Wow. The Iceland economy has been put on ice for the second time in about a decade.
Wow Air, the Icelandic budget airline, filed for bankruptcy. Due to fluctuating fuel costs and overcapacity in the industry, Wow Air suffered the same fate as other European carriers: death.
The company tried everything to survive, including meeting with potential investors. But the talks fell through.
It became an instrumental force for the nation’s tourist industry and the national economy. Wow Air was credited for dragging Iceland out of the doldrums of economic irrelevancy in the aftermath of the economic collapse.
Now that Wow Air is gone, Iceland is in panic mode.
The central bank confirmed that it is cutting its main interest rate by half a point to four percent. Officials are also projecting the economy to contract 0.4 percent, down from initial expansion estimates of 1.8 percent.
When you factor in the nation’s dreadful fishing season, you have a recipe for disaster.
More from Bloomberg:
The bank on Tuesday revised up its unemployment forecast for this year to 3.9% from 3.1%, while predicting inflation will peak at 3.4% in 2019 before it slows toward the 2.5% target over the next two years.
The krona slid 0.6% to 138.7 per euro as of 10:57 a.m. in Reykjavik. The currency is down 3.7% this year.
The government has signaled it may step in to help the economy. It has spent the past few years reducing debt to help build up its buffers, while the central bank has been adding to its foreign currency reserves.
This is reminiscent of the economic collapse from a decade ago when Iceland almost went bankrupt. The conditions were so bad that Prime Minister Geir Haarde and Foreign Minister Ingibjorg Gisladottir had to negotiate a $2.1 billion bailout with the International Monetary Fund.
So what happened exactly?
From The Balance:
In October 2008, Iceland nationalized its three largest banks. Kaupthing Bank, Landsbanki, and Glitnir Bank had defaulted on $62 billion of foreign debt. The banks’ collapse sent foreign investors out of Iceland. That sent the krona down 50 percent in one week. The stock market fell 95 percent. Almost every business in Iceland went bankrupt. Housing prices fell, while mortgage costs doubled.
Here’s how Iceland’s banks created the crisis. First, they lured deposits from the Netherlands and the United Kingdom by offering 15 percent interest rates. They could offer these rates because the value of Iceland’s currency, the krona, was high. It had become a major trading currency. That drove its value up 900 percent between 1994 and 2008.
That also created inflation. Housing prices rose. Between 2003 and 2004, the Iceland stock market skyrocketed 900 percent. By 2006, the average Icelander was 300 percent wealthier than in 2003. Many Icelanders added second mortgages using cheap foreign currencies.
The banks used $100 billion in deposits to invest in foreign companies, real estate, and even soccer teams. That amount dwarfed Iceland’s 2008 GDP of $14 billion.
Then the 2008 global financial crisis shut down bank lending. Like U.S. banks Bear Stearns and Washington Mutual, Iceland’s banks went bankrupt. The government couldn’t bail them out because it didn’t have the money. Instead of being too big to fail, they were too big to save. As a result, these banks’ financial collapse brought down the country’s economy.
Back then, it was the financial industry that brought down Iceland. Today, it is the airline sector.
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