Mr. Chairman, ladies and gentlemen.
Let me begin by thanking you for the opportunity of being able to address this meeting here today. I wish to begin by thanking Björgólfur Jóhannesson, the outgoing managing director of the organisation, for our good cooperation in recent years and I wish him all the best in his future endeavours. I also expect that I can count on the good continued cooperation with the new managing director and the board of directors of the organisation.
It has not escaped anyone’s attention that in the past four weeks we have gone through a period of very serious economic turbulence. The breakdown in the international financial system has hurt us Icelanders badly. I have discussed this situation a number of times, more than once in the Althingi, and the consequences are well known to most of you. Our largest banks collapsed in the wake of the withdrawal of credit lines on which they had relied and the world financial frost descended upon our financial system with full force, as it has elsewhere in the world. In fact, Iceland is no exception in this respect, but our situation was special in the sense that our three largest banks constituted some 90 per cent of the financial system. It is for this reason that this situation has had such devastating consequences for us, as we are currently working with the International Monetary Fund to draft a plan for emerging from this situation.
In actual fact, it was for a while by no means certain that all the banks would go the same way. All was done to prevent Kaupthing from collapsing. It was the largest bank, the largest company in the country, and the last of the three to collapse. The 500 million euro emergency loan of last resort that the bank received on Monday did not suffice to enable the bank to surmount its subsequent difficulties. No doubt, the unprecedented blow struck by the financial supervisory authorities of the UK was crucial in bringing about the collapse of the bank.
For the past four to five weeks, the Icelandic authorities have done all they could to minimise the damage inflicted by the international situation on the Icelandic economy. There are no doubt many who feel that time has passed slowly during this period, and I think that in many places a tremendous effort has gone into limiting the damage to our Icelandic interests, both in the short and long run. As for the actions of the Government, there are two main points that stand out. One was the passage of the Emergency Act on October 6th and the measures taken in continuation thereof and the other was the agreement reached with the International Monetary Fund that currently awaits approval by the Fund’s Board.
With the passage of the Emergency Act, the radical but also necessary step was taken to protect the domestic part of the banks. This was done to protect the Icelandic public and companies, securing the savings deposited in the banks and ensuring that minimal banking services would be at hand. For a while, it was by no means certain that these vital interests could all be salvaged at the same time.
This decision was not made without pain – and this is of course clearly plain to me – but the other alternative was a complete collapse of the banks with the consequent maelstrom for our society. The other alternative, to let things run their course, was of course no alternative at all, a situation that no responsible government could have tolerated.
Although we have succeeded in minimising the damage resulting from the collapse of the banks, it was evident from the beginning that it would be enormous. The foreign exchange reserves all but dried up and payment intermediation to and from the country has since then not worked properly, in part because of the virulent measures of the UK authorities. Still, this situation has gradually improved in the past several days. The precipitous decline in the exchange rate of the króna has led to rising prices in the country. The economy is currently faced with great difficulties, as can be seen in the news these days, where companies are laying off staff in large numbers.
It was for all of these reasons that the most sensible course of action for the Government was to seek cooperation and assistance from abroad to bring foreign currency into the country and restore stability to the economy.
This was discussed with leaders of other countries. I myself spoke to a number of persons, as did other ministers and, of course, the Central Bank. We were left with the clear message that the participation of the International Monetary Fund would be crucial in the consideration of other countries that were contemplating necessary assistance to us. We also found that the Fund staff was very willing to render assistance.
It should be borne in mind that the International Monetary Fund was actually created to assist countries in balance of payments difficulty. We have been members of the Fund since 1945 when it was established. It is therefore not a setback for us anymore than it is for other nations to turn to the Fund and request its assistance and cooperation. The Fund was most cooperative in its consultations with us as is evidenced by the fact that the Fund staff concluded it’s processing of our request with deliberate speed, considering the fact that such an international institution generally works slowly with its heavy bureaucracy. It only took a few weeks to put together an economic action plan in cooperation with the Fund, which was a prerequisite for Fund assistance. Normally, such a process takes weeks, even many months. At present we are waiting for the Fund’s Board of Executive Directors to consider this matter next week, after which we expect to receive a loan of just over 2 billion dollar that will be disbursed in three payments and will be repayable in the years 2012-2015.
We expect the Fund to approve our request next week. We have understood from the response of our neighbouring countries that an agreement with the Fund will increase the likelihood that we will receive credit assistance from other countries that we have sought.
Ladies and gentlemen.
The increase in the policy interest rate from 12 per cent to 18 per cent that was announced earlier this week caught many by surprise, as may have been expected. This is however a very necessary component in our cooperation with the Fund and is seen as a temporary measure to prevent capital flight at the time when the króna will be re-floated.
All who are concerned with the present situation agree that the most pressing task at hand is to restore the foreign exchange market so that a normal market exchange rate can re-emerge. In order for this to be possible, we must try to prevent capital from leaving the country and instead help capital coming in. This is the thought behind the policy interest rate increase. This is not a normal interest rate increase to counter an expansion in domestic demand that all know is currently nonexistent in the country. We must think of this issue along these lines. The increase in the policy rate is without doubt the most sensitive measure taken in cooperation with the IMF. I certainly realise that it creates a difficult situation for many, but if it is viewed in the context of the total package of measures, it is a necessary measure for restoring economic stability.
Let us not forget that if we had chosen not to take these measures, the consequences for households and companies would no doubt be worse. We are therefore choosing between alternatives, none of which are desirable. We have chosen the least favourable alternative in the hope that it will help us back towards stability sooner rather than later.
We must accept temporary adversity in order to get back on our feet. This is best done by facing problems right now in order to overcome our difficulties as early as possible.
Ladies and gentlemen.
In the past century, the road to Iceland’s prosperity was paved by the fishing industry. Although we have faced difficulties at times, there is no doubt that this industry laid the foundation for our wealth. This is agreed by all reasonable men. Although the relative weight of the industry in the overall economy has declined considerably from earlier times, there should be no doubt of it’s still enormous importance. It is regrettable that it has taken the present difficulties to open the eyes of all for realising this fact. The economy is relying on the fishing industry in the economic restoration now before us and it is evident that the importance of the industry increases again, compared to the most recent years. The weight of the fishing industry in export earnings and total production will therefore increase again.
Since the cut in the cod catch quota by a third in the past fisheries year, it can certainly be asserted that the fishing industry has gone through greater difficulties than it has for many years. This was no easy decision, neither for the minister of fisheries nor for the other ministers in the Government, far from it. It was a deliberate decision, at the counsil of marine biologists, to respond to the problem of restoring the cod stock. With a deliberate effort, the intention is to rebuild the cod stock to its maximum sustainable yield. This creates a number of problems for those most affected, as I fully realise.
But the impact of this measure has perhaps turned out to be less than many thought, at least so far. Income from cod exports was higher in the past fisheries year than the year before, even if export volume declined by 17 per cent. Total export income from all fisheries products rose by close to 19 billion between the two latest fisheries years. The reasons for this are well known to all of those present here, i.e., the lower exchange rate of the króna and higher market prices, in part because of reduced supply out of Iceland. This helped offset the blow to the fishing industry from the cut in the cod catch. Although export income has increased, it should not be forgotten that a cut in the cod catch by a third has had an adverse influence on employment creation, especially in communities where the catch of cod is most important.
The minister of fisheries and agriculture has announced that an increase in the cod quota is under consideration in view of the current economic situation. It would be unwise for the parties concerned to jump to a conclusion beforehand. No decision is presently at hand, but when it is arrived at it will only be after careful deliberation, based on the best available marine biology advice.
As I observed earlier, the fishing industry overcame the difficulties of the past fisheries year better than many believed. This bears witness to the tremendous resilience of the fishing industry and the resourcefulness of its managers. This comes as no surprise, because the fishing industry has always responded quickly to changed circumstances. The guiding principle for company operations is that they must rely on their own resourcefulness in order to survive in international competition. They all know perfectly well that no one will do it for them. They do not enjoy government subsidies, unlike in many other countries. Here, there is no way to counter difficulties other than by meeting them head on through greater efficiency in operations.
When the exchange rate declines rapidly, the debt of the industry increases and its equity capital evaporates. Creditors must understand this situation and show some flexibility, since it is of primary importance now to keep the wheels of the economy turning. The companies in the export sector play a primary role here. Still, we should not only focus on the increase in the policy interest rate introduced last week. It certainly was steep, and hopefully it will not last long, but it was a necessary precondition for restoring the foreign exchange market and contribute towards a more stable exchange rate. Let us hope that this measure yields expected results, so that inflation can decline and interest rates along with it. The excessively strong exchange rate was a great obstacle for the fishing industry, but at present, the weak exchange rate is no less a source of great difficulty. A more stable and a stronger exchange rate is a goal towards which we must all strive.
Following the collapse of the three banks, voices have been heard that the surety covenants of the fish catch quotas will be called in on those credits that can no be paid. The danger can thus arise that catch quotas will end up in the hands of foreigners. With regard to this situation, it can be stated that all surety covenants on quotas will be lodged with the new banks, because all loans to domestic borrowers will be lodged there in addition to the fact that restrictions on quota ownership exclude foreigners. All loans carrying a surety covenant in quota ownership therefore end up with the new banks, as I believe that most of you already know.
The big issue regarding the fishing industry vis-à-vis the banks is the state of forward contracts following the collapse of the banks. All derivative contracts were lodged with the old banks, including contracts of fisheries companies. These companies have in recent years entered extensively into such contracts to protect their cash flow against a further strengthening of the króna. At present, the opposite has happened as the exchange rate has declined precipitously, as I noted earlier. This has led to sharp losses on these derivative contracts that could amount to a total of 25-30 billion for the fishing industry as a whole. This problem must be resolved and is currently under discussion between banks, the industry and government authorities. No decisions have been reached, as is the case in many other urgent matters at hand, following the collapse of the banks.
In recent weeks the voices have become louder of those who say that we should use the opportunity now to amend the allocation of quotas. Quotas issued should be called in, as people put it, and reallocated along entirely different lines. This is totally irresponsible talk. Aren’t matters difficult enough as is? Need we exacerbate them by putting the basic industry of the country into jeopardy? We need not waste words on this matter. It is out of the question. The same applies when the cod catch quota will be increased anew. Those increases will not be allocated in any other way than has been done hitherto. Those who suffered the cut in their catch quota should enjoy the fruits when the time comes, as has often been reiterated by me and the minister of fisheries.
Ladies and gentlemen.
As I have observed here earlier, we have gone through very painful but all the same necessary measures to minimise the damage to the economy from the liquidity crisis and the difficulties we have encountered from the greatest financial depression that has hit the world economy, probably in the past 80 years or so.
Governments all around the world are currently seeking to protect their financial institutions as best they can. Many have fallen by the wayside, far more than appear in the news. Huge sums are being spent from public purses all around the world to protect financial and banking systems. And the case has by no means been resolved. We do not know how this will end.
We must embark upon these measures that I discussed here. This is of course regrettable. It is therefore very unfortunate that there are some who insinuate that the Government and the Central Bank have not been doing all they could to save the banking system.
Perhaps it is understandable up to a point that critics wish to point at most others beside themselves when looking for the source of trouble.
We all know that when individuals become bankrupt, they tend to blame their bank for not being more accommodating, not understanding enough and not providing enough service.
By the same token, the banks blame the Central Bank for their collapse. This is well known. In actual fact, as banks must at some point tell their customers that they can go no further, so must the Central Bank.
Up to the time that the banks collapsed, every effort was made to get control of the situation and seek ways out of their problems. Many were consulted and listened to, advice and proposals from many people were considered, but not all could be followed.
Many of the proposals meant that the Treasury would have to pour scores if not hundreds of billions of public money into solutions that could not be guaranteed to work and could just as well come to nought. Such ideas were generally intended to help one of the banks to survive but not the others. The main point was that we could not risk hundreds of billions from the public purse to solve the problems of one bank.
The proposal of Landsbanki has been widely discussed. The directors of Landsbanki came to us on the fateful Sunday at the end of September with the proposal of merging Landsbanki and Glitnir with a government capital injection of 200 billion –one third of the foreign exchange reserves. Landsbanki would thereby acquire two-thirds of the new banks and Glitnir shareholders nothing. These ideas were far-fetched and unrealistic. The Landsbanki directors were told so, although not in written form.
The comments of those who now criticise so vociferously must be viewed in the context of the consequences of a series of events that actually did not take place. Such a comparison may be favourable to the critics but obviously does not tell the whole story.
Ladies and gentlemen.
We must all realise that there are difficult times ahead. I am certain that the Icelandic people will conquer these difficulties, as it always has. The Icelandic fishing industry will play a large role as it always had. I expect that you will cooperate closely with me through your organisation in order to build for the future. There has always been a need but now the need is crucial.
Reykjavik, 31 October 2008