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Iceland GDP growth 2004

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It was mainly caused by heavy borrowing (specifically short term, foreign borrowing).


That borrowing (which continued for several more years) was ill-advised. The reason why it was done anyway is that the model the Icelandic financial system is built on is fundamentally flawed. Not because, as socialists would tell you, the market can't regulate itself, but because the market can't regulate a government run financial system.

And Iceland's financial system is, and has been all along, government run. The government prints the currency, sets interest rates, is the de facto insurer of banks if they were to fail, has regulatory power over everything, etc. That's not a free market. Not even if the government chose to neglect to watch over what happens with the money they are printing and backing.

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