Iceland was originally a small country with a population of only 30,000, and its main financial income was fishing, sightseeing and assistance from the US garrison. In 2003, due to the increasing global demand for raw materials and investors such as Alcoa, Iceland could supply cheap and clean energy in large quantities through hydropower, and successively invested in the construction of giant aluminum smelters in Iceland. The continuous influx of foreign investment (mostly related to energy resources) has boosted Iceland's economy in the past decade, becoming a victim of the support operation of borrowing and high consumption, making Iceland's economy a mini-version of the American economy, and the national debt clock has long since stopped.
On the other hand, due to a large amount of foreign investment, the demand for labor market in Iceland has greatly increased, and the demand for labor in short supply has continuously pushed up Iceland's wages. Driven by high wages, there is a hidden crisis of inflation. Because everyone is optimistic about the future economy and keeps borrowing money from banks for consumption, personal loans have increased by as much as 70% every year, and the Icelandic stock market has also increased by more than three times.
Due to the appreciation of the Icelandic krona in the early days due to the large demand for foreign capital, Icelandic enterprises are also happy to enjoy the benefits of appreciation and borrow a lot to buy foreign companies. Under the vicious circle of Icelandic people relying on debt to support their debts, Iceland's total debt ratio is as high as 3.5 times of GDP, surpassing the debt-ridden United States.
In order to curb inflation caused by foreign investment and support Iceland's currency, Iceland's central bank raised interest rates continuously. However, the high interest rate policy of Iceland's central bank has attracted international bloodthirsty speculators to constantly transfer funds to arbitrage, which has accelerated the financial turmoil under the vicious circle.
As early as the beginning of this year, many credit rating agencies discovered the unreasonable illusion of Iceland's economic prosperity and downgraded Iceland's credit rating. At this time, the ratio of Iceland's short-term loans to foreign exchange reserves is 1.35 times that of exports. The high debt ratio forces the Icelandic central bank to adopt a tight monetary policy, but the tight monetary policy forces banks to reduce financing for enterprises and families and reduce the liquidity of funds.
According to statistics, the proportion of Iceland's housing expenditure to GDP has dropped by 5% to 10% due to the austerity policy. In a small economy like Iceland, the decrease of GDP leads to the increase of public expenditure, and Iceland's finance may turn from surplus to deficit. If the situation continues to deteriorate, the financial system may be involved. In order to solve the risk of financial institutions being involved, the government must come forward to solve the crisis, which is also the main reason why the Icelandic government must borrow money from other countries.
Ironically, high government borrowing, a large amount of foreign investment and overheated consumer spending created the illusion of Iceland's prosperity in the past, but these three main factors that promoted Iceland's economy have now become the chief culprit of Iceland's crisis. The depreciation of the Icelandic krona led to the accelerated withdrawal of foreign capital, similar to the situation in Thailand during the Asian financial turmoil.
At present, the assets of the Icelandic central bank are only about 4 billion euros, but the total foreign debts of Iceland's four major banks are as high as 1000 billion euros, and the government is willing to bail them out. Iceland's import proportion is as high as 45% of GDP, and its purchasing power is rapidly declining due to consumption tightening and currency depreciation. A series of domino effects led to the bankruptcy crisis in Iceland today.
In the face of decline, Iceland took over the three largest banks in China, and the Prime Minister also admitted that a small country was not suitable for an excessively open economy. Perhaps this is a good warning for countries and regions that are currently pursuing economic development. Look at Iceland and think about ourselves. Maybe we can learn something from Iceland.