A super analysis from Már Guðmundsson, Governor Central bank of Iceland.
He shows how Iceland had a very different experience with respect to policy responses to the crisis and recovery from the same.
First Iceland did not bail out its banks. It could not as banks were nearly 10 times larger than its GDP. What they did instead was to save the depositors and conducted swap facility to provide foreign exchange. So, in the end Iceland averted a sovereign debt crisis which the developed world is facing:
So the bottom line is that a sovereign default was avoided in spite of an almost unprecedented financial collapse and the worst economic recession since the interwar years. A key to that result was the ring-fencing of the sovereign from the collapse of the private banks. All debt service payments on sovereign debt, in both domestic and foreign currencies, have been made in full and on time. But the avoidance of default during the crisis does not come without the willingness to use the means available to avoid that outcome, even in very adverse situations, and the ability to endure the temporary hardship that comes with it.
In addition, Iceland – like Ireland, probably – was helped by a relatively good fiscal position prior to the crisis. The fiscal consolidation that began in 2010 and has already resulted in a significant primary surplus was subsequently an important factor in restoring external confidence, which fell to what, in retrospect, seems an unjustifiably low level. In Iceland’s case, the overall effort was made easier by the outside assistance of the IMF, the Nordic countries, and Poland. The same consideration applies to the hardest-hit EU countries and should be kept in mind when assessing their probability of default.
He speaks on rating agencies and whether there is anything like riskfree asset. Riskfree assets is the theme of his presentation..