Iceland's Economic Eruption and Meltdown

The Icelandic financial collapse, which occurred in the fall of 2008, is without precedent. Never before in modern history has an entire financial system of a developed country collapsed so dramatically. This paper describes the country's path towards financial liberalisation and the economic background that lead to an initially flourishing banking sector. In doing so, the paper elaborates on the economic oversights that were made during the financial build-up of the country and how such mistakes contributed to the crash. The focus is thus on identifying the main factors that contributed to the financial collapse and on drawing conclusions about how these missteps could have been avoided. Also summarised are the mistakes that followed in the attempted rescue phase after the disaster had struck. The paper discusses these issues from a general perspective to provide an overview of the pitfalls that any fast growing market may be exposed to. It concludes that the economic collapse was primarily home-brewed and a consequence of an unbound, risk-seeking banking sector and ineffective (or non-existent) actions of the Icelandic authorities.