Address to the Althing on the economic situation in Iceland
by His Excellency the Prime Minister, Mr. Geir H. Haarde
15 October 2008
I have asked for this opportunity to make this report to the Althing on the difficult and serious situation which has arisen in the economic life of the nation. Momentous days lie behind us and we have been dashed by waves of misfortune over this brief period. It is at such times that the Icelandic nation will show what stuff it is made of – its fortitude and prudence in the face of these disasters inspires admiration everywhere. We may for a time be bloodied, but we are unbowed.
We are now slowly but surely emerging from the worst of the storm and already Landsbanki and Glitnir have begun operating in a changed form. People are working hand over fist to normalise currency transactions so that international trade can operate normally, so that companies can transfer foreign currency into the country and Icelanders abroad can have reliable access to foreign currency.
The Government and the Central Bank are trying their utmost to normalise currency transactions and with that in view, loan lines of up to 400 million euro were activated yesterday from the central banks of Denmark and Norway. We will strengthen the currency reserves considerably in addition to this and discussions are now in progress in Moscow on a possible currency loan; in addition, discussions have been held with the IMF on the possible involvement of the Fund with the reconstruction work which will face us in this country. The Government has underlined the need to assess without prejudice everything which could be of help in this problem which the nation faces.
Following the events of the last few days it is likely that there will be considerable reduction in domestic demand. It is, therefore, necessary that the economic instruments at the command of the administration are employed in order to stimulate the economy and thus soften the down swing.
This morning the Central Bank announced a reduction of 3.5 percentage points in the policy rates. This reduction in the policy rates will reduce finance costs for families and businesses and thus help to start the wheels of the economy turning again.
In recent years the authorities have opened the Icelandic economy to free flow of capital, goods, services and people. These changes have brought about a revolution in living standards in this country and rapid growth of the business sector. This opening up has, on the other hand, had the side effect of making us very dependent on international markets, while being unable to have any influence on them
Over the past year the international credit crunch has deepened slowly but surely. Its origin lies in the USA and the so-called sub-prime loans, which US finance companies had sold back and forth between each other. When it came to light how unsound these loans were, doubt and distrust grew on the markets, which caused in the end more problems than the sub-prime loans as such had caused. The fate of the Icelandic banks is the best illustration of this, since they had almost entirely avoided trade in US sub-prime loans; but the freeze in international credit markets meant that the position of Icelandic banks was suddenly altered for the worse.
The Icelandic banks had over a period of a few years grown so quickly that their assets and liabilities had become many times the GNP of Iceland. The growth of the banks was driven by the easy access to cheap credit over the past few years. But all loans need at some time to be paid and this is, of course, true for the banks too. It was known that 2008 would be a difficult year for refinancing them, but, for most of the period, it looked as though it would work out. During the summer it was intimated on behalf of the three big banks that refinancing had been assured well in advance, and right up to September there was no reason to expect other than that the banks’ plans would be fulfilled.
Around the middle of September the situation changed for the worse, following the fall of the US giant Lehman Brothers, as well as many other finance houses and banks in the US. Fear developed on the markets and credit virtually dried up. A situation arose which the Icelandic banks could not escape from, a situation which no one would want to be in.
The banks’ debts had become too large for the Icelandic economy and the authorities were faced with the question, whether the Icelandic nation should pay these debts and bind future generations.
The decision taken by the Government ring-fenced the domestic part of the banks, the savings of the general public and ensured that basic banking services for Icelandic homes and businesses could continue.
Over the last weeks dozens of banks around the world have had to throw in the towel and look to the state for assistance in their home countries. The problem which faced the Icelandic Government when this chain of events was unleashed was more serious than the problem facing other governments, because of how large the Icelandic banking system was in proportion to the economy. It was, therefore, clear that it was neither sensible nor feasible for the Icelandic state to shoulder the burdens of the entire banking system.
When banks which are important to the economic system get into trouble elsewhere in the world, it is common for governments to nationalise them entirely. If the Government of Iceland had taken this route it would have committed itself to paying many thousands of billions of krona of foreign debts for the banks. Such an obligation could easily have become insurmountable to the nation. Therefore the Government decided to take another course with the long term interests of the Icelandic nation uppermost. The actions of the Icelandic authorities are among the most radical actions taken by a government in a banking crisis.
I would like to reiterate my thanks to members of the Althingi from all parties for working to ensure that the so-called emergency legislation was passed as quickly as it was. The events of the subsequent days prove, in my opinion, that the legislation was necessary and made the best of a difficult situation.
The most important task now is to retrieve as much value as possible from the operations of the banks in order to limit the damage caused by their collapse. All of us, the administration, members of parliament, and others in leading positions must stand together in this task. In this work we will need to make use of the efforts of all those with experience and expertise in banking. We should not allow speculation about the causes of the fire to hinder the work of extinguishing it.
In these difficult times it is essential to prevent fear and anxiety, which understandably effect people, from developing into confusion and panic. For this reason the administration has already put into effect wide-ranging measures to address these issues and is planning others.
Right at the start of this chain of events the Government established a working group of four ministers to supervise measures. A steering committee was set up with representatives from the main ministries and institutions involved to ensure the coordination of measures and actions by the administration. A huge amount of work has been done over the last few days and weeks in communicating information and guidelines to the pubic and the media.
Yesterday an information centre was opened for the public, businesses and the media to receive inquiries from people here and abroad. The Ministry of Social Affairs has been operating a service and information net which will continue in cooperation with the information centre. Everyone is working together to assist people, to explain the situation and to find solutions to difficulties when they arise.
The events of recent days have understandably raised considerable interest in the media, both domestic and foreign. Close to 200 foreign journalists from all over the world have visited Iceland. It was decided to operate a special media centre in Midbær school, which has received enquires. A special group has been working over the past days to coordinate relations with the media both here and abroad. I would like to express my thanks to all those who have worked inexhaustibly over recent days as well as all those who have got in touch and offered their help and advice.
The economic upheavals currently shaking the globe are the worst in 90 years. In circumstances like these, it has become abundantly clear that the nations of the world are looking to their own interests first, letting them take precedence over old ties of friendship. This has been our painful experience here in Iceland in recent months, as we have stood knocking on closed doors in our efforts to obtain loans and assistance from many of our closest friends in the international community.
There is actually nothing abnormal about nations placing the greatest stress on their own interests in times of adversity. But the way we were treated by the British Government last week had nothing to do with salvaging British interests and was absolutely unacceptable.
The British Government took the unprecedented decision of using anti-terrorism legislation to freeze all Landsbanki assets in the United Kingdom. In the media, the British Prime Minister even claimed that all assets belonging to the Icelandic Government had been frozen, though that statement was withdrawn in writing a short time later, when it was explained that this applied only to assets held by Landsbanki. The British Prime Minister also made the unsubstantiated and false claims in the media that the state of Iceland was bankrupt and in default, and the British Finance Minister asserted that the Icelandic state did not intend to
meet its obligations. In the wake of these statements, the British financial supervisory authority was brought into play against Kaupthing in the United Kingdom and the bank’s operations there were closed down, leading to the collapse of Iceland’s largest enterprise. These measures and statements wreaked enormous damage on many other Icelandic undertakings.
The British Government’s unprecedented actions against Kaupthing in the United Kingdom have led us to review our legal position vis-à-vis the British authorities. To that end, the Government of Iceland has appointed a British law firm, which is now working to prepare a case, and the Icelandic Government has also taken various measures to ensure that the British public is made aware of our point of view.
Despite the dispute that has arisen in relations between Iceland and the United Kingdom, both countries have emphasized resolving the issues connected to Landsbanki’s IceSave accounts. The same applies to IceSave accounts in the Netherlands.
Delegations from the Netherlands and the United Kingdom held meetings with Icelandic officials last weekend. Preliminary results have been achieved in talks between the Icelandic and Dutch delegations concerning a settlement between the two countries, subject to approval by the Althing.
No agreement has yet been concluded with the United Kingdom, but I am hopeful that an outcome will be achieved soon.
In the emergency legislation passed by the Althing last week, depositors’ claims were given priority during the receivership process. There are good prospects that Landsbanki’s assets in the Netherlands and Britain will go a long way toward covering the claims that savers in these countries have on the respective banks – which will in turn reduce the claim that falls on the Icelandic state. The Government has taken measures to ensure the value of the banks’ assets and in that way limit losses as far as possible.
We must learn from everything that has now befallen us. At the same time, as we work determinedly to resolve the most pressing problems, major tasks await us.
Among other things, we need a major reckoning with the past. I said in an interview with Morgunblaðið on Sunday, that I would instigate the writing of a white paper on banking operations which should be preceded by a thorough investigation. This scrutiny must take into account the things that were achieved, as well as those that went wrong. The Minister of Justice has begun preparations for dealing with this aspect of the issue and will report on them here today in his address. If there is the slightest suspicion of illegal conduct, rest assured that the parties involved will be held accountable.
The economic blows that the nation has suffered mean that we must look ahead and build for the future. The Icelandic nation rests on strong foundations, so there is no question of us having to start from scratch, even though the financial system has suffered a setback.
We are rich in natural resources that we can exploit sensibly, and we will continue developing the energy sector. Yesterday, for example, we heard the gratifying news from Dalvík that a memorandum of understanding has been signed regarding the construction of a data centre there, and it is clear that we have many opportunities in this sector.
In recent years, the Icelandic fisheries sector has sustained major cuts in catch quotas in order to rebuild the cod stock. These sacrifices will pay off when the stock starts regaining strength, and those who accepted the burdens during the cutbacks will profit when catches start increasing. With greater catch quotas in coming years, fisheries will be able to move forward again.
One of Iceland’s resources is the land itself, its beauty and history, which attract tourists to the country. The tourist industry possesses great opportunities, and we must not allow ourselves to become discouraged when it comes to marketing the country abroad.
The most important investment any nation can make is in education. The emphasis the Government has placed on building up the educational system in recent years will provide us with a firm footing in the challenging times ahead.
There are always opportunities in a difficult position. We have been forced onto the defensive in recent days, but with determined effort, we will slowly but surely regain the offensive. We are confronted with a unique opportunity to come together as a nation and set ourselves a course for the future. In this work, it will be essential to call on a broad group of individuals from widely differing parts of society for their advice and counsel, as well as to ensure that the public can be heard and make its contribution. In this way, we can jointly draw up a roadmap for the future. The Government will launch this effort over the next few days, establishing a formal structure and time framework and drawing up a detailed picture of its organisational aspects.
The Government’s role will be to oversee this work and ensure that good ideas receive the support they need, but in other respects, we intend to trust in the energy and enterprise of individuals in implementing these ideas.
Over the last few days, many have been vying to announce the death of free commerce and the market economy because of the shocks on the financial markets. Pronouncements of this kind are based more on delight in the misfortune of others than they are on a realistic assessment of the situation, because society cannot prosper in the long run without free commerce and free markets. The free market is an instrument for maximising the creation of value in society, but it must of course be subject to laws and regulations. When the worst crisis has passed, I consider it essential to conduct a thorough review of the regulations governing the financial markets, both in this country and elsewhere. The aim of this review must be to strengthen the foundations of the financial system and ensure financial stability, not to place such shackles on financial operations that they can never recover.
The Icelandic nation has been confronted with great and difficult challenges in the past, and adversity has always fortified us and brought out the best in this nation. There are difficult times ahead, and they will put our solidarity to greater tests than ever before. But no one need be in any doubt that the people of Iceland will draw on their inherent strength and make their voice heard in the world once again.
Reykjavik, 15 October 2008