Greeks take note: Iceland is recovering

In the last few months of 2008, during the outbreak of the global financial crisis, three Icelandic banks Glitnir, Landesbanki and Kaupthing - like the rest of the global financial system - became insolvent and only avoided going bust instantly when Iceland, as a country, took over responsibility for their obligations.
However soon afterwards Icelandic government decided that it could not afford to honour the debt and defaulted, and the the banks went bust anyway. This was despite having taken $2.1 billion loan from IMF. It was an example of Scandinavian common sense (which, as they say, "is not that common"): if you cannot afford to honour your debt, call it a day, go bust and start again.

Since a number of outside creditors lost their money, especially in the UK (a case of Icesave) and the Netherlands, Iceland came under pressure to take austerity measures and keep paying through their nose. Iceland is a country of less than 320,000 so these were massive obligations (around $3.5 billion to the British and Dutch governments alone through savers guarantees). In two rounds of demands, the Icelandic government agreed with the support of vote in the parliament, Althing. However the President Mr Olafur Ragnar Grimsson took a different view, refused to sign the bill and called a referendum. The Icelanders voted decisively for going bankrupt: 98.10%, i.e. not to pay the debt.

Subsequently the Iceland's Prime Minister at the time of the financial crisis break out, Mr Geir Haarde was put on trial on the charges the he had not taken adequate measures to protect the country's economy.

The Iceland's default was the beginning of its quite speedy recovery despite the fact that the western world was in economic crisis. Their currency was devalued by 70% making the economy more competitive. According to IMF Iceland's Gross Domestic Product, having recovered from a massive fall in 2009 of 6.9% and in 2010 of 3.5%, increased be 2.5% in 2011 and such steady pace of growth is expected to continue in 2012. In February 2012 Fitch upgraded Iceland's debt to "investment grade", from BB+ to BBB-. In comparison Fitch rates Greece at B-, six levels below Iceland (and this is after the recent Greece debt upgrade by 4 levels).

In February this year Iceland paid the first tranche of its debt repayment to IMF of $106.6 million and, spectacularly, bought back $443.4 million its bonds with the maturity in 2013 from IMF. Therefore Iceland paid around a quarter of its debt to IMF and ahead of time.

This is in stark contrast to Greece's way of handling the crisis. When Prime Minister Georgios Papandreou called for a national referendum on accepting the EU austerity measures or going bust last autumn, he was deposed and a new Prime Minister, Lucas Papademos, who was responsible for putting Greece in a financial mess in the first place was installed.

Greeks should take note: social unrest and taking on more debt to pay for old is not a way to recovery. As the democracy birthplace they should have more faith in it. As Iceland's example shows the route to recovery from the financial disaster is first default, then putting the political, economic and financial matters in order (and this may involve prosecuting some politicians and financiers who caused the mess in the first instance) and then gradual (and affordable) repayments. Is it a common sense after all?