Though progressive by any standard, Iceland is a relatively conservative country befitting a thousand year old country that seen its share of hardships. Its latest round of hardship, a spectacular economic collapse, is today the catalyst for Iceland’s leftward turn at the polls. Free-market conservatives were trounced.
Since 1991 until very recently, the Independence Party, a right-wing party with a neo-liberal free-market ideology influenced by Margaret Thatcher and Ronald Reagan, had dominated Icelandic politics. Under longtime Independence Party Prime Minister David Oddsson, Iceland privatized the country’s state-owned businesses, remaking the economy along Thatcherite lines. Traditionally, the Icelandic economy had been more regulated than in most other Western economies but the Independence Party would open the country to a liberalized investment environment. As entire sectors were privatized, regulations were erased.
The privatization would include the state-owned banks, which under private owners grew massively by borrowing and lending overseas. In effect given the lax regulatory environment, Iceland’s bank sector become one giant hedge fund. When it was all said and done, Iceland’s banks would hold liabilities twelve times of Iceland’s GDP. Iceland has been mired in crisis since late September, when the country’s three largest banks collapsed under the weight of these debts. Cleaning up this mess has not been cheap for the small mid-Atlantic island nation of 320,000. Current estimates run to $10 billion, or about $30,000 for every man, woman and child in the country. The collapse of the banks alone is expected to cost taxpayers nearly $3 billion, on top of another $3 billion the government has invested in the new nationalized banks to keep them afloat.