the icelandic economic situation status report

Published on August 10th 2011

The IcelandicEconomic SituationStatus Report

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Iceland

Population:320,000

Capital:Reykjavík

Currency:Krona (ISK)Language:

Icelandic

Size:100,000 km2

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Part AThe Financial Crisis

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... with assets of the “big 3” banks 11 times Iceland’s GDP

In 2008, the banking sector had become gigantic ...

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Then, in October 2008, the “big 3” failed in 3 days

7 October 2008 Landsbanki fails

8 October 2008Glitnir fails

9 October 2008Kaupthing fails

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The financial crisis became a currency crisis ...

Exchange rate for one Euro

Capital restrictions imposed

Bank collapse

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... and the capital markets evaporated

90008000

7000

6000

5000

4000

30002000

1000

0

OMX Iceland 15 Index Performance, 1998-2008

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Political instability followed ...

... and the first left-wing government in over 30 years was elected

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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

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In addition to the “old” banks, a part of the “new” banks was placed in ownership of creditors

S

Landsbankinn(formerly NBI)

Arion bank Íslandsbanki

Creditors of Landsbanki Íslands hf

Creditors of Kaupthing Bank hf

Creditors of Glitnir bank hf

Resolution Committee

Kaupthing bank hf*

19%87% 95%

The FSA appoints the resolution committees

Icelandic State Financial Investments

Manages the state’s holdings

81% 13% 5%

Resolution Committee Resolution Committee

Landsbanki Íslands hf* Glitnir bank hf*

*) Old banks, in resolution processSource: Vilhjalmur Thorsteinsson

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The government also entered an IMF programme to reduce the fiscal deficit

24 October 2008The Icelandic government

reaches an agreement with the IMF on a stabilization program,

including a $2.1 bn loan

28 October 2009IMF's Executive Board

approves the 1st review of the Economic Recovery Program

16 April 2010IMF's Executive Board approves the 2nd review of the Economic

Recovery Program

29 April 2010IMF's Executive Board approves the 3rd review of the Economic

Recovery Program

11 January 2011IMF's Executive Board approves the 4th review of the Economic

Recovery Program

3 June 2011IMF's Executive Board approves the 5th review of the Economic

Recovery Program

31 August 2011Scheduled end of the Economic Recovery Program. A 6th and final review will be published

before the end of the program.

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Part BThe Current Landscape

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Iceland went into a recession ...

Real GDP, 2009 prices

... and public debt surged

Net public debt, % of GDP

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However, Iceland’s debt is manageable ...

... and Iceland has not defaulted on any loans

SwedenDenmark

SwitzerlandIceland

United KingdomTotal OECD

PortugalUnited States

Greece-2500% 0% 2500% 5000% 7500% 10000%Net public debt (% of GDP)

Source: OECD

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Homes struggle with higher unemployment ...

... and a lower living standard

Statistics Iceland’s Standard of Life survey

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Inflation reached 17% when the currency collapsed...

... but has stabilized again

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Despite the recession, Iceland still remains competitive compared to other economies

Globalization (KOF)Competitiveness (IMD)

Economic Freedom (Heritage)Property Rights (IPRI)

International Business (WEF)Innovation (BCG)

Innovation (INSEAD)Media Freedom (Freedom House)

181139

58191

177169

125183

125178

110167

132134

196

403130

2118171615

1111

42111

Iceland No. of countries

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Part CRecent Developments

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Debt restructuring of …

… and initiatives by the banks and the government have been put in place to

speed up the process

... households and corporations is ongoing…

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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

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An agreement was reached three times

Agreement between all

governements

Icelandic Parliament Approval

Signing of the President

of Iceland

Approval in a National

Referendum

Approval of UK and Dutch

governments

I

IIAgreement between all

governements

Icelandic Parliament Approval

Signing of the President

of Iceland

Approval in a National

Referendum

Approval of UK and Dutch

governments

IIIAgreement between all

governements

Icelandic Parliament Approval

Signing of the President

of Iceland

Approval in a National

Referendum

Approval of UK and Dutch

governments

(Jun ‘09 – Sep ’09)

(Sep ‘09 – Mar ’10)

(Feb ‘11 – Apr ’11)

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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

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Iceland’s current credit ratings

Aaa, Aaa1, Aaa2, Aaa3Aa, Aa1, Aa2, Aa3A, A1, A2, A3Baa, Baa1, Baa2, Baa3

Ba, Ba1, Ba2, Ba3B, B1, B2, B3Caa, Caa1, Caa2, Caa3Ca, Ca1, Ca2, Ca3C

AAA, AAA-, AA+AA, AA-, A+A, A-, BBB+BBB, BBB-, BB+

BB, BB-, B+B, B-, CCC+CCC, CCC-, CC+CC,CC-, C+C

Investment Grade

Speculative Grade

Outlook NegativeNegative

AAA, AAA-AA+, AA, AA-A+, A, A-, BBB+, BBB, BBB-

BB+, BB, BB-B+, B, B-CCC+, CCC, CCC-CC+, CC, CC-C+, C

Stable

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Since the crisis, the Central Bank has lowered interest rates ...

... and Iceland’s CDS spread is decreasing

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The Central Bank has introduced a plan to remove capital restrictions in two phases:

the plan will be complete at the latest by the end of 2015

Phase I Reduction of

offshore ISK positions

Phase IIRemoval of

onshore ISK controls

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The IMF fiscal consolidation program has reduced the deficit...

... and a budget surplus is projected in 2013

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Despite a deep recession ...

2007 2008 2009 2010 2011-10-8-6-4-202468 Real GDP change (%)

NorwayIcelandUKIreland

Greece

... Iceland has recovered relatively quickly

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Iceland has applied for membership of the EU …

… and formal negotiations started in June 2011

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Other notable eventsAn investigative committee released a report on the causes of the collapse ...

... and volcanic eruptions in 2010 and 2011 disrupted flights around the world

Image source: Flickr user fridgeirsson

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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

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Other notable eventsIn May 2011, another volcanic eruption disturbed flights in Iceland, the UK, Scandinavia and Germany…

… 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.

Images from www.visir.is

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Despite the crisis, Iceland’s future is bright

• An educated workforce• Natural resources in abundance• Innovative and competitive businesses

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The full report with further details is available atchamber.is/statusreport

A mailing list is available atchamber.is/mailinglist