Iceland – One Year Later

Remarks to Icelandic National League of North America Convention May 5, 2011, Brandon, Manitoba by Donald K. Johnson, O.C. , LL.D.

Ladies and gentlemen, I am delighted to be addressing such a distinguished group of Icelandic Canadians this evening. Of course, like you, I, have Icelandic roots. I was born in Lundar, Manitoba and raised by Canadians of Icelandic descent. I am thrilled that my sister, Margret Reykdal and her daughter, Diane, who both live in Edmonton are here, together with my brother Paul and his wife, Ollie, who live in Winnipeg.

For those of you who attended the INL Convention last year in Edmonton, you may recall that the focus of my remarks was on a relatively simple proposal to resolve the Icesave dispute between Iceland and Britain and the Netherlands. Our proposal was that the Parliament of Iceland would commit to forward to the British and the Dutch 100% of the cash proceeds from the sale of Landisbanki’s assets, and Britain and the Netherlands would, in turn, agree that Iceland would have no further obligation.

Today, I’ll focus my remarks on three issues:

• An update on the status of the Icesave saga
• The remarkable recovery of Iceland following the financial and economic crisis of 2008, and
• My perspective on the pros and cons of Iceland adopting the Canadian dollar as its currency, replacing the Icelandic krona. This has been the subject of considerable media speculation during the past few weeks.

Update on the Icesave Saga

As many of you know, we wrote a letter on June 8, 2011 to U.K. Prime Minister David Cameron, Dutch Prime Minister Mark Rutte and Prime Minister Johanna Sigurdardottir with copies to their ministers of finance, signed by 17 prominent Icelandic Canadians from across Canada. The letter urged them to arrive at the compromise which we proposed.

We understand that the government of Iceland discussed the terms of our proposed resolution of the Icesave dispute with the governments of the UK and The Netherlands. However,, the UK and The Netherlands rejected this proposal. Last December, the European Free Trade Agreement (EFTA) Surveillance Authority referred the case to the EFTA court in Luxembourg. In March of this year, Iceland lodged its defence with the EFTA court. Other EFTA and EU member states will now be given an opportunity to submit their observations during a hearing in the second half of this year.

Importantly, it now appears virtually certain that the liquidation of the assets of the Landisbanki estate will be able to cover 100% of the principal amount owing to the UK and The Netherlands by the end of this year. Sixty-seven percent of the amount owing has already been dispersed from the sale of Landisbanki assets. It would appear that the Icesave saga will come to a successful conclusion by the end of 2012. This conclusion will remove one significant barrier to the relationship between Iceland, the UK/The Netherlands and other members of the EU.

Iceland’s Remarkable Recovery

There has been considerable media coverage about the remarkable economic and financial recovery of Iceland compared to the situation in Ireland.

Iceland

While Iceland probably did not have much choice, the government did not bail out the banks and burden its citizens with a huge amount of additional debt. Also, Iceland was fortunate to have its own currency, which was allowed to depreciate by 58% during the financial crisis. The country created “good banks” and “bad banks” with questionable assets being transferred to the “bad banks”. Primarily as a result of these factors, Iceland’s economy has stabilized and experienced 3.1% GDP growth during 2011 and a similar growth is expected this year. The unemployment rate in Iceland is approximately 7.2% and Iceland’s debt to GDP ratio peaked at 85% and is declining. Iceland has emerged from the International Monetary Fund (IMF) Assistance Program and returned to international capital markets a year ago to raise USD 1 billion. The Fitch Rating Agency upgraded the country’s bonds to investment grade. Nobel Laureate Joseph Stiglitz stated: “Iceland is a success story” and “It has managed to return the worst crisis to recovery”.

Ireland

By comparison, the government of Ireland bailed out the banks and the country’s taxpayers are now burdened with a huge amount of additional debt. Debt to GDP has risen to 120%, the unemployment rate is 15% and the economy is not growing. Because Ireland was a member of the EU, Germany and other EU countries insisted on Ireland bailing out their banks because banks in their countries held a significant amount of Irish bank debt. Also, because Ireland had adopted the euro, it did not have the flexibility to allow its currency to depreciate like Iceland did.

Iceland’s Currency Choice

There has been considerable media speculation about Iceland’s currency alternatives – adopting the Canadian dollar, adopting the euro, adopting the Norwegian kroner, or simply sticking with the Icelandic krona which it has used for 137 years. Media speculation began when Iceland’s new Minister of Finance stated that she was in favour of Iceland joining the euro, notwithstanding the huge fiscal and economic challenges facing all members of the European Union. Naturally, for good reason, many Icelanders were not in favour of giving up their sovereignty and becoming a member of the European Union.

If Iceland had been a member of the EU during its financial crisis of 2008, it would likely be in a similar position to that of Greece and Ireland today. It would not have been able to devalue its currency to restore its competitive position, because its currency would have been the euro. There are also significant challenges associated with Iceland’s fishing industry and its ability to enter into free trade agreements like the one that currently exists between Iceland and Canada..

The other three alternatives to continuing with the krona were to consider adopting the US dollar, the Canadian dollar, or the Norwegian kroner. Logically, Iceland should prefer the Canadian dollar to the US dollar, given the close ties between Canada and Iceland and given the fact that the Canadian economy is in much better financial condition than the US. Iceland might also prefer the Canadian dollar to the Norwegian kroner because it may not wish to cede its sovereignty to another Scandinavian country, given the historical relationship between Iceland and Denmark, Norway and Sweden. Consequently, the rest of my remarks will be focus on the pros and cons of Iceland adopting the Canadian dollar.

Pros and Cons of Iceland Adopting the Canadian Dollar

The decision on whether or not to pursue the possibility of Iceland adopting the Canadian dollar will be made by the government of Iceland, but it would likely be subject to a referendum. Also, it is not known if Canada would be interested in discussing this possibility. Before the government decides whether or not to pursue this possibility, it needs to take into consideration the potential benefits and the potential risks of such a decision.

There are a number of benefits to the business sector in Iceland of adopting the Canadian dollar, including:

• Access to broader range of investors for Icelandic bank, corporate, and government debt with potential lower borrowing costs.
• Access to a first-rate financial regulatory system
• Removal of foreign exchange controls would facilitate direct foreign investment.

There are significant political challenges and risks associated with such a decision. These include:

• The population of Iceland is only 1% of the population of Canada – 320,000 vs 33 million. Iceland would be giving up all control over monetary policy. Monetary and fiscal decisions for Iceland’s economy would be made in Ottawa, not Reykjavik. There is a long distance between Ottawa and Reykjavik as well as a four hour time zone difference
• If Iceland had not had its own independent currency, the krona, during its fiscal crisis of 2008, but had already adopted the Canadian dollar prior to that date, it would never have been able to position its economy for the dramatic economic and financial recovery that it has achieved.
• In the future, the exchange rate of the Canadian dollar vis-à-vis other major currencies may be inappropriate for Iceland’s economic situation.
• Not many Icelanders would recognize the pictures of former prime ministers of Canada on some of our currency

I am sure all of us in this room would like to strengthen the relationship between Canada and Iceland through increased trade, investment, tourism, sharing our unique cultures, student exchanges and capitalizing on our mutual interest in the Arctic. However, even if both countries are interested in strengthening our relationship, we can still achieve this objective even if we don’t have a common currency. The relationship between Canada and the United States is a classic example. 

The pros and cons of Iceland adopting the Canadian dollar should be subject to an extensive public debate in Iceland. The first opportunity actually arises in Toronto on May 15 when the Fraser Institute is hosting a Policy Briefing on “Understanding Iceland: Lessons for Greece? Currency Partner for Canada?”. A prominent delegation of 11 Icelanders representing the business, academic and political sectors will be attending. I plan to attend this event and look forward to a spirited discussion on this subject!

That concludes my remarks. I would now be happy to answer any questions!

Donald K. Johnson is a Member of the Advisory Board, BMO Capital Markets. He is a long-time member of the ICCT, and sponsored the Opening Reception at the INL of NA 2012 Convention.

Posted in Icelandic National League of North America, News.