Status Report

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Published on August 10th 2011The IcelandicEconomic SituationStatus Report

Iceland2Population:320,000Capital:ReykjavkCurrency:Krona (ISK)Language:IcelandicSize:100,000 km2

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Part AThe Financial Crisis3... with assets of the big 3 banks 11 times Icelands GDP4

In 2008, the banking sector had become gigantic ...Then, in October 2008, the big 3 failed in 3 days57 October 2008 Landsbanki fails8 October 2008Glitnir fails9 October 2008Kaupthing fails

The financial crisis became a currency crisis ...6Exchange rate for one EuroCapital restrictions imposedBank collapse6... and the capital markets evaporated7

The worst performing stock index in the world in both 2008 and over the decade 1998-20087Political instability followed ...8... and the first left-wing government in over 30 years was elected

The failed banks were split into old and new banks ...9

... with Icelandic operations transfered to new banks and international operations staying in the old banksIn addition to the old banks, a part of the new banks was placed in ownership of creditors10SLandsbankinn(formerly NBI)Arion bankslandsbankiCreditors of Landsbanki slands hfCreditors of Kaupthing Bank hfCreditors of Glitnir bank hfResolution CommitteeKaupthing bank hf*19%87%95%The FSA appoints the resolution committees Icelandic State Financial InvestmentsManages the states holdings81%13%5%Resolution CommitteeResolution CommitteeLandsbanki slands hf*Glitnir bank hf**) Old banks, in resolution processSource: Vilhjalmur ThorsteinssonThe government also entered an IMF program to reduce the fiscal deficit1124 October 2008The Icelandic government reaches an agreement with the IMF on a stabilization program, including a $2.1 bn loan28 October 2009IMF's Executive Board approves the 1st review of the Economic Recovery Program16 April 2010IMF's Executive Board approves the 2nd review of the Economic Recovery Program29 April 2010IMF's Executive Board approves the 3rd review of the Economic Recovery Program11 January 2011IMF's Executive Board approves the 4th review of the Economic Recovery Program3 June 2011IMF's Executive Board approves the 5th review of the Economic Recovery Program31 August 2011Scheduled end of the Economic Recovery Program. A 6th and final review will be published before the end of the program.11

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Part BThe Current Landscape12Iceland went into a recession ...13Real GDP, 2009 prices... and public debt surgedNet public debt, % of GDP

13However, Icelands debt is manageable ...14... and Iceland has not defaulted on any loansNet public debt (% of GDP)Source: OECDHomes struggle with higher unemployment ...15... and a lower living standardStatistics Icelands Standard of Life survey

15Inflation reached 18.6% when the currency collapsed... 16

...but is now close to historical valueDespite the recession, Iceland still remains competitive compared to other economies17

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Part CRecent Developments18Debt restructuring of 19 and initiatives by the banks and the government have been put in place to speed up the process... households and corporations is ongoing

Non-performing have decreased20

as performing after restructuring has increasedNon-performing are those where one of debtors loans fall in one of the following categories:Payments have been deferredIs 90 days past dueIn restructuring processIn legal collectionIn resolution process

20One of the failed banks operated the online savings bank Icesave in the UK and Netherlands21

The UK and Dutch governments demanded an Icelandic state guarantee to reimburse the deposits22An agreement was reached three timesIIIIII(Jun 09 Sep 09)(Sep 09 Mar 10)(Feb 11 Apr 11)

22After Icesave III was rejected, the matter is now with the EFTA Supervisory Authority (ESA)

It is estimated that the UK and Dutch governments will receive approximately 94% of their claim from the estate of the failed Landsbanki23Icesave aftermathIcelands current credit ratings24

Since the crisis, the Central Bank has lowered interest rates ...25... and Icelands CDS spread is decreasing

25The Central Bank has introduced a plan to remove capital restrictions in two phases:26the plan will be complete at the latest by the end of 2015Phase I Reduction of offshore ISK positionsPhase IIRemoval of onshore ISK controls

The IMF fiscal consolidation program has reduced the deficit...27... and a budget surplus is projected in 2014

27Despite a deep recession ...28... Iceland has recovered relatively quickly

Iceland has applied for membership of the EU 29

and formal negotiations started in June 2011Other notable events30

An investigative committee released a report on the causes of the collapse ...

... and volcanic eruptions in 2010 and 2011 disrupted flights around the worldImage source: Flickr user fridgeirssonOther notable events31

In 2011, a three year wage contract was signed for the bulk of Icelands workers ...

... and in 2010, a constitutional assembly was elected to reform the constitutionOther notable events32In May 2011, another volcanic eruption disturbed flights in Iceland, the UK, Scandinavia and Germany but the eruption is now over and nobody was harmed. The impact of the eruption on daily lives was minor outside area close to the volcano.

Images from www.visir.isDespite the crisis, Icelands future is brightAn educated workforceNatural resources in abundanceInnovative and competitive businesses33The full report with further details is available atchamber.is/statusreport

A mailing list is available atchamber.is/mailinglist34