Már Guðmundsson: Iceland’s crisis and recovery – facts, comparisons, and the lessons learned Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the Institute of International and European Affairs, Dublin, 27 April 2015. *  *  *  Accompanying charts can be found at the end of the speech. Chairman, Ladies and Gentlemen, It gives me great pleasure to speak here at the Institute of International and European Affairs in Dublin about Iceland’s crisis and recovery and some of the lessons that could be learned from this experience. This is not least because of our historical bonds and the affinity that I feel exists between our people, to which we can now add the common experience of being hard hit by the Great Financial Crisis. It is well known that Iceland was the first advanced country to experience a full-scale banking crisis during the autumn of 2008, when its three big cross-border banks failed. It was also the first advanced country to go on an IMF programme. What is probably less well known is that at that point, Iceland was already on its way into a recession after an unsustainable boom and serious overheating during 2005–2007 and a currency crisis in the first half of 2008. The banking collapse and the associated wealth loss and further currency depreciation made the recession significantly worse, of course, as did the recession that hit the global economy in the fourth quarter of 2008.
But if, over recent years, many companies have been largely focussed on survival, waiting for some of the uncertainty to be resolved before actively considering opportunities to invest and expand, it’s possible that the easing of borrowing costs brought about by these policies has not yet fully translated into spending decisions. As uncertainty lessens, past monetary policy actions may gain greater traction, thus further supporting the recovery. So there are good reasons for thinking that the reduced uncertainty may help to facilitate this handover to business spending we need to see, and that some of those effects may be long lasting. But we also need to be alive to the possibility that the events of the past few years may colour and contaminate business behaviour for many years to come. It may be a long time before companies look ahead with the same confidence that they did during the period of remarkable stability prior to the crisis. Before their trust is restored that the authorities are able to stop really bad things from happening. Before they rebuild their relationships with their banks. On this final point, many companies were let down by their banks during the financial crisis, and I fear that many will be reluctant to return to a business model which relies on their banks providing liquidity and support in times of need. The reluctance today of some companies to borrow from their banks may be less a lack of demand and more a breakdown of trust.