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The Icelandic Economic Situation Status Report. Published on August 10 th 2011. Iceland. Currency: Krona (ISK). Language: Icelandic. Size: 100,000 km 2. Capital: Reykjavík. Population: 320,000. Part A. The Financial Crisis.
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The IcelandicEconomic SituationStatus Report Published on August 10th 2011
Iceland Currency: Krona (ISK) Language: Icelandic Size: 100,000 km2 Capital: Reykjavík Population:320,000
Part A The Financial Crisis
... with assets of the “big 3” banks 11 times Iceland’s GDP In 2008, the banking sector had become gigantic ...
Then, in October 2008, the “big 3” failed in 3 days 7 October 2008 Landsbanki fails 8 October 2008 Glitnir fails 9 October 2008 Kaupthing fails
The financial crisis became a currency crisis ... Exchange rate for one Euro Bank collapse Capital restrictions imposed
... and the capital markets evaporated OMX Iceland 15 Index Performance, 1998-2008 9000 8000 7000 6000 5000 4000 3000 2000 1000 0
Political instability followed ... ... and the first left-wing government in over 30 years was elected
The failed banks were split into “old” and “new” banks ... ... with Icelandic operations transfered to “new” banks and international operations staying in the “old” banks
In addition to the “old” banks, a part of the “new” banks was placed in ownership of creditors Creditors of Landsbanki Íslands hf Creditors of Kaupthing Bank hf Creditors of Glitnir bank hf Landsbanki Íslands hf* Kaupthing bank hf* Glitnir bank hf* S ResolutionCommittee ResolutionCommittee ResolutionCommittee The FSA appointstheresolutioncommittees Arion bank Landsbankinn(formerly NBI) Íslandsbanki 87% 95% 19% 81% 13% 5% IcelandicStateFinancialInvestmentsManagesthestate’s holdings *) Old banks, in resolution process Source: Vilhjalmur Thorsteinsson
24 October 2008 • The Icelandic government reaches an agreement with the IMF on a stabilization program, including a $2.1 bn loan • 11 January 2011 • IMF's Executive Board approves the 4th review of the Economic Recovery Program • 31 August 2011 • Scheduled end of the Economic Recovery Program.A 6th and final review will be published before the end of the program. • 16 April 2010 • IMF's Executive Board approves the 2nd review of the Economic Recovery Program The government also entered an IMF programme to reduce the fiscal deficit • 28 October 2009 • IMF's Executive Board approves the 1st review of the Economic Recovery Program • 29 April 2010 • IMF's Executive Board approves the 3rd review of the Economic Recovery Program • 3 June 2011 IMF's Executive Board approves the 5th review of the Economic Recovery Program
Part B The Current Landscape
Iceland went into a recession ... Real GDP, 2009 prices Net public debt, % of GDP ... and public debt surged
However, Iceland’s debt is manageable ... Net public debt (% of GDP) Source: OECD ... and Iceland has not defaulted on any loans
Homes struggle with higher unemployment ... Statistics Iceland’s Standard of Life survey ... and a lower living standard
Inflation reached 17% when the currency collapsed... ... but has stabilized again
Despite the recession, Iceland still remains competitive compared to other economies
Part C Recent Developments
Debt restructuring of … ... households and corporations is ongoing… … and initiatives by the banks and the government have been put in place to speed up the process
One of the failed banks operated the online savings bank Icesave in the UK and Netherlands The UK and Dutch governments demanded an Icelandic state guarantee to reimburse the deposits
An agreement was reached three times I (Jun ‘09 – Sep ’09) II (Sep ‘09 – Mar ’10) (Feb ‘11 – Apr ’11) III
After Icesave III was rejected, the matter is now with the EFTA Supervisory Authority (ESA)It is estimated that the UK and Dutch governments will receive approximately 94% of their claim from the estate of the failed Landsbanki Icesave aftermath
Iceland’s current credit ratings Aaa, Aaa1, Aaa2, Aaa3 Aa, Aa1, Aa2, Aa3 A, A1, A2, A3 Baa, Baa1, Baa2, Baa3 Ba, Ba1, Ba2, Ba3 B, B1, B2, B3 Caa, Caa1, Caa2, Caa3 Ca, Ca1, Ca2, Ca3 C Investment Grade Speculative Grade Stable Negative Outlook Negative
Since the crisis, the Central Bank has lowered interest rates ... ... and Iceland’s CDS spread is decreasing
The Central Bank has introduced a plan to remove capital restrictions in two phases: Phase I Reduction of offshore ISK positions Phase II Removal of onshore ISK controls the plan will be complete at the latest by the end of 2015
The IMF fiscal consolidation program has reduced the deficit... ... and a budget surplus is projected in 2013
Despite a deep recession ... Real GDP change (%) Norway Iceland UK Ireland Greece ... Iceland has recovered relatively quickly
Iceland has applied for membership of the EU … … and formal negotiations started in June 2011
Other notable events An investigative committee released a report on the causes of the collapse ... Image source: Flickr user fridgeirsson ... and volcanic eruptions in 2010 and 2011 disrupted flights around the world
Other notable events In 2011, a three year wage contract was signed for the bulk of Iceland’s workers ... ... and in 2010, a constitutional assembly was elected to reform the constitution
Other notable events In May 2011, another volcanic eruption disturbed flights in Iceland, the UK, Scandinavia and Germany… Images from www.visir.is … but the eruption is now over and nobody was harmed. The impact of the eruption on daily lives was minor outside area close to the volcano.
Despite the crisis, Iceland’s future is bright An educated workforce Natural resources in abundance Innovative and competitive businesses
The full report with further details is available atchamber.is/statusreportA mailing list is available atchamber.is/mailinglist