The banking collapse triggered further currency depreciation and contributed to a significant destruction of household assets (e.g., bank equity, mutual funds, and pension assets). The third shock was the international economic recession in the fourth quarter of 2008 and the first half of 2009. The subsequent recession was shaped by the post-boom adjustment, the three aforementioned shocks, and the policy responses of the authorities. It is an interesting topic for future research to try to quantify the relative effects of the three shocks on the subsequent recession. We cannot take it for granted that the banking collapse is the most important one in that respect, although it commands the first place in the psyche of the population. The asset destruction that was associated with the banking collapse took place in several countries, mostly in Northern Europe, and in absolute terms the loss of the foreign creditors is bigger than that of domestic residents. The currency crisis and the banking crisis are linked, of course, as the banks exacerbated the former. However, with a floating exchange rate, the burst of the unsustainable macroeconomic boom was always going to be associated with a major depreciation, irrespective of what happened to the banks and whether Iceland had a cross-border banking system or not.
In fact, the Central Bank had been predicting a recession in 2009 since at least 2006, as can be seen from the graph that shows predictions for 2009 GDP growth at different dates. The predicted recession was supposed to be a mild one, but then we need to bear in mind that recession forecasts tend to be dampened while the times are still good! 4  BIS Review 139/2010  When all three shocks had hit, the mood changed dramatically, as can be seen from Graph 2. The bleakest forecast was made in May 2009, when GDP was predicted to contract by 11% in 2009 and unemployment for 2010 was forecasted to reach 11%. However, the outcome turned out to be much better – a contraction of 6.8% – and the prospects for peak unemployment have also improved markedly. I think this due not to ordinary forecast errors but to various factors that supported domestic demand and export production in 2009, some of which were temporary. These included temporary permission to withdraw a specified maximum amount from third pillar savings, with use amounting to 1½% of GDP in 2009. This measure is akin to a fiscal stimulus of a similar size. But these factors also included other measures to support households, which mitigated the decline in private consumption. Furthermore, the delay in corporate and household restructuring, although detrimental in the medium term, postponed some of the short-term contractionary effects that tend to accompany it.