By Constantine von Hoffman
March 30, 2012
Millions of Spaniards took to the streets on Thursday to protest another round of government spending cuts. Yet while the IMF and other global lenders have for decades used such austerity measures in bailing out debt-laden nations, there is considerable evidence that the policies don’t work. The most recent cases in point — the contrasting fortunes of Greece and Iceland.
Only four year ago, Iceland was an economic basket case. After going on a borrowing binge banks between 2001 and 2008, the country’s banks were $85 billion in debt, which equates to 700 percent of the nation’s GDP. As Michael Lewis wrote in his book “Boomerang,” Iceland represents a case in which “an entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, ‘We can do that.’ “
After the financial crisis struck in 2008, Iceland was effectively shut out of the international capital markets, making it impossible to borrow money to cover the country’s interest payments. By the start of 2009, the government had taken over its banks and became the first Western European nation since 1976 to take out a loan from the IMF. Then Iceland took the road less traveled — it declined to cover its banks’ debts. It forgave debt held by Icelandic citizens. It prosecuted bankers. It rejected austerity.