Capital controls and the resolution of failed cross-border banks: the case of Iceland

Abstract

Iceland has come a long way since the dark days of October 2008 when the country’s banking system collapsed almost in its entirety. After a deep recession in 2009–2010, Iceland is enjoying steady, if modest, economic growth of about 2 per cent per annum. Inflation, which peaked at 19 per cent after the collapse of its currency, the krona, is now at 4 per cent and the unemployment rate, even if high by historical Icelandic standards at 5.5 per cent, is among the lowest in Europe. The underlying current account surplus and the net international investment position are approximately 3 per cent and −60 per cent of GDP, respectively.1 Surely, this is better than could be expected only 5 years after the ‘perfect storm’.2 Formidable problems do remain. Government debt is 110 per cent of GDP, and many firms and households are also burdened by excessive debt....