Iceland’s Jagged Control Cliffs
Iceland, the original developed country applicant for post-crisis bilateral and multilateral aid, has begun repaying the IMF and Nordic partners after a $1 billion Eurobond return as next year’s deadline for lifting exchange restrictions will now likely be extended to 2015 according to the Fund’ post-program monitoring. GDP growth was 2.5 percent in the first half while inflation was twice the target at 4.5 percent. Emigration has slowed with the broader Eurozone mess with unemployment off the 9 percent peak, although long-term joblessness remains acute. The stock and real estate markets are up and two of the main three banks have issued covered bonds although credit expansion is “negligible.” Household debt is still above 100 percent of output, and the corporate load has halved since 2008 to 180 percent. Foreign reserves are over 100 percent of short-term obligations as Landsbanki covered 50 percent of priority external claims the past year, but only “limited” reduction affected the overall stock of offshore krona, with full release now envisaged at mid-decade. Earlier capital account liberalization could be “disorderly” as residents also exit and the weaker exchange rate heightens inflation. The initial opening will be gradual through auctions and a departure tax under officials’ new strategy. Non-resident krona holdings amount almost to 25 percent of GDP, and conversions into long-term euro-denominated bonds may be the preferred path for resolution.
The budget continues to run a slight deficit and upcoming elections work against plans to raise hotel and social insurance charges. A key revenue move is fishing quota restructuring toward a transferable rights system which can collect 1 percent of GDP. Real interest rates are now positive after 100 basis points in central bank hikes, but banks suffered losses from court-ordered recalculation of indexed loans on NPLs still at 10 percent of the total. Capital adequacy is high at over 20 percent of assets, as Basel III liquidity standards are adopted with a moratorium on dividend payments. Litigation from the original Icesave depositor deal with the UK and the Netherlands poses a risk, with demands that the state treat them as full contingent liabilities. Even with this scenario the review concludes that official creditors including Scandinavian providers are in a “good position” to be reimbursed.
Swedish authorities likewise came to the rescue in Latvia, which has regained investment-grade status after it managed “internal devaluation” within a euro peg as an EU success in contrast with Greece’s subsequent slide. Lithuania had followed lesser austerity which was seemingly shunned in a leftist lurch in recent elections, while Estonia’s AA credit rating was reaffirmed in October as its MSCI frontier stock index was ahead 15 percent. S&P cited political stability and the “unleveraged government balance sheet” with wage pressure from health service and teacher strikes under more flexible control.
