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Iceland's Swift Recovery Offers a Lesson to Banks and Governments

Still think the difference between Iceland and Ireland is one letter and six months Anyone who laughed at Iceland's recent misfortunes had better realize that the joke is on them. In 2008, when its top three banks imploded, this tiny Nordic nation seemed headed for bankruptcy. But Iceland fought back--and won.

Still think the difference between Iceland and Ireland is one letter and six months? Anyone amused by Iceland’s recent troubles had better realize the joke is on them. In 2008, when its top three commercial banks imploded, this tiny Nordic nation of hot springs and potato schnapps seemed headed for bankruptcy. But Iceland fought back — and won. In a June report the Organization for Economic Cooperation and Development praised the Icelandic government for restructuring the country’s financial system and tackling a postcrisis deficit. The Paris-based OECD predicted 3 percent growth for Iceland in 2012. If there’s a lesson, it’s one that bailout-happy bankers and governments may not want to hear. OECD senior economist David Carey notes that Iceland is in better shape than Ireland partly because it let its banks go bust. “They didn’t have a choice; the banks were too big,” Carey says. “But a lot of the pain was borne by creditors of the banks rather than by taxpayers.”

Iceland is again borrowing on global markets — something many of its European cousins can’t do. Its economic recovery remains fragile, says Eileen Zhang, a sovereign analyst for Standard & Poor’s. But Iceland is unlikely to regret the day it broke the banks.

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