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Greece and other euro zone nations involved in the on going debt crisis should consider taking similar steps to how Iceland handled its crisis in 2008, a former Icelandic investment banker told Business Insider.The banker said Greece should just go ahead and let its banks default just like Iceland did.
“The biggest problem is everyone thinks we can add to government liability and roll it forward.”
He doesn’t think adding to government liability will work though.
“If you delay the pain, you dampen growth. It’s like a band aid, just take it off.”
He acknowledged that it won’t be an easy task.
“It will be a painful five to 10 years, but they will only extend the problems by not taking the pain.”
He pointed to Iceland as an example and said the country has been able to move forward and begin to rebuild its economy.
In 2008, Iceland, which has a population of about 320,000, became embroiled in a massive financial crisis.
What happened was Icelandic banks, which owed more than six times the country’s GDP in debt, became insolvent when the world’s credit markets dried up.
As a result, the banks couldn’t pay their loans back.
Unlike the U.S. which used taxpayer money for bank bailouts, Iceland’s government chose to let the banks default.
“‘Too big too fail’ didn’t apply in Iceland,” the banker said. “It was ‘too big to be rescued.'”
Iceland’s banks ended up defaulting on a whopping $85 billion.
As expected there were economic severe consequences that followed.
Despite going through the largest economic crisis in history, today Iceland’s economy is expected to experience 3% growth by 2012, according to the OECD. What’s more is Iceland’s budget deficit seen falling below 3% of the country’s GDP this year and experiencing a small surplus by 2013.
It’s important to take into consideration that Iceland is a lot different from other euro zone nations. Iceland has its own currency, the krona, instead of being tied to the euro. It also has a smaller population compared to Greece’s 11.3 million.
But the point the Icelandic banker makes is Greece has to deal with its problems now rather than later.
“Greece is just shoving it under the carpet. Greece will not be able to pay,” he said.
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