Iceland Revisited

I had some fairly strong opinions on the situation in Iceland early last year after its population continuously voted down deals its elected government was making to settle bank default-related debts with fellow sovereigns England and The Netherlands. Though we are on the record as writing that bank bailouts are anti-capitalistic (in the Shumpeterian creative destruction sense, not the anti-socialistic sky-is-falling version of the TV news networks) and can foster moral hazard, we nevertheless accused Icelanders of being shortsighted when they refused to fulfill their responsibilities for their banks under EU directives.

So, was I right? Within the past two weeks Iceland has wrapped up its lending program with the IMF, its unemployment rate has seemed to stabilize and is moving in the right direction, and the island nation seems to be in a much better state than many of its European counterparts. Based on this evidence, particularly in a broader economic environment which has been less than robust, it would appear that the citizens of Iceland and their populist president were right after all.

However, since the 'no' votes and leading up to an announcement of a deal last week, the government continued its efforts at sincere negotiations to settle its debts, leading everyone to correctly believe that a satisfactory conclusion would be had. Therefore, many of the positive developments in the interim (such as the continuing relationship with the IMF) were facilitated by the idea that the referendums were not the final word.

In short, maybe we were both right. Putting the debt settlement plan to the people certainly put the government in a better negotiating position, particularly once the English and Dutch made it clear that they weren't interested in being cast as bullies. However, the very real prospect of a final settlement enabled the country to move forward from the brink it was precariously perched on. As is so often the case with complex situations, it would seem that thinking of things in terms of black and white answers to problems was/is not always the best strategy. Good advice for policymakers and bloggers alike perhaps...

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