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Document Type

Case Studies

Abstract

On September 29, 2008—two weeks after the collapse of Lehman Brothers—the government of Ireland took the bold step of guaranteeing almost all liabilities of the country’s major banks. The total amount guaranteed by the government was more than double Ireland’s gross domestic product, but none of the banks were immediately nationalized. The Icelandic banking system also collapsed in 2008, just one week after the Irish government issued its comprehensive guarantee. In contrast to the Irish response, the Icelandic government did not guarantee all bank debt. Instead, the Icelandic government controversially split each of the three major banks into a new bank that was solvent and held all domestic assets and deposits, and an old bank that retained everything else and was placed into bankruptcy. Given the different responses of the Irish and Icelandic governments to the crisis and the different economic adjustment options afforded by the currency regimes of each country, economists have looked at Ireland and Iceland to study possible responses to other financial crises.

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