Episode · 2003–2011 · Reykjavík & Dublin
Iceland & Ireland
Two small countries discover what “too big to save” means
Iceland and Ireland ran the same experiment with different accents. Iceland privatised its banks in 2003; within five years Kaupthing, Landsbanki and Glitnir had grown assets to roughly ten times the national economy, funded by wholesale borrowing and by internet deposit accounts sold to British and Dutch savers. Ireland, cheap to borrow in after joining the euro, poured the same wholesale money into a property boom so large that construction reached a fifth of its economy.
Both booms were validated by everyone whose opinion mattered: rating agencies, regulators, the IMF. Michael Lewis’s later account made the Icelandic version famous — fishermen turned currency traders — but the economics were mundane. Small countries with newly opened capital accounts attracted more foreign money than their productive capacity could use, and the surplus went into assets whose prices then rose, confirming the story.
In October 2008 the wholesale funding vanished for both. Iceland let its banks fail, refused to cover foreign depositors, imposed capital controls and devalued. Britain and the Netherlands paid out their own Icesave savers from their national guarantee schemes instead, and the EFTA Surveillance Authority took Iceland to court over the refusal; in January 2013 the EFTA Court dismissed the case in full. Ireland did the opposite: on 30 September 2008 it guaranteed its banks’ liabilities in full, converting a banking crisis into a sovereign one, and by 2010 needed an EU-IMF programme itself.
The comparison is the book’s most pointed natural experiment in crisis management. Iceland’s output contraction was sharper and its recovery faster; Ireland protected its creditors and paid with a decade of austerity. Neither had the option that a large country has — being able to afford its own banks.
What it cost
On figures from the Icelandic prime minister’s office, unemployment there went from 1.0% in 2007 to 8.1% in 2010, and household income from employment fell 24% over those three years. Irish unemployment, on the CSO’s monthly series, went from 4.8% in January 2007 to 16.1% in December 2011 — 361,000 people — and among under-25s to 32% in March 2012. In Iceland the debts grew as the wages shrank: the króna lost more than half its value, and the inflation that followed swelled the indexed loans that were most of Icelandic household debt.
- 30% Icelandic families in negative equity at the end of 2012 — 57,157 of them, and that after two years of improvement; household defaults had peaked in December 2010 at around 20% of all lending by the three largest banks and the Housing Financing Fund Prime Minister’s Office of Iceland, Reduction of the Principal of Housing Mortgages, November 2013, section 1.1, pp.12–13, on Statistics Iceland and Central Bank of Iceland data
- 12.9% Irish mortgages on a principal home more than 90 days in arrears at the September 2013 peak — 98,736 accounts out of 768,136; counting shorter arrears too, 142,892 accounts, 18.5%, were behind in June 2013 Central Bank of Ireland, Residential Mortgage Arrears and Repossessions Statistics, the current published mortgage arrears data tables (PDH master data), quarters to end-September 2013
- −34,400 Ireland’s net migration in the year to April 2012, the largest outflow since 1989: 87,100 people left, 46,500 of them Irish nationals. Iceland’s net outflow was 4,835 in 2009 and 2,134 in 2010, and its population fell in both years — the only two years it has fallen since 1900 Central Statistics Office, Population and Migration Estimates April 2012, 27 September 2012, Table 1; Statistics Iceland, External migration by sex and citizenship 1961–2025 (MAN01400) and Population – key figures 1703–2026 (MAN00000)
About two thousand people stood outside the Althingi one night in January 2009, throwing rocks, paving stones, fireworks, shoes and toilet paper; they pelted the prime minister’s car with eggs and banged on it with cans. Police used pepper spray and then tear gas, which had not been fired in Iceland in sixty years. It is remembered as the Pots and Pans Revolution, after the kitchenware people banged to drown out the parliamentary session inside. At the height of it about ten thousand took part, in a country of 320,000.
What followed
Iceland’s coalition resigned on 26 January 2009. Geir Haarde, prime minister from 2006 to 2009, was impeached, and in April 2012 the Court of Impeachment convicted him of gross negligence for failing to hold ministerial meetings on important government matters before the crisis; he was given no punishment. In February 2015 Iceland’s Supreme Court sentenced four Kaupthing figures, its chairman and chief executive among them, to between four and five and a half years. Ireland’s thirtieth Dáil had 78 Fianna Fáil TDs; the thirty-first, elected in February 2011, had 20.
The Reykjavík Grapevine, Ten Years Later: The Protests That Brought Down The Government, 30 January 2019; European Court of Human Rights, press release ECHR 357 (2017) on Haarde v. Iceland, 23 November 2017; Sigurður Einarsson and Others v. Iceland, application no. 39757/15, judgment of 4 June 2019, paragraphs 12–13; Houses of the Oireachtas members API, memberships live at the first sitting of the thirtieth Dáil on 14 June 2007 and of the thirty-first on 9 March 2011
Phases on show: displacementboomeuphoriapanic