Iceland Financial Crisis 2008-2011 - Essay Example

Iceland’s business tycoon and three main private sector banks of the country acquired ten times more debt than its economy. In my opinion, these banks acquired many assets that were disproportionate to the size of the economy and its ability to back up such lending by banks. I believe the steps that Iceland’s government took five years before 2003 were the main cause of the crisis. This was when Iceland’s government made a financial deregulatory decision by allowing multinational companies to build huge energy projects and it privatized three of its major banks. The government’s lack of concern and the unethical financial practices of the prominent multinational companies and private banks risked the survival of the entire of Iceland.

The first mistake the government did was to allow these multinational huge energy projects to acquire an extraordinary amount of assets and privatize Iceland’s three banks. These banks took debts from foreign banks and allowed loans to finance these huge projects that the government overlooked. Also, it was shown in the documentary that KPMG and other American firms, which audited the financials of these companies, did not find anything wrong. I believe that these audit firms were unable to evaluate these issues or they just simply avoid them. The Iceland financial crisis is a result of the fraud and false financial reporting of the privatized banks and multinational huge projects. In my opinion, though the government’s decision was for the prosperity of the country, the government failed to monitor the functioning of the private sector. One of the major flaws of the deregulatory decisions was that the government privatized three main banks of the country.

The credit created by these banks was ten times more than the actual money in the economy and surpassed the annual growth of the economy. When these projects and businesses defaulted on their payments, this caused the entire Icelandic economy to collapse. As a result of this, 90 percent of the Icelandic stocks declined in value and the national gross domestic product went down by 5.5 percent. Half of the economy found that their accounts were frozen; this crisis caused millions of people around the world jobless and homeless. This all was the result of the uncontrollable business industry, and the privatization of three main banks Landsbanki, Glitnir, and Kaupthing bank. Furthermore, the three main business tycoons of Iceland that were considered to be the guru and prosperity of the Icelandic economy; Jon auger Johannesson, Lyour Guomundsson, and Bjorgolfur were found guilty to cause the financial crisis.

Analyzing the information in the film, I believe that the Icelandic financial crisis is a lesson for other nations of the world. This shows the inappropriate measures and decision of the government to allow private sectors to function so liberally caused the Icelandic economy to fall into a financial crisis. This was the major cause that the boost in the Icelandic economy suddenly turned into a crisis in 2008 (Boyes). After the investigation, it was found that the major energy plants acquired substantial assets, but the actual production of these multinational companies was very low to generate enough cash flow to pay their debts.

Furthermore, the business tycoons rather than investing this money in the financial sectors were spending on their luxury and pleasure. Similarly, like Enron, Jon Asger Johannesson and Johannes Jonsson the owner of the Baugur Group were found guilty of false reporting. This suggests that these cases were similar to that of Enron which collapsed the American economy. I perceive Icelandic Financial Crisis, as the result of corruption and false reporting by major banks, multination companies (Elf Aquitaine), and business tycoons. These parties supported each other to hide their flaws. The banks supported Jon Asgeir Johannesson who kept on acquiring loans based on false financial reporting. Moreover, the oil project Elf Aquitaine is considered as Europe’s biggest fraud investigation due to which the Icelandic banks collapsed.

The credit that these banks provided was already connected with the holding companies that were connected to these banks. In addition to this, bank employees pursued international investors to buy shares of banks. The Qatari investors purchased five percent of the shares of Kaupthing, which were bought by using funds obtained on credit from Kaupthing bank. I, therefore, believe that the financial practice of Icelandic banks was the main cause of these issues (Boyes). The outcomes of the mutual false reporting of the bank and multinational company caused the entire Iceland economy to fall in to worse financial crisis, with millions of people unemployed and homeless. This shows that credit was created on credit in the economy, and the unethical and fraudulent acts of energy companies in the country caused the entire economic system to collapse. Read More