What caused the economic crisis in Iceland

globalization

The global financial crisis, which began as a real estate crisis in the USA in 2007, has led to significantly slowed economic growth or to a recession almost everywhere in the world. For the first time since the Second World War, the real gross domestic product (GDP) of the economically developed countries shrank. And in the economically developing countries, GDP growth fell significantly. Due to the problems of numerous financial companies and the general loss of confidence, the crisis also affected the non-financial sector and led, for example, to a significant reduction in world trade.

Facts

The global financial crisis, which began in 2007 as a real estate crisis on the subprime market in the USA, has led to significantly slower economic growth or to a recession almost everywhere in the world. According to the International Monetary Fund (IMF), the real gross domestic product (GDP) of the economically developed countries fell in 2009 for the first time since the Second World War, by 3.4 percent compared to the previous year. And while the real GDP of the economically developing countries and the CIS increased by 8.5 and 5.8 percent respectively in 2007 and 2008 compared to the previous year, in 2009 it increased by only 2.8 percent. Worldwide, real GDP growth in 161 countries in 2009 was below the 2007 figure. In only 29 countries it was higher in 2009 than in 2007 - above all countries with little integration into the world market and relatively low GDP per capita. In 2007, real GDP growth in 147 countries was at least 3.0 percent. In 2009 this only applied to 61 states.

The financial crisis was triggered by the fact that the years of rising real estate prices in the USA, which had developed into a real estate bubble, stagnated and fell in some areas. With lending rates rising and resale values ​​falling, many borrowers were unable to pay their loan debt. Previously, the credit risks were bundled in securities (securitization) and traded worldwide. Speculation in credit derivatives had additionally increased the investment risks. The securitized real estate loans were initially rated by rating agencies as "low risk" - but in the course of the real estate crisis, the securities were rated increasingly poorly.

Several large American financial firms, either directly or indirectly active in the real estate sector through securitization, had to file for bankruptcy or be bailed out by the government in the wake of the crisis (Lehman Brothers, Merrill Lynch, AIG, Bear Stearns, Fannie Mae, Freddie Mac) . Rapid price falls on the global stock markets exacerbated the crisis and the interbank market almost completely came to a standstill worldwide. The shortage of liquidity in banks and the general uncertainty ultimately led to the crisis spreading to the non-financial sector. For example, global imports of goods fell in real terms - measured in constant prices - by 11.8 percent from 2008 to 2009. According to the IMF, the corresponding decline in exports was 11.2 percent.

Data Source

International Monetary Fund (IMF): World Economic Outlook (WEO), Oct. 2017

Terms, methodological notes or reading aids

The gross domestic product (BIP) measures the value of domestically produced goods and services (added value), insofar as these are not used as intermediate inputs for the production of other goods and services. GDP is currently the most important macroeconomic measure of production. Real GDP is independent of price changes, since it is calculated at the prices of a base year, i.e. in constant prices.

On the Subprime market Even borrowers with poor credit ratings can obtain a mortgage loan.

CIS - Commonwealth of Independent States / CIS - Commonwealth of Independent States

Information on the larger Financial crises since 1970 you'll find here...