem than its propping up of the banks after the fall. Even so, the new banks are too large, and need to be reduced down to size, both their assets and staff.


-Are you concerned that too much public money has been spent recapitalizing the banks?

Yes, the government probably went too far in this regard, especially immediately after the crash when huge sums of taxpayer money were arbitrarily transferred to the banks to make their books look a little better. Also, before the crash, the Central Bank lent the commercial banks a lot of money against collateral of dubious value with the result that the Central Bank became technically bankrupt. For this reason, the recapitalization of the Central Bank was about as costly to the taxpayers as the recapitalization of the three failed banks.


-Much is made of the IMF's role in Iceland. How do you personally feel the IMF has impacted Iceland?

The IMF has done well by Iceland. There is a broad consensus, in government circles and elsewhere, that without the IMF’s advice and help, the situation would have been harder to handle. Without the IMF, output and the value of the currency would most likely have fallen more and unemployment would have increased more. The Nordic countries have also played a significant role by providing the financial resources needed to make it possible for the IMF to support the program. This is because the maximum amount of financial support available from the IMF was not nearly enough to bridge the huge financing gap after the crash. The broad contours of the IMF program have not been challenged, not by the political opposition to the government and not by academics or others outside government. In Iceland, the IMF is the only game in town. Whether this will change after the IMF leaves Iceland in mid-2011 remains to be seen.