Iceland in financial crises
Much of the growth seen by the economy of Iceland in the last two decades came as the result of a boom in domestic demand following the rapid expansion of the country's financial sector.
Icelandic banks expanded aggressively in foreign markets following the privatization of the banking sector in the early 21st century, and the Icelandic consumers and businesses borrowed heavily in foreign currencies. The Iceland boom period was like nothing the country had seen before. Worsening global financial conditions throughout 2008 resulted in a sharp depreciation of the Icelandic krona vis-a-vis other major currencies.
The 2008–2011 Icelandic financial crisis was a major economic and political crisis in Iceland that involved the collapse of all three of the country's major privately owned commercial banks, following their difficulties in refinancing their short-term debt and a run on deposits in the Netherlands and the United Kingdom due to ICESAVE accounts.
Relative to the size of the economy of Iceland, Iceland’s systemic banking collapse is the largest suffered by any country in economic history. The foreign exposure of Icelandic banks, whose loans and other assets totaled more than 10 times the country's GDP, became unsustainable. Iceland's three largest banks collapsed in late 2008.
The country secured over $10 billion in loans from the IMF and other countries to stabilize its currency and financial sector, and to back government guarantees for foreign deposits in Icelandic banks.
GDP fell 6.8% in 2009, and unemployment peaked at 9.4% in February 2009. GDP rose 2.7% in 2012 and unemployment declined to 5.6%.
Since the epic collapse of Iceland's financial sector, government economic priorities have included: stabilizing the Icelandic krona or isk kr by implementing capital controls, reducing Iceland's high budget deficit, containing inflation, addressing high household debt, restructuring the financial sector, and diversifying the economy.
Three new Icelandic banks were established to take over the domestic assets of the collapsed banks. Two of them have foreign majority ownership, while the State holds a majority of the shares of the third. Iceland began making payments to the UK, the Netherlands, and other claimants in late 2011 following Iceland's Supreme Court ruling that upheld 2008 emergency legislation that gives priority to depositors for compensation from failed Icelandic banks.
Iceland owes British and Dutch authorities approximately $5.5 billion for compensating British and Dutch citizens who lost deposits in ICESAVE when parent bank Landsbanki failed in 2008.