Iceland: A Small Country in a Global Crisis Case Study (Case Study Sample)

A CASE STUDY OF ICELAND – A SMALL COUNTRY IN A GLOBAL CRISIS
Student’s name
Course name and code
Professor’s name
Date
Iceland – A Small Country in a Global Crisis
The size of a country and its relation to the effects of world capital shifts
The economic crash of Iceland is a good case scenario to test whether factors like the magnitude of a country's economy and its governance capabilities are more important than other considerations such as the management of the economy and its governance capabilities to enable the comprehension of how the world economic disturbance (Archer and Nugent, 2020). This study also looks into whether the worldwide minute size of a state outside of the European Union and the Euro interconnections was manifested in the global financial turmoil and if such exposure limits the country's response to the crisis or enabled its response (OECD, 2009).
To begin with, Iceland is the only country to have undergone a complete collapse of about its whole financial department due to the 2008 financial calamity. The country had three main banks which represented 85% of the country's financial sector (OECD, 2009). Besides, Iceland is the only OECD member country to have experienced a currency setback other than South Korea- a medium-high economy. To create a clear mental picture of the situation, the Icelandic Kroner with the acronym (ISK) declined by more than 48% between the intermediate years of 2007 and 2009 (Ólafsson and Peterson, 2010).
The prevailing conditions in the fall of 2008 were dire in Iceland. The country's central bank distributed only foreign currency to be used in the importation of fuels, medicines and medicinal items and foodstuffs (Central Bank of Iceland, 2008). The domino effects of the conditions included: a rise in inflation rate to double figures from single figures (18%) while unemployment rates rose by 8% from full employment, also, debt- both domestic and commercial increased over the roof because homes and businesses in the country had borrowed in international currency (IMF, 2009). The government had to seek help from the IMF.
The economic turmoil for Iceland did not stop at that. The inflation rate increased by 6.8% in 2009. This drop is considered the highest drop since such measurements in GDP began to be measured in 1945 (Statistics Iceland, 2010). The economic crisis eventually led to political turmoil. People started demonstrating along the streets of Reykjavik, there was a collapse in the coalition that was made up of the CIP and the SDA parties (Archer and Nugent, 2020). The economic crisis also led to the country's parliamentary elections which led to the creation of the country's left-center government for the first time (Thorhallsson and Rebhan, 2011).
Progressively, the political crises also involved the firing of the conservatives from office after 18 years of coalition service with the centrist APP between the years 1995 to 2007 (Archer and Nugent, 2020). Iceland applied to join the European Union for the first time in mid-2009 when the new government made up of the LGM and the SDA parties gained a parliamentary majority by voting (Carey, 2011). The SDAs were determined on a faster ascension process and the immediate adoption of the Euro currency (Carey, 2011). These promises informed the party's electoral success combined with blame for the economic crash of the country (Thorhallsson and Rebhan, 2011).
Studies show that from the very beginning, the main point of focus for small states in this literature is the relationship between its variables and the capabilities of the state (Neumann and Gstöhl, 2004) concerning the size of inhabitants, the economy, size of their territory and military size (Vital, 1967; Archer and Nugent, 2002; Thorhallsson, 2006). The development of the study also involved the inclusion of the influence of the presence of a sizeable bureaucracy. This was, however, not taken seriously (Keohane, 1969; Vayrynen, 1971 & Handel, 1981).
Evidence from established research shows that small states are prone to the impacts of global financial variations. Their economical vulnerability comes about due to; the small size of their GDP and local markets, their dependence on foreign trade and exposure to the economic variations of international markets (Griffiths, 2004). The commonwealth report of 1997 ranked small states as not being economically capable since their administration's small size was a problem in the behaviour of the international community (Carey, 2011). Such countries were thought incapable of defending themselves diplomatically and were incapable too of engaging in international affairs (Koehane & Handel, 2017).
Small countries are doubted self-governance. They are thought to have little to no capacity for exposure to risks because of their smallness and little margin for error (Reid 2015). When well put, such countries are known to have vulnerabilities due to complete power loss and territory as well as poor infrastructure unlike their large states counterparts (Barston, n.d). Also, small states are dependent on larger states for policy making, basic survival and access to the international world. Such countries require alliances for their survival (Thorhallsson, 2016).
Other studies show small states as being smart economically, and administratively, they are resilient and fast to globally adjust to competition and other challenges (Browning, 2016). The states are not seen as constrained by their administration and the economy but they are opportunity makers locally and internationally (Commonwealth Advisory Group, 1997). In conclusion, therefore, it depends on what eye one is looking at the small states, the research material consulted and the prevailing conditions of such studies. People have different opinions when it comes to the size of a country and the effects of the variations of finance globally on the country.
The pros and cons of using interest rate increases on Iceland's economy.
The disadvantages of increased interest rates on Iceland's economy are diverse. From the surface level, the effects the interests posed seemed moderate (IMF, n.d). The increased range read 15-30% (Central Bank of Iceland, 2010). The increased rates have a way of making the lives of normal people hard by increasing the cost of lending and reducing the purchasing power of consumers (IMF, 2011). Businesses also incur high costs of running their businesses due to the high cost of their loans brought about by the high-interest rates (IMF, 2011). The eventuality of all this is an increased cost of living.
The advantage though could be stated as high economic growth for the country associated with less variability (IMF, 2011). The need to counter the effects of inflation through methods such as expansion policies, depreciation of the exchange rates and increasing public debt would be very low since such things would not be affecting the economy in either way (Central Bank of Iceland, 2010). Raising the interest rates enabled the government to have money to run its businesses easily leading to continuous development (IMF, 2011).
Through the interest rates, the government subsidized their citizen's cost of living enabling them to at least have a little bit of a normal life (IMF, 2011). Banks continued to offer loans to borrowers because they had a way of cautioning themselves against losses due to the high cost of borrowing. People continued to conduct their businesses successfully due to the availability of such loans (Central Bank of Iceland, 2010).
How the Iceland currency sank
The main factor that made the Iceland kroner sink very deep was the fear that the country's financial affairs were so bad that their foreign investment would dry up eventually (IMF, 2011). According to Antje Praefcke, the head of Iceland's commercial bank it was clear that the continued financing of the existing account deficit depended on the continuous inflow of foreign capital (Althing, 2010). When such payments stopped, it was hard to maintain a balance of payment and therefore crisis could not be averted leading to the sinking of the kroner further (Carey, 2011).
The trading volumes reduced by more than half the amount sold in the past months (IMF, 2011). This led to the overly sell-offs. The sell-offs diminished the kron