Iceland Mag

2 Reykjavik

Iceland Mag

Business

The Current State of the Icelandic Economy

By Matt Eliason

  • Soaring real estate prices The Icelandic economy has come a long way since the winter of 2008, and real estate prices in Reykjavik have improved back to pre-crisis figures. Photo Vilhelm Gunnarsson

Bouncing Back; Iceland‘s Economic Meltdown and the Journey Back to Prosperity. Chapter 3

 

Despite the initial pushback from the international community, Iceland’s "great escape" should serve as a model for all nations. A steady diet of capital controls, IMF loans, and stable economic growth have paid dividends for the Icelandic system, which has been feverishly paying off loans and accumulating capital to offset the fallout from the crash. Iceland does still owe $1.8 billion to the Washington-IMF, Nordic governments and Poland from the initial funds it borrowed, however, the Icelandic people and their government deserve credit for making the best of a bad situation. While the initial collapse garnered world-wide breaking news coverage, their recovery has gone relatively unreported.

After scaring away investors for the better part of six years, Moody’s and S&P have both revised their investment grade ratings of the small Nordic country to Baa3 and BBB- stable, after the “Viking nation” has made significant progress in reviving its local economy. In fact, Iceland’s six year emergency bonds have just recently come due and there is talk of the Icelandic state returning to the international debt market with yield-hungry investors salivating at the opportunity to invest. While there is still an unresolved stand-off with the creditors of the failed banks regarding the run-on deposits of Icesave, as of July 8th, 2014, Iceland received over €2.1bn new orders for its first sovereign bond offering in two years.

Further proof of Iceland´s recovery is the return of its real estate market. Prices currently resemble pre-crisis figures, with apartment high-rises popping up all over the Reykjavik city skyline. An economics report commissioned by the Icelandic bank Islandsbanki (ISB) has found that residential real estate prices rose by 2.6% in 2013, taking rates up to similar levels found in 2004 before the last real estate bubble. More specifically, in the capital city of Reykjavik prices have risen 35%, a comforting sign for those who saw the value of their home drop over 30% back in 2009 as a result of the crash.

Iceland’s growing economy has plenty to offer as well. Did you know that one in every 84 fish caught in the world comes from Iceland’s waters? The island also has the incredible ability to produces five times more electricity than it needs, due to the geothermal energy production captured from Iceland’s volcanic surface. There is currently a sea cable being built to connect Iceland to the UK grid in order to supply England with cheaper energy. Furthermore, the tourist industry is booming in Iceland, with over one million visitors expected to grace their scenic landscape in 2014 alone. And for all you film buffs out there, Iceland has seen a recent influx of Hollywood productions choose Iceland as their filming location. Movies such as Oblivion, The Secret Life of Walter Mitty, and Star Wars: Episode VII, have all chosen to shoot on site in Iceland as well as the popular TV show, Game of Thrones.

Even with the recent successes of the Icelandic economy, there are still testing times ahead. The Icelandic system is inching closer to financial autonomy with talk of removing the capital controls enacted at the time of the crisis. The finance ministry of Iceland has hired New York-based law firm Cleary Gottlieb Steen & Hamilton LLP and London-based consultants White Oak Advisory LLP to assist in eradicating the controls. The first hurdle the finance ministry must navigate is the sensitive subject of creditor repayments. “It is crucial to ensure that settling the debt of failed financial undertakings does not threaten economy stability,” said the finance ministry in an official statement made on July 9th.

It is widely feared that removing the controls could adversely effect the highly volatile Icelandic króna, since the domestic economy, “doesn’t generate enough foreign currency to enable creditors to redeem those assets from the current-account balance.” Due to these fragile issues, removing the controls could produce an unfavorable reaction regarding foreign investment in Iceland. But at the same time, Icelanders agree that the capital controls need to be removed, and the actions should probably be taken sooner rather than later. It has been proclaimed by the newly elected Icelandic policy makers that removing the currency limitations is a top priority of the government. Thus, the next few months will be essential in determining whether the recovery was a legitimate success.

There is no getting around the obvious; the Icelandic banking system brought this economic stress upon itself. However, its battle back to stability illustrates the true resolve of this small Nordic nation. The decision to let the country’s three largest banks fail, while maintaining its currency, and stabilizing the economy, helped Iceland defy the odds, in what is now considered one of the greatest economic recovery successes in recent history.

But Iceland is not in the clear just yet. The final chapter of their banking recovery story will be written once the Iceland finance ministry removes the capital constraints and the market decides if the current system has the domestic strength to support the international markets. 

Related content

Editor's Picks