Iceland's Economic Crisis - Essay Example

Let us evaluate the possible causes of the Iceland’s crises. The fundamental reason of the Iceland crises is the financial crises that the banks of the country faced. When there was a major deregulation practice in place, Iceland also adopted the policy. This is the period during the year 2000 when the country’s major industries were deregulated which also included the banking industry. At first, it was a prolific decision and started paying benefits. Iceland’s stock market grew by 900%, which was one of the best growths of the decade.

In addition, it is estimated that the banks of Iceland had growth multiple times the growth of the country itself. The deregulation of the banking industry caused a significant change in the spending pattern and thus, the national economy of Iceland (Bagus et al, 2011). The banks now lent money in simple terms and conditions which made it possible for the common Icelander to obtain loan for virtually anything. Mortgages became easy and the people were lured into take up house loans. The finances that the banks of Iceland used to continue their activities were obtained from interbank lending and from deposits from outside the country (Gudmundsson et al, 2010).

The growing lending eventually led to the rise in the cost of living and inflation crept up to around 14% in September 2008. As a corrective measure, the Central Bank raised the interest rate to above 15%. This caused the international funds to be deposited into Iceland’s banks because the banks of other countries were offering much lower interest rates. As a result, the money supply in Iceland grew by 56.5% compared to 5% of GDP growth. Banks found it difficult to pay back loans because much of the investment had been circulated in the interbank market.

The central bank also failed to loan the banks because the amount needed was even greater than the