Iceland's President: We Let the Banks Fail and We're Better Off For It

Iceland President Olafur R. Grimsson, in an interview with Bloomberg, said his country was much better off because it refused to bail out the banks and allowed them fail. "The difference is that in Iceland we allowed the banks to fail," Grimsson said. "These were private banks and we didn't pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks."

Earlier this year when the Icelandic government negotiated a draconian bailout agreement which was approved by the Icelandic Parliament, it was Grimsson, who as President exercised his right to put the issue as a referendum before the people, who overwhelmingly rejected it.

"Iceland is faring much better than anybody expected," Grimsson said. The Icelandic state's liability on foreign depositor claims stemming from Icesave accounts at the failed Landsbanki Islands hf should be put to a national referendum, he said. "How far can we ask ordinary people — farmers and fishermen and teachers and doctors and nurses — to shoulder the responsibility of failed private banks," said Grimsson. "That question, which has been at the core of the Icesave issue, will now be the burning issue in many European countries."

After Iceland rejected the deal, the IMF eventually relented and began to release a $4.6 billion IMF-led loan. Now Grimsson said the government may not need the entire amount. Iceland's bankrupt banks were split, such that the $85 billion owed to foreign creditors was separated from the banks' domestic operations so as to allow them to serve the national economy.