Speech by Iceland’s Minister of Industry, Energy and Tourism, Katrín Júlíusdóttir
Posted by IACC in NewsSep 18th, 2009Ladies and Gentlemen
It´s an honour to be invited to address your annual fall luncheon.
During times of world wide financial and economic crisis, advocates of trade and international cooperation, such as the Icelandic American Chamber of Commerce, play an important role, reminding us to reach out to one another instead of contracting into a shell of self-interest and protectionism.
It is especially important now that we hope to have sounded the bottom of the crisis and strive to create favourable conditions for renewed growth.
Soon a year has passed since we experienced the collapse of Iceland´s financial system, triggering a deep economic downturn and difficulties for both the industries and ordinary homes.
Some say our small independent economy was like the canary in the coal mine for the financial world.
If that´s the case I like to point out that this canary survived the serious incident last year, not unharmed, but currently in rehab and hoping for a full recovery.
I am not going to dwell long on the reasons for the collapse of our financial institutions as I understand you discussed those in some details during your meeting in New York last March.
For now I will just say that it was a mixture of internal economic and financial imbalances and unfavourable external factors.
We are a modern globalized economy, and an active participant in the EU´s common market.
In our small economy, using the world’s smallest independent floating currency we had an international banking sector which had grown to having total assets of more than ten times our annual GDP.
Despite the renowned flexibility of the Icelandic economy the risk was perceived as being too great and after the global credit crunch and liquidity crisis had brought down several large international banks, especially Lehman Brothers, funding for our banks dried up.
Additional external factors include the controversial use of an anti-terrorist legislation against Icelandic interests by the British government.
I want to focus on Iceland´s strategy following the crisis, what has been achieved and the future outlook.
Looking back over the last year the word REFORM stands out.
In almost every field we can see reform and changes, in fact incredible changes.
These reforms are political, administrative, regulatory or legislative, economic and regarding the investigation into the collapse and its causes.
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In the political field there have been great changes.
The coalition government consisting of the Independence Party and the Social Democratic Alliance, wich had to deal with the immediate aftermath of the financial collapse, faced a bitter winter of discontent.
After passing the emergency banking legislation, drafting a plan for economic recovery and entering a two year Stand by Arrangement with the International Monetary Fund the government faced growing unrest.
Icelanders, not easily provoked, took to the streets carrying pots and pans to drum the beat to chants demanding the resignation of the government, directors of the Central Bank and the Financial Supervisory Authority.
A major demand was for a general elections to be held so the nation could decide who should lead the reconstruction.
These mainly peaceful demonstrations have been referred to as the kitchenware revolution.
In January our minister of commerce asked the director of the FSA to resign and then stepped down himself.
One day later the prime minister announced the resignation of the coalition government of the Independence Party and the Social Democratic Alliance.
In early February a minority government of the Social Democratic Alliance and the Left-Green Movement took office, led by Johanna Sigurdardottir, the first woman to become prime minister in Iceland.
Johanna appointed two non-partisan professionals as minister of commerce and minister of justice, the posts concerning on the one hand the banks and the Financial Supervisory Authority and the investigation by a newly appointed special prosecutor into the financial collapse on the other
This government announced that it would mainly focus on urgent measures before calling general elections in early spring.
These elections and the campaign leading up to them changed the political landscape in Iceland considerably.
Three of the four major political parties also saw their leaders step down and new leaders take over before the elections.
The parties forming the minority government won a clear majority in the parliament.
The Social Democratic Alliance emerged as the biggest party with Johanna Sigurdardottir as leader and prime minister for a new coalition government determined to lead the resurrection of the economy while earning Iceland a place as one of the Nordic welfare states.
Iceland´s smallest political party lost all representation while a new movement formed out of the kitchenware revolution won four seats.
27 out of a total of 63 members of the parliament were newcomers.
And this newly elected parliament has worked flat out since.
I believe this is the first time in our history that the parliament doesn´t take any break during summer.
Key officials in all goverment offices have hardly been allowed any summer holidays.
So these have been busy times, often hard but interesting.
Looking back to these times of change the kitchenware revolution, subsequent change of government and elections are symbols of political stability rather than unrest.
The changes were peaceful and democratic in nature despite a rather grave situation with fast growing unemployment and debt burdening households and companies.
Another example of this social cohesion is the so called stability pact made between the trade union movement, the employers association and the government.
This unique pact contains agreement on wage restraint, large scale projects to reduce unemployment and counteract the economic recession and the participation of the large pension funds in financing necessary projects.
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Structural reform, both administrative and legislative, has been a key issue and we are active in reform processes both domestically and abroad.
Although Iceland became a victim of the international credit crunch, it is clear that we made our own mistakes.
The banks overextended themselves and we now realize that authorities should have fulfilled their supervisory role more vigorously.
I firmly believe that a nation ones burnt by a crisis of this magnitude is committed to prevent the same mistakes being repeated.
The Government has actively participated in discussions and work at the European level on how to restructure the financial markets supervision in Europe.
Iceland sent to the European Commission comments on the proposals made in the Larosiére report on how to address the financial meltdown and the actions necessary to remedy the crisis on the European level.
Iceland has also sought the assistance of – and benefited from the advice of – the international community.
Renowned international experts have worked with Icelandic experts in the reform process domestically.
With new legislation the Central Bank governance has been changed, with one governor and a deputy governor appointed through a rigorous process replacing three previous governors.
A Monetary Policy Committee has been appointed, with 2 external academics, to take monetary policy decisions.
The bank’s independence has thus been strengthened further.
A new board and director of the Financial Supervisory Authority (FME) has been appointed.
Wide-ranging regulatory reform has also taken place in order to strengthen financial supervisory authorities.
A new Ministry for Economic Policy is being formed.
Both the Central Bank and the Financial Supervisory Authority will now fall under the purview of this ministry (without reducing the Central Bank’s independence).
This will hopefully increase cooperation between the two institutions responsible for financial stability.
Fiscal rules used in preparing and executing the budget have been – and will be further – strengthened.
A more long-term view is to be secured.
Economic forecasts underlining the budget will be done within the independent Statistical Office rather than within the Ministry of Finance.
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Economic reform is a major issue for us.
After the collapse of 95% of the banking sector we experienced a severe currency crisis along with the financial crisis.
The Icelandic króna dropped 50%.
The devaluation has both negative and positive consequences.
On the downside it fuels inflation and balloons the foreign currency denominated debt of companies and households.
Around 70% of all corporate debt in Iceland is in foreign currencies so this creates real difficulties in our economy.
As most domestic mortgages in Iceland are indexed the inflation also affects the debt burden of ordinary households.
On the positive side the devaluation sharply reduces demand for imported goods and services and thus quickly restores balance of external trade.
The competitiveness of domestic goods and the export sector is also greatly enhanced.
A general drop in purchasing power spreads the cost of these changes evenly among all citizens.
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The Government is fully committed to the stabilization program of the IMF and the macroeconomic outlook remains broadly in line with what had been planned.
The focus is on three major issues:
- stabilizing the exchange rate,
- revising fiscal policy
- and restructuring the banking sector.
To support the Icelandic króna, the Central Bank initially raised its policy rate to 18% but has since then reduced the rate to 12% and we expect it be lowered faster with less inflation.
We secured a loan of total 5 billion US Dollars from the IMF, the Nordic Countries, Russia and Poland.
These loans are to bolster the Central Bank’s currency reserves.
The Central bank has also imposed capital controls in full co-operation with the IMF.
The Central Bank has now introduced a plan to start easing the controls in a controlled process that may take months.
The government has approved a medium-term fiscal plan to bring government finances from a 13% deficit in 2009 to a surplus by 2012. A tough but an important step.
A number of tax increases and expenditure cuts have been announced – nearly evenly divided.
Adhering to this plan is indeed a painful experience but we believe the IMF program is vital for re-establishing confidence in our economy.
The struggle is to reach the strict fiscal goals while still keeping the social security net intact for those worst off in society.
We are also committed to those projects and funds needed to encourage economic growth and innovation.
The demand for debt restructuring for households and companies has been strong.
The government has ruled out a general debt relief but has instead strengthened resolution mechanism and assisted individuals in keeping their homes despite growing debts.
With the refinancing of the new Icelandic banks almost finished a renewed effort has been put into finding new solutions to ease the debt burden of households.
New measures will be introduced as soon as the parliament reconvenes early October.
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Restructuring the Banking sector is in its final stages.
This has been an enormous task.
To secure payments system and continuation of domestic banking services following the largest banking crisis faced by any country, the government decided to carve out of the three old banks their domestic parts, amounting to around quarter of their size before the crisis.
Their foreign operations are now being liquidated.
All domestic deposits were moved to the new banks and all domestic loans to secure the viability of the economy.
Other creditors of the Old Banks are to be paid for the net assets transferred from the Old to the New Banks.
Solvency issues related to the old banks are being dealt with by special Receivership Committees.
Iceland remains fully committed to internationally recognized principles of transparency and fair treatment of creditors.
The process is under the supervision of respected international auditors to ensure best practices.
As you can imagine the collapse of a nation’s whole banking system leaves some mess but we have been doing our best to sort it out., task by task
Agreements have been reached on compensations for two of the Old Banks and I hope they will be taken over by their former creditors any day now.
One particular solvency issue regards the now infamous Icesave internet deposits in the UK and the Netherlands.
The Icelandic parliament recently passed a bill allowing the government to back 5.5 billion dollars in loans from the U.K and the Netherlands to the Icelandic Deposit Guarantee Fund to repay funds lost by foreign depositors in the collapse of Landsbanki Islands hf.
This state guarantee is the single largest financial commitment the Icelandic state has undertaken but is in line with our firm stance of honoring all our international obligations.
The parliament made the state guarantee subject to certain criteria and preconditions, aimed at ensuring debt sustainability and allowing Iceland to restore its financial system and its economy while at the same time honoring our obligations.
We have had constructive discussions with the British and the Dutch on how to resolve the issue on the basis of Althingi´s restrictions and the loan agreements.
You may have heard that these discussions will continue because one of the constrictions is not being recognized by the British and the Dutch.
Optimistic that it will be resolved.
We are now awaiting the second review of the economic plan and its progress by the board of directors of the IMF.
With bank restructuring in place and the solvency issues solved or in the final stages the plan is broadly on track while things have taken a little longer than expected at first.
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Ladies and gentlemen
In my opinion the sentiments in Iceland regarding the Icesave obligations are closely linked to another important issue and that is justice.
People loosing their jobs and seeing their debt burden grow ask themselves “How could this happen”? The next question is: “Who is responsible”?
Answering these questions is a very important part of the whole process.
The roots of the crisis and first reactions are being studied by a expert committee appointed by the parliament.
The report will be published in November.
A special prosecutor´s office is also investigating possible wrongdoings in leading up to the crises, assisted by foreign specialists and cooperation with authorities abroad.
The Financial Supervisory Authority has also established a forensic unit.
Our foreign experts have adviced us to be patient as an investigation will take time and is not to be hurried.
While finger pointing and early prosecution might bolster support for some of the difficult tasks the government is undertaking I believe that in the long run it is in the general interest of us all to wait for the whole picture to emerge.
That will be an important healing process for the whole society.
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So, this is how far we have come this eventful year.
We hope to be sounding the bottom of the crisis like so many other nations.
Despite unprecedented rise in unemployment and public debt, other economic data seem slowly to be developing in our favour.
The balance of trade with other countries is now positive, foreign exchange revenues are gradually increasing, inflation is going down, and interest rates are expected to be lowered further.
The Central bank has introduced its plan of relieving the currency controls.
But there is no doubt in my mind that this winter will be a hard one.
Unemployment is expected to peak early next year at over 10%.
For households already facing difficulties the debt burden will be even heavier.
Even more strict fiscal measures are needed at the same time.
This will be the time to stick together and come through ready to work for a renewed economic growth.
Economic forecasts agree that this year will be a year of contraction and 2010 likely a year of stagnation, but that economic growth should pick up in 2011
With the major steps in the economic plan behind us we must now look towards the future.
In mid-July the parliament empowered the government to apply for membership of the European Union and to hold a national referendum on a prospective Treaty of Accession.
What we are seeking is long-term stability, which one might argue we have never had, regardless of this financial crisis..
EU membership and later adopting the euro as a currency is a crucial part of Iceland’s strategy towards economic recovery.
We believe that gaining the formal status of a candidate country will strengthen Iceland´s economic recovery.
It is a natural step for Iceland as a European nation and given the already deep and long-standing participation in the European integration process.
We share the EU’s core values of democracy, human rights and the Rule of Law and are proud exponent of the European model, based on strong democratic institutions, free market economy, environmental protection and social cohesion.
But while looking towards the EU I want to note that the EU application and possible membership will not affect business with non-EU states.
I hope we will still enjoy the good relations to the west as we have done in the past.
The main challenges we face regarding EU membership will be the Common Fisheries Policy.
We are the only European country in which fisheries is practically the backbone of the economy and this is also the first time that a country so dependent on fisheries enters into accession talks.
We are not expecting any special treatment by the EU but remain hopeful that the application process can be completed relatively quickly.
This is because we have already adopted more than 2/3 of Community legislation through the EEA Agreement, have been in the internal market for 15 years and are full members of the Schengen cooperation since 1996.
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Ladies and gentlemen
We all know that the only sure way out of an economic crisis is by creating value and export revenues.
I have the privilege of serving as minister of industry, energy and tourism which is sometimes referred to as the ministry of opportunities and innovation these days.
Despite Iceland´s damaged reputation in the financial world we have discovered that our reputation in the field of renewable energy and its utilisation is intact.
We have been approached by several foreign companies interested in green field projects in Iceland, based on our energy resources.
Many of these projects involve using our green energy for operations aimed at diminishing the need for fossil fuels, e.g. by producing silicon for solar panels or by running more eco friendly server farms.
Foreign direct investment in Iceland is of great importance to us right now; as a needed stimulus for the economy, as means to increase employment and as a vote of confidence in our economy.
The government is doing its part to facilitate the realisation of such projects.
We have been signing investment agreements where we offer a certain stability in the operational and tax environment.
And soon we will take the next steps by introducing a framework legislation for the incentives offered.
A framework legislation will not only make it easier to promote Iceland as an investment opportunity abroad but will also simplify all the work involved in preparing projects and enable investors to assess the opportunities in a itransparent environment.
The great challenge is financing neccessary projects.
Fortunately we do have large pension funds willing to participate but in my opinion we should welcome partners from abroad as they could help us approach international financial institutions.
Tourism from US to Iceland is doing very well at the moment. We are certainly faced with new challenges, with the world economic turmoil. However, due to the devaluation of the Icelandic krona, Iceland is suddenly in a new position. We are a very economic destination. This is very new to us, believe me. The Icelandic tourism industry was very fast to realise the marketing potential in this and since last fall the message to the market has been adjusted to this fact. Icelandair the Icelandic tourist Board and Iceland Naturally have been instrumental in this respect, showing great foresight when they boosted their marketing activities in certain markets to take advantage of these new and exciting opportunities.
I would also like to mention Icelandair´s new route, direct flights from Seattle to Iceland, which Icelandair opened this spring. We are already seeing the impact of the Seattle flight in our tourism numbers and all in all travel from the US to Iceland is up 7% this year, compared to a almost 10% decrease for the rest of Europe. This simply means that we are increasing our market share, which is extremely important during these turbulant times.
So despite the rather bleak short-term outlook, with rising unemployment and public debt, we believe we have positive long-term prospects for recovery.
Iceland’s fundamentals remain strong.
Sustainable use of clean energy and marine resources backed by a good infrastructure, culture of innovation, a young and well educated workforce and large pre-funded pension funds, work in our favour.
International institutions such as the World Economic Forum write that despite the current difficulties and a drop of six places in competitiveness, to number 26, the sound competitiveness fundamentals displayed in key areas will hopefully ease the recovery and allow the Icelandic economy to bounce back more rapidly.
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To wrap this up:
The government sincerely appreciates allt the strong support and solidarity that has been shown.
We are cautiously optimistic about our economy’s long-term prospects but want to assure that Iceland is open for business.
Thank you for your patience.
