Bust and boom

Iceland is recovering from its financial shock – without the aid of a bank bailout

It’s been a good week for the admittedly small band of people who get excited about the decisions made by central banks. In America, the Federal Reserve embarked on a second great round of printing money. In this country, the Bank of England abandoned any idea of controlling inflation, leaving interest rates at a three-century low despite having missed its inflation target for seven months.

But by far the most interesting decision was made a long way to the north, in a country which people usually only pay attention to when its banks or volcanoes blow up, bringing either the financial or air traffic system grinding to a halt. Mar Gudmundsson, the governor of the Icelandic Central Bank, cut his country’s interest rate, bringing it down to a fairly normal 5.5 per cent. And he wasn’t trying to stave off a banking collapse or salvage an economy as it plunged into recession. It was just part of a slow process of getting business back to usual.

Iceland, I hear you say. Isn’t that the country that got wiped out by the credit crunch? The place where they are all shivering in the dark, eating cod tails, and wondering whether a single pack of candles will last them through the winter? Yes, that one. Two years on from the credit crunch, however, Iceland hasn’t stepped back into the Palaeolithic era. All those experts who told us in 2008 that the only alternative to rescuing the banks was economic Armageddon turn out to have been not quite right. Iceland’s three big banks, Glitnir, Kaupthing and Landsbanki, did end up being taken over by the state, but, while domestic depositors were protected, the government didn’t attempt to meet all international obligations.