Már Guðmundsson: The Icelandic economy two years after the crash Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at a meeting of the Icelandic-American Chamber of Commerce, New York, 19 October 2010. *  *  *  Chairman and honoured guests, It gives me great pleasure to be with you here today and give a speech at this meeting of the Icelandic-American Chamber of Commerce. In my remarks, I would like to take stock of the current economic situation, two years after the collapse of the bulk of Iceland’s banking system, and assess the prospects for robust recovery. I am well aware that this only gives a partial picture. The saga of economic and financial developments in Iceland during the last decade or so is made up of two separate but interrelated stories. On the one hand, there is Iceland’s boom-bust cycle and problems with macroeconomic management in small, open, and financially integrated economies. This is a well-known story that has played out in other countries several times. On the other hand, we have the story of the rise and fall of three cross-border banks operated on the basis of European Union legislation (the European “Passport”). That story, at least for smaller countries, is much more unique than the first. Today I will focus on the first story and will have to refer you to another speech 1 and a forthcoming article 2 for my views on the latter.
It is therefore no wonder that concerns about Icelandic sovereign debt default have largely evaporated. This can be seen in the spread on Iceland’s sovereign credit default swaps, which has fallen significantly this year and is currently at 288 basis points, well below those of Ireland and Portugal. Before turning to the outlook and near-term policy challenges, let me mention two important problems that Iceland will not face if present policies remain on course. The first is an unsustainable public debt level. As Graph 6 shows, the gross debt of Iceland’s general government (central and local government) exceeded 100% of GDP at the end of 2009. That is very high, of course, although there are countries with higher gross debt, as the graph shows. However, Iceland’s net public debt is significantly lower and is sustainable given the prospects for repayment of Treasury debt in net terms from 2013 onwards. In addition, if we factor in the Central Bank’s foreign exchange reserves, the bulk of net public debt is denominated in Icelandic krónur. But what about the unsettled Icesave debt? The answer is that it will not fundamentally change the picture, as present estimates of the amount and speed of recovery of the assets of the failed Landsbanki and indications of what might be on the table in terms of financing costs in a new settlement suggest that the net present value of the settlement will be significantly lower than in previous agreements.