This effort has been sufficient to create a primary surplus and, along with growth in the economy from H2/2010 onwards, to put debt on a downward trajectory as a share of GDP, which is predicted to be 85% gross and below 60% net in 2015. But this has not come without significant pain, and again, would not have been possible if private bank liabilities had been guaranteed more than was needed to keep the domestic payment system and basic banking services up and running. Let me conclude by summarising some of the potential lessons from this tale: 1. Iceland did not allow its entire banking system to collapse, it did not nationalise its banking system, and it did not default on sovereign debt. So, in spite of what one sometimes hears, the Icelandic case does not teach any lesson on the pros and cons of such measures. 4  BIS central bankers’ speeches  2. Iceland avoided sovereign default through a good initial fiscal position, the ringfencing of the sovereign as much as possible from collapsing cross-border banks, and a medium-term fiscal consolidation programme. The lesson is to practise fiscal prudence and avoid the socialisation of private sector losses. 3. Iceland protected its domestic payment system and deposits. The lesson might be bail-in, separability in resolution between the public utility element of banking from the rest, and deposit preference. 4. The EU system for cross-border banking is deeply flawed.
Be that as it may, the direct fiscal costs of capital injections into domestic banks, losses on government guarantees, the blanket guarantee of domestic deposits, and the refinancing of the Central Bank are estimated to have amounted to onethird of year-2010 GDP. The net might turn out to be somewhat lower, however; for instance, there will be some recovery on the collateral of CB lending to failed banks. Gross government debt went from under a third of GDP before the crisis to a peak of one GDP, and net debt rose from around a tenth to two-thirds. As a result, there was no fiscal space to save banks 10 times GDP, and attempting to do so would have bankrupted the country. Indeed, Iceland had to embark on a medium-term fiscal consolidation programme even as output was still contracting, in order to stop government debt from reaching an unsustainable level and to rebuild the external confidence needed for the sovereign to regain market access. The overall fiscal effort (measured by changes in the cyclically adjusted primary balance as a percentage of potential GDP) amounted to 10 percentage points 2010–13, more than that of Ireland during the same period (although Ireland will overtake Iceland if the expected effort for 2014 and 15 is added).