Currencies and Global Financial Crisis

Some countries, in order to prevent themselves from the crisis, try to use the power of globalization, and in order to improve their economic performances, they focus on increasing the standard of living in their countries. Such examples we have from Ireland and Iceland.

In the case of Ireland, it joining the EU in 1973 with Great Britain would make the country more attractive for the investors, and in the case of Iceland, it adopted the European legal framework and became a member of the European Economic Area in 1994 to increase the country’s economic performance through becoming closed to the other countries economically, also knowns as the spillover Principe.

The thing that happened in the case of Ireland was that it took advantage of the tax incentives to attract foreign investments, which directly affected the economic environment in the country and made Ireland one of the most attractive economic hubs.

What happened in the case of Iceland was that it was really affected by the aggressive investment strategies. It became more like a huge hedge fund, that was by the help of low taxes, light regulation, and minimal oversight from the government. As a result in both countries, at the beginning of the 2000s, we see that the asset prices started to grow dramatically. Stock or real estate prices went massively up, and the one that gained profits through it was the state coffers.

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Collapsing in a global financial crisis

As a result of the above examples, both their economies were facing excessive capital inflows and credit expansion.  Due to the fact that they both have different currency arrangements, they have different mechanisms of capital inflows and outflows. In the case of Ireland, because of being a member of the European Union, it was enjoying the low-interest rates and higher house prices made further borrowing possible.

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In the case of Iceland, we see that the country used high interest rates to keep its own domestic credit but it enlarged the speculative inflows, which made the currency appreciated more, while investors evaded the high-interest rates by borrowing in foreign currencies, that finally resulted in the sudden stop, collapsed exchange rate and other more. According to the https://topforexbrokers.net/ website, similar cases are taught very closely by the forex brokerage companies and try to analyze them, which helps them to more or less determine the future, upcoming trends, and what kind of impacts they might have on the economy and decision-making process of their clients.

Similar Macroeconomic Tendency

Even though the cases of Iceland and Ireland are remarkably similar, it is vivid that they had different currency arrangements. After reviewing several economic indicators and charts, it is visible that when the unemployment rate falls, investment and growth take off, even though the unemployment rate in Ireland is higher.

In the case of Iceland, they had a decreased wages, which also caused the unemployment rate to increase.

The importance of currency regime

Many experts believe that the fact that saved Ireland from the global financial crisis in 2008 was its membership in the Eurozone.  In save, we mean that it was left with the option for enough liquidity while in the case of Iceland, the banking system left the country without the proper service, and sovereign credit ratings badly affected the losses of the foreign creditors.

Not only the banking system collapsed in Iceland, but the whole non-financial businesses went bankrupt because their debts were dominating in the country. Even though we say that Ireland was the one that better survived the economic crisis, the cost of the crisis in the case of Iceland was 44% of GDP, versus 41 % in the case of Ireland.

The main reason for that is that due to the failure of the banking system in Iceland and the bankruptcy of the non-financial sector, there was the opportunity created for the pervasive debt restructuring to become possible.

Unconventional measures

As part of the IMF program, debt relief was undertaken in both countries and the foreign creditors appeared to be behind the capital controls. The capital controls had an impact such as transferring resources out of the country from the failed banks to households and the government.

The government also imposed legislation to make the tax requirements 31 % on the estate that allowed the creditors to walk away with the amount that was left in the failed banks.

These stories show very important and obvious lessons. Those two countries entered into global finance with an open economy. This policy with the low taxes and fewer regulations works very well in terms of a small market economy for the short run but can cos losses in the longer perspective.