In 2008, Iceland was struck hard by a financial crisis.Instead of bailing out its banks using taxpayer funds like the United States did, Iceland let its bank default.
Some economists, such as Joseph Stiglitz and Paul Krugman, now think that letting the banks default was the right thing to do for Iceland’s economy, and some see it as a model for other debt-stricken European nations.
Others aren’t so sure.
Here’s your guide to the Icelandic crisis, and what its lessons for the rest of Europe.
Icelandic banks owed more than six times of the country's GDP in debt, and when the world's credit markets dried up, they could not pay their loans back.
The banks ended up defaulting on more than $85 billion.
20/20 did a special called 'The Icelandic Financial Crisis in 6 minutes' in which they argued that Icelandic banks borrowed more than they could afford and gave out bad loans without giving out stringent enough credit checks.
The UK and the Netherlands pushed for Iceland to pay back the $6 billion its citizens lost when Icelandic banks failed.
Some British and Dutch citizens had money in Icelandic banks because of the high interest rate the banks offered, but when the banks collapsed, Iceland could not insure their assets.
The UK and the Netherlands are currently suing Iceland for failure to repay these debts in the European Court of Free Trade.
Source: The New York Times
The collapse in the Icelandic krona means that prices for items that have to be imported soared. Icelanders who took out loans in foreign currency have had their mortgages double or triple because of the fluctuation in their currency.
Icelanders saw an 18% slump in their disposable income in 2009.
Iceland is unique for a couple of reasons.
First, Iceland was not too big to fail. Its population is 329,000, about the size of St Louis.
Also, unlike Ireland, Greece or Portugal, Iceland has its own currency--the kronur. Iceland can devalue its currency in a way that Eurozone members cannot.
Icelandic Finance Minister Steingrimur J. Sigfusson said that:
'People should be careful when it comes to drawing comparisons between Iceland on the one hand, and Greece, Portugal, Spain and Ireland on the other. Iceland didn't have the ability to save the banks. Trying to rewrite the events that led to that eventuality as some sort of an export product is irresponsible.'
There are those who wish to see Iceland join the eurozone. The OECD recently argued that currency shocks would be easier for Iceland to withstand if it were part of the eurozone.
And as recently as May, the governor of Iceland's Central Bank said they were still interested in joining the eurozone, despite the region's current woes.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.