Finally, the low real exchange rate stimulated exports and other traded goods sector activity. Moreover, the composition of Iceland’s exports is such that they are somewhat less cyclically sensitive than, for example, exports of motor vehicles and consumer durables. The net result was that Iceland’s exports held up well in comparison to world trade overall, as can be seen in Graph 3. Some of these factors were temporary, however, and the price was paid this year. Contrary to earlier (probably unrealistic) expectations, Iceland did not recover from recession in the first of half 2010. That means that Iceland will emerge from recession later than most other countries, many of which began to recover in the second half of 2009. But given the huge imbalances in the Icelandic economy during the boom and the size of the shocks it sustained, this is not surprising when measured against the broader historical record of countries experiencing major financial crises. In both international and historical comparison, Iceland has gone through a deep and a somewhat drawn-out recession, as can be seen from the following graph. BIS Review 139/2010  5  Perhaps recovery has only just started, but the signs of stabilisation are all over the place. The huge current account deficit of the boom period has turned into a surplus if we exclude the accrued interest on the debt of the failed banks, interest that will probably never be paid.
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.