“Fears of a meltdown are vastly overblown“, wrote Hannes Gissurarson, professor of political theory at the University Iceland in the Wall Street Journal yesterday.
International media coverage of Iceland has been in a frenzy following speculation that the tiny Nordic country is allegedly on the verge of economic collapse.
But the negative media publicity is unwarranted according to a number of senior bankers more familiar with the atypical workings of the Icelandic financial system.
“The global turmoil is certainly hurting the financial sector, but the danger of things toppling over here is greatly exaggerated,” said Finnur Oddsson, managing director of the Icelandic Chamber of Commerce.
Thor Herbertsson, co-author of an influential report in 2006 on Iceland’s economy with Fredric Mishkin, a member of the US Federal Reserve board, said “Iceland is not in more danger than some Wall Street banks.”
Richard Portes, President of the Centre for Economic Policy Research, urged investors to pay more attention to the data. Mr Gissurarson, who is also a member of the Central Bank of Iceland, presented some of this data to the Wall Street Journal yesterday.
“Iceland isn’t melting,” he said, and pointed to an improving current account deficit which dropped to 16% of GDP in 2007 from 25% the year before. Gissurarson said that Iceland has virtually no public debt and has enjoyed “unparalleled political stability” since the pro-business Independence Party took office in 1991.
He also addressed the issue of large private-sector debt which critics say is evidence of the impending doom. “To correctly assess the health of the economy, it’s not enough to look only at the future value of the investments financed by this debt but also at the new capital that has been created in Iceland over the last 16 years.”
Gissurarson said that this new capital, which has seen a surge in Icelandic investments overseas, (particularly in British and Nordic retail), has been part-funded by 5 billion dollars worth of fishing quotas and 6 billion dollars of newly-privatized public assets in Iceland. This is why Icelandic investors “have been able to play a far more important role in international finance markets than the small size of the economy might suggest”.
Gissurarson also highlighted that Iceland has per capita one of the strongest state pension systems in the world with assets of around $24 billion at the end of 2006 – $7 billion more than the country’s total annual GDP. Its two main exports, seafood and aluminium, also currently command record prices.
He concluded that there “is no mystery” to the recent appearance of Icelandic investors abroad, pointing to the rapid transformation of what was in essence a poor country before 1991, to a rich one with a privatised economy and “liquid capital” which can be used as collateral.
Meanwhile Icelandic central bank policy maker Ingimundur Fridriksson said yesterday the country’s banks are stable, having “virtually no subprime exposure”. Glitnir, one of the largest Icelandic banks with offices in 11 countries, said it was now the second largest equity broker on the Oslo Stock Exchange (OSE) after increasing its market share to NOK 24,127 million, or 7.37% of equity turnover, in March.
“Glitnir has a positive view on the development on OSE going forward. Most crises end with a collapse, and we believe the FED supported buyout of Bear Stearns will be remembered as the climax of the current credit crisis”, said Bengt Jonassen, Head of Research at Glitnir Securities.