While the eurozone economy stalls and austerity fatigue sets in for countries whose economies are shrinking faster than their debts, Iceland is attracting lots of praise for its strong performance, as it emerges from the deep recession that accompanied the banking collapse of 2008 and 2009.
Moody’s estimates that the Icelandic economy will grow by 2.5% this year and the same next, following 3% growth in 2011. It suggests that total government debt to GDP peaked last year at 117% and is on track to fall to 94% next year, when it estimates the annual budget deficit will shrink to 1.2% of GDP, having been 9% for 2010 and 2009 and 13.5% in 2008.
It’s a small economy, vulnerable to external shocks, but that’s quite a turnaround, in line with the fiscal consolidation achieved by Nordic countries after the banking crisis of the early 1990s often held up as a model for eurozone economies.
There are risks, of course, around possible capital flight when Iceland eventually lifts capital controls and continuing uncertainty over prior claims of international bondholders that were subordinated by emergency measures when the country’s banks collapsed. These are now being pursued in international courts.
In a credit opinion published last month, Moody’s cited as positives the recent overhaul of the country’s banking system and strengthened institutions.
International investors should pause and reflect, however, before the cheering for Iceland gets too loud. A worrying reminder of the country’s recent past echoes in moves under way last month to sack the lead regulator for the country’s banking system.
Gunnar Andersen, former managing director of international banking and treasury at Landsbanki who left that bank several years before it was plunged into crisis along with domestic peers, returned in 2009 as director general of the FME, Iceland’s financial supervisory authority, with a remit to strengthen oversight of the financial system so as to prevent any repeat of the crisis. He also played a crusading role in calling to account many of those individuals whose misdemeanours had destabilized the banks in the first place.
In three years, the FME sent 77 cases to the Icelandic special prosecutor with allegations against almost 200 individuals ranging from fraud, false reporting, insider trading and extensive market manipulation spanning many years to outright theft. It’s a record to make the much larger and better-staffed regulators of other nations caught up in the banking collapse of 2008-09 blush. A former permanent secretary of the ministry of finance was recently sentenced to two years’ imprisonment and many more cases remain to be heard.
Andersen was perhaps too zealous for comfort for certain powerful figures in the country’s political and banking elite. Accusations have been tabled that he himself provided inaccurate reports 10 years ago when asked to sign a letter disclosing all the offshore subsidiaries of Landsbanki, shortly after it had acquired Heritable in the UK among other assets. His accusers cite a failure to include in the list two offshore trusts that controlled shares to compensate Landsbanki staff under share options schemes. Andersen says he omitted them from the list because the bank was not their legal owner and after taking advice from Landsbanki’s then auditors and from the stock exchange of Iceland that to include them would be inappropriate.
The board of directors of the FME has retained two Icelandic lawyers to investigate the affair. They have found that no law was broken.
Contacted by Euromoney, the permanent secretary of the ministry of economic affairs agrees that the FME under Andersen has done an excellent job but says that an issue of trust has emerged between him and the board. This issue, pitting the board of the country’s regulator against its director general, remained unresolved as Euromoney went to press and even the process for resolving it was unclear. The permanent secretary explains that FME is an independent institution, not a part of the ministry. Even though its executive board is appointed by the minister, it is neither under the command of the ministry nor the minister who has neither the role nor the instruments to resolve the dispute.
It’s an unseemly business. Foreign investors should bear in mind: this is still Iceland.
