Excerpts from the address delivered by Prime Minister Jóhanna Sigurðardóttir at the AGM of the Central Bank of Iceland, on 17 April 2009
Trust is a key word – not only during the economic downturn we are currently experiencing and in financial markets, but in all areas of society and in government. Trust is the foundation of all our relations, and the foundation of a healthy, everyday society.
The government currently in power has had just over two months to build trust and begin the reconstruction of the country’s economy. It has had a short time to restore trust both domestically and internationally, and to reconstruct the economy, which is the basis for work and welfare and thereby for our common future. By restoring trust we lay the foundation for savings, a healthy financial and equity market, and the reconstruction of business and industry in the future.
During this short time many things have happened and positive signs are appearing. Inflation is falling rapidly and interest rates are dropping, the balance of trade in goods is positive and, for the first time in a long time, figures on unemployment are lower than forecast.
As early as the beginning of next year, inflation is predicted to be only 2.5%, and under such conditions interest rates should have reached a lower level than we have seen for a long time. This will make a decisive difference for Icelandic households and industry, the central pillars of our society.
Despite the difficult situation which prevails in our economy and in the global economy, it is important to bear in mind that these are temporary difficulties, which the Icelandic nation can withstand. Doom and gloom predictions of national bankruptcy or the large-scale handover of natural resources have no basis in reality, if we continue along the path which has now been charted out in co-operation with the IMF and friendly countries.
The only thing which could place us in such a position are irresponsible suggestions that the problem could be solved by rejecting international collaboration and evading our obligations. If there is anything which threatens Iceland’s future at this moment it is such mirages.
Although the Treasury debt has increased following the banks’ collapse, the lion's share of this will consist of obligations to domestic parties in ISK. At the end of this year, gross national government debt is estimated to be around ISK 1,100 billion. This debt is naturally offset by substantial assets. At the end of 2009 the Treasury’s corporate assets are estimated to amount to ISK 580 billion, plus an additional ISK 355 billion in receivables and cash and cash equivalents.
If these forecasts prove correct, the net Treasury debt at the end of this year will therefore amount to only ISK 150 billion, or 10% of GDP. It should be borne in mind that, in the short term, gross debt will be high due to Icesave commitments, making interest payments substantial. On the other hand it is now evident, and I am pleased to be able to report this here today, that assets of Kaupthing bank are sufficient to settle accounts with the bank’s German depositors. This is a significant milestone towards reaching a settlement in good faith with the international community.
Ladies and gentlemen.
The economic strategy followed by the Icelandic government is transparent and accessible; it has been formulated in close co-operation with the IMF and none of it is shrouded in secrecy. The entire programme is accessible, as it should be at all times. There are no secret clauses concerning our natural resources or other interests. Everything is out on the table – as it should be. Important benchmarks have been reached in the Economic Recovery Programme in recent weeks and further major steps will be taken in the coming weeks.
Major advances include changes to the Central Bank, the introduction of a new Monetary Policy Committee and alterations to the Financial Supervisory Authority. Crucial steps have been taken in restructuring the banking system, for instance, by improving relations with foreign creditors and information disclosure to the new banks. The government’s decision to enlist the services of foreign financial advisors to work with our own experts has accelerated this work significantly, as was urgently necessary.
Another key benchmark was reached in bank reconstruction this week, with the delivery of the provisional assessment of assets transferred from the old banks to create the balance sheets of Nýja Kaupthing, NBI and Íslandsbanki. Finalisation of this assessment is underway and the final version is expected to be available next week.
Increased confidence in the economy, both abroad and in Iceland, is a prerequisite for the relaxation of currency controls. Expectations of stability and a rapid economic turnaround would accelerate the removal of these controls.
Another crucial aspect is to follow the Economic Recovery Programme drafted in consultation with the IMF, which represents the international community. In this context, a decision by Iceland to commence accession talks with the EU would be of major significance.
The threat which the sizeable sums held by domestic and foreign investors, for instance, in so-called Glacier bonds, pose to exchange rate stability is a cause for definite concern. It is therefore essential that the parties be given an opportunity to sell these assets and convert their ISK systematically and effectively.
The Central Bank of Iceland plays a key role here and I am convinced that it will resolve this issue in the near term, in close co-operation with experts from the ministries and the IMF.
While tightening the rules on currency transactions was a solution of last resort, it was necessary and unavoidable. The government’s prompt and determined action has already begun to produce results and provide the economic premises for ISK appreciation. Anyone circumventing the controls is merely prolonging their duration still further and acting against the interests of households and most businesses – just when we need to stand together and defend broader interests than have been in focus in recent years.
When Finnish expert Kaarlo Jännäris delivered his report on regulation and supervision of financial undertakings to the government, I at once appointed a working group to review the report. This morning the government agreed to implement immediately the following proposals made in the Jännäris report.
Firstly, proposals will be drafted immediately under the auspices of the Prime Minister’s Office, on combining various tasks and perhaps reducing the number of ministries responsible for financial market legislation.
In the second place, as soon as the elections are over, a committee will be appointed to examine in detail the advantages and disadvantages of increasing co-operation between the Central Bank of Iceland and the Financial Supervisory Authority (FME) and/or merging the two institutions. This work would focus not least on how to ensure that both bodies would apply the supervisory authority granted to them with full effect.
In addition, the Minister of Commerce will be requested to present to the cabinet a bill amending the Act on Deposit Guarantees, to respond to the consequences of the banks’ collapse on the situation of the current fund and the changes which have been made to the European regulatory framework for deposit guarantees to date. The Ministries concerned shall also take an active part in discussions at European level on further review of deposit guarantee schemes.
We have no time to lose, each week and each month is important. Things moved far too slowly during the first months following the collapse and now we have to work faster and turn words into deeds.
Ladies and gentlemen.
I have made no secret of my view that an application for membership of the European Union, followed by the adoption of the euro, should be one of the priorities of the next government. The conclusion of accession negotiations will reveal a clear picture of the opportunities offered by EU membership. We can then put the outcome without hesitation to the nation, to decide in a referendum.
Accession to the European Union and the adoption of the euro would be, in my estimation, material steps towards increasing credibility and achieving the stability necessary for profitable business and industry and household financial recovery. While EU accession would by no means solve all of our problems, it would constitute a decisive further step along the route we are already travelling. EU membership would mean greater financial discipline for the government and set clear goals in the form of the Maastricht conditions. This effect became very apparent on the Swedish financial market following the decision by Sweden to apply for EU membership.
The fact is that EU states which have not adopted the euro, such as Denmark, have benefited from the support of the European Central Bank, and that the ECB has assisted other states, such as Hungary, who have found themselves in difficulties. I propose that in tandem with EU accession talks we seek to negotiate an agreement on whether, and if so how, the European Central Bank could contribute to stabilising the exchange rate in Iceland in the short-term, or until the euro can be adopted in Iceland.
The report on EU membership presented earlier today examines the advantages and disadvantages of following this course. Clearly, any and all co-operation with the European Central Bank would add to the credibility of the Central Bank of Iceland and facilitate the achievement of its objectives on financial stability.
Only by increasing stability can we ensure long-term economic growth and prosperity for all. The nation’s independence and vitality is by no means dependent upon having an independent currency. The ISK does not ensure our independence, but rather places us at the whim of international financial markets. These are forces with which we cannot contend, despite having such highly capable people at work in the Central Bank.
There are no doubt plenty of improvements which need to be made, not least in view of the events of the past months. I have therefore decided to request that the new Monetary Policy Committee of the Central Bank review the pros and cons of altering monetary policy and present proposals to the government upon concluding such assessment. Furthermore, in my estimation the Central Bank is the proper party to assess how we can take major steps towards dispensing with indexation of debt.
Rebuilding trust will be among the key emphases of the government in coming quarters. Since taking over as Prime Minister, I have had occasion to speak to prime ministers of many friendly countries. I have been aware of their willingness to work with us on recovery and reconstruction.
It is extremely important that we resolve the Icesave matter with favourable agreements with foreign states offering to provide us with credit. The outcome will determine how indebted the nation and its people will be in the future. This is one of the key challenges facing the government today, a task which unfortu¬nately was postponed for too long and simply left in abeyance. There has been a major change here, and the issue has now been grasped firmly and with determination.
Ladies and gentlemen.
I would like to take this opportunity to thank the superb staff of the Central Bank for their dedicated efforts under difficult conditions and in demanding times. It is important that the government’s economic policy be implemented in close colla¬boration with the ministries and the Central Bank and in plain sight of everyone. This seems to me to have been the case since the new Governor and Deputy Governor took over at the Bank. Improved co-operation and consultation by no means jeopardises the independence of the Central Bank, but ensures that everyone row together in the rough waters in which we find ourselves.
Next month a special assessment committee will make its selection from a group of well-qualified applicants for the positions of Governor and Deputy Governor. A positive and professional outcome is crucial and is not open to compromise. It is the basis for building trust and that trust is the foundation for the reconstruction which has now commenced and for all that we have yet to do.