A Tale of Two Crises: Greece and Iceland

In the fall of 2008, Iceland suffered a severe shock when its largest banks collapsed. The size of the shock was enormous relative to the size of the economy The Icelandic government immediately began addressing the difficult problems that arose, entering into an IMF program in November 2008. In the fall of 2010, the newly elected government of Greece announced that its predecessor had misreported and hidden the true magnitude of the prospective fiscal deficit (over 15 percent of GDP) for the fiscal year then in progress.  Greek government debt was already over 100 percent of GDP. Markets immediately closed. The government initially sought support from its fellow Eurozone members, but the Europeans quickly brought the IMF into the picture, and a “troika” of the Eurozone members, the European Central Bank and the IMF worked jointly to support Greece.

The paper begins with a very brief outline of the background of the two economies.  Thereafter, focus turns to the IMF programs, other policy measures, and the results. But it is not enough to describe planned reform measures; implementation was very important and is a key difference between the outcomes for the two countries.  A conclusion assesses the reasons for the striking differential in performance.