THE VOICE OF INTERNATIONAL LITHUANIA
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Lithuanian President Dalia Grybauskaitė with the Ambassador of Iceland, Elin Flygenring.
The Icelandic government failed to convince its own citizens in the elections this weekend, and the conservative opposition claimed poll win as voters returned parties that ruled over 2008 financial collapse back to power.
But the present Icelandic government has, nevertheless, something important to teach the eurozone, according to an Icelandic economics professor.
While droves of businesses have had to close its doors in Euro cities like Rome and Athens, the business community in Reykjavik avoided mass death. But it could have gone differently, says economics professor Thórólfur Matthíasson at the University of Iceland.
He has called the crisis that hit Iceland in 2008, the perfect storm. A financial sector ten times larger than Iceland's GDP collapsed. The Icelandic krona lost over half the value. Inflation rose far and fast.
Up to 90 percent of Icelandic companies were in danger of getting bankrupt, but many of them could point to future, long term opportunities. The solution Iceland chose, and Matthíasson participated in, was to facilitate the corporate debts.
Both government, banks and individuals went into talks about impairment. The result was win-win, says Matthíasson.
Banks got customers who could handle their debts. Businesses avoided extensive closures. Icelanders avoided unemployment and social deprivation.
- The banks could have pushed for bankruptcy in many companies, but have instead really done their very best to look for common sense in the matter, says the economics professor.
- Firms are left with the maximum debt burden they can bear, but without getting any gift of money from the banks, he maintains.
Something similar was done for a number of individuals and families who were in danger of bankruptcy, often with debts of 110 percent of the value of their properties written down.
- It has helped those who bought when house prices were at their highest, says Matthíasson.
- In this way we avoided that a bad situation became even worse. It is the Icelandic way, he says and believes many European governments and creditors would do well to study this direction of choice.
But there are still many families who are struggling under a heavy debt burden, and Icelanders are tired of the harsh emergency. Saturday voters punished governing parties in everything choice.
While several European countries still are struggling with recession, Iceland is again growing. Matthíasson is optimistic on the economy's behalf.
- We work a lot more than the average Norwegians and Danes, but by working more, we have managed to keep up the standard of living. And we should not forget that unemployment is at 4-5 percent, which is far below what is the case elsewhere, says the economics professor.
- The conditions are there, the question is whether we have the sense to do the right thing out of it, he says and thinks bad management could cost much.
Iceland, five years after the crisis continue strict capital controls, which puts severe limitations on industry opportunities abroad.
There is no normalization in sight as long as capital controls are there. And there's no good plan for how it will be removed, according Matthíasson and think it's going to stay like that for years.
- If we do not enter currency cooperation with others, it will take us a very long time. All in all, this will be a project of 20 to 30 years. We may not have as strict capital controls at the end of the period, but the first ten years certainly, he says.
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