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On Iceland's financial crisis Fantauzzo, Shaun


The global financial crisis has provoked a robust debate in international political economy literature. Existing studies afford readers with a thorough analysis of the impacts of neoliberalism and market fundamentalism, both of which are regarded as determinants of economic and political volatility. These studies identify a relationship between financialization and volatility that is encouraging as it permits for a more qualitative assessment of global phenomena, therefore facilitating a greater understanding of country-level experiences of the global financial crisis, of which there exists substantial and puzzling variation. Iceland’s financial crisis is an example of this variation. Though Iceland’s financial liberalization occurred during an era of unprecedented international financialization, this does not explain why Iceland’s government prohibited foreign competition, nor does it explain the rapid, astronomical growth of Iceland’s banking sector between 2002 and 2008. Furthermore, Iceland’s refusal and subsequent inability to honor foreign debt obligations represents a new development that merits addition consideration. These discrepancies provoke a number of questions regarding the impact that Iceland’s institutional structure has on domestic and international developments, such as the liberalization of its financial sector and the financialization of the global economy. This suggests not that Iceland’s financial crisis is a purely domestic phenomenon, but rather that domestic institutions played a unique role in exacerbating the impact of neoliberalism and market fundamentalism. I develop a conceptual framework informed by Mancur Olson’s theory of ‘institutional sclerosis’ to reveal the institutions that pre-dated Iceland’s financial collapse and argue that Iceland’s corporatist structure is conducive to capture, resulting in a disproportionately overextended banking sector. In addition, I summarize the events of Iceland’s debt negotiations to provide a more comprehensive understanding of what influenced Iceland’s politicians to provide continued support for honoring foreign debt obligations despite a clear ‘no’ mandate afforded by Icelanders in both referendums, as well as why Iceland honored foreign debt obligations altogether, allowing for proper conclusions to be drawn about Iceland’s recovery model and its implications for existing theories in the fields of international political economy and global governance.

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