Financial crisis in Iceland

Inside Job

Yoichi Horibe

Iceland now has a lot of opportunities to earn profits because the krone is really strong. Recent events like the 2011 volcanic eruptions have affected Iceland’s economy. When the krone peaked in 2005 and the financial crisis hit in 2008, they lost a lot of money but they could get over it now because of their profitable products and their two-job economy.

Investors use foreign currency cleverly because before the crisis they tended to export goods but after the crisis they change to import immediately. As a result, the fishermen are not required to make the same amount of fishes as before. The reason is foreign product flows into Iceland. They just work a half day and spend time on their farm as second job.

This situation about currency is the same as Japan. If Japanese Yen is strong, revenue of export 120(*products) yen decreases to 100(*products) yen. As a result, they prefer import in this situation.

The 2008 crisis is triggered by Credit Default Swap (CDS). At first, Lehman Brothers had insured bankrupt by CDS before the crisis. One of Lehman’s businesses, subprime loan has defaulted. When Lehman Brothers went bankrupt, many investors and companies didn’t prepare for Lehman’s CDS because they couldn’t expect this happening and they couldn’t pay the insurance fee for Lehman brothers. As a result, many investors and companies suffered from this ripple effect.

Recently Paul Volcker made “Volcker rule” to prevent it from relapse. JP Morgan Chase suffered from this rule because this rule prohibits all financing to hedge fund and derivatives matter. This seems really meaningless rule because the original objective of derivatives is to hedge risk. However, government prohibits it. This is paradox.

In conclusion, Iceland is merely one of casualty of the crisis. So many people lost their jobs. There is no specific solution for this problem. We have to consider about it well.