Let Banks Fail : Iceland's plan looks to be working

Iceland let its banks fail in 2008 because they proved too big to save.

Now, the island is finding crisis-management decisions made half a decade ago have put it on a trajectory that’s turned 2% unemployment into a realistic goal.

The island’s sudden economic meltdown in October 2008 made international headlines as a debt-fueled banking boom ended in a matter of weeks when funding markets froze. Policy makers overseeing the $14 billion economy refused to back the banks, which subsequently defaulted on US$85 billion. The government’s decision to protect state finances left it with the means to continue social support programs that shielded Icelanders from penury during the worst financial crisis in six decades.

Successive Icelandic governments have forced banks to write off mortgage debts to help households. In February 2010, 16 months after Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf failed, unemployment peaked at 9.3%. The rate was 4.2% in December, according to Statistics Iceland. In the euro area, unemployment held at a record 12.1% in November, Eurostat estimates.

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