Chapter 1: Restoring Confidence in the Aftermath of Iceland’s Financial Crisis

Abstract

Abstract Following the collapse of the banking system in October 2008, the Icelandic authorities attempted to restore confidence in the country’s institutions, improve their functioning and gradually improve the country’s credit rating. The authorities took ownership of an International Monetary Fund-sponsored economic programme that managed to turn the macroeconomic development around when, following a trough in the summer of 2010, an economic expansion started that has continued ever since. They applied for membership in the European Union in order to show their commitment to be part of the international economic community and to have a lender of last resort in the European Central Bank in future crises. The causes of the collapse were investigated and many bankers were prosecuted. Finally, financial regulations were made stricter and the structures of the Central Bank and the supervisory authority were changed for the better. The net effect was to lower the credit default swap rate on the government’s debt, gain access to capital markets and make the Iceland story one of resurrection rather than only hubris and collapse.