Iceland: Election of Sigurdardottir - full text
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Johanna Sigurdardottir secured her position as Iceland's first female prime minister, when Iceland's interim centre-left government won a resounding election victory on April 26. The Socialist Democratic Alliance and Left Green Movement coalition secured 34 seats in the 63-member parliament.
Sigurdardottir pledged to work towards EU membership and stated that Iceland was "settling the score with neoliberalism". The Left Green Movement, the junior coalition party, remained opposed to EU membership, but the government pledged to put any EU membership deal to a referendum. Sigurdardottir's victory came after the mass resignation of Geir Haarde's centre-right government in January, following Iceland's economic collapse.
Immediate Context
The Icelandic financial crisis was precipitated by the wider global credit crisis which began in the US sub-prime mortgage markets in August 2007. The crisis spread to markets across the world with most developed financial markets suffering huge losses. The Icelandic banks had undergone a huge expansion built on credit from international capital markets since denationalisation was completed in 2003. When these sources of funds disappeared in the last quarter of 2007 the banks were left very vulnerable to insolvency due to their huge liabilities and small national economic base.
The entire Icelandic economy was vulnerable to the crisis because of its high levels of inflation and high interest rates. In June 2006 the ratings agency Standard & Poor's had downgraded Iceland's outlook to negative due to high levels of inflation and high government spending. In an attempt to rein in inflation the Icelandic central bank raised interest rates to 13.5 per cent in August 2006. With inflation running at 8.6 per cent the bank stated that further rises were unavoidable if the inflationary outlook did not improve.
Emergency measures to reduce inflation and stop the devaluation of the krona were introduced by the central bank in March 2008. Interest rates were raised by 1.25 percentage points to 15 per cent. This proved insufficient and in April 2008 the bank raised interest rates again, this time to 15.5 per cent. Despite these measures Standard & Poor's downgraded Iceland's credit rating to negative. Iceland sought regional assistance and in May the central banks of Sweden, Denmark, and Norway unveiled a 1.5 billion euro (US$1.00=0.6430 euros as at May 16, 2008) emergency funding package to stabilise Iceland's banking system and support its currency. The Icelandic business community called for further measures in June 2008 when the krona fell to 70 per cent of its January 2008 level against the euro.
The collapse and nationalisation of Iceland's banking system began in September 2008 with the government taking a 75 per cent stake in Glitnir, the country's third largest bank, to pre-empt its collapse. The rescue pushed the krona to a new low against the euro. In October legislation was introduced to the Althing (the unicameral legislature) to give the government emergency powers to nationalise banks and force mergers or bankruptcies. The measures were proposed in response to depositors, investors, and foreign banks losing confidence in Icelandic banks. All three major Icelandic banks came under state control shortly afterwards.
A US$10 billion IMF-led bailout package was agreed for Iceland in November 2008. The funding for the package was provided by the IMF, Russia, and European countries and was roughly equal to Iceland's GDP. Within Iceland protesters called for the prime minister and the governor of the central bank to resign over the crisis. In January 2009 Prime Minister Geir Haarde resigned after his ruling coalition collapsed.
Reaction and Outlook
The new banks created in the wake of Iceland's financial crisis were valued by auditors on April 22, allowing negotiations with creditors to begin. The new banks, New Kaupthing Bank, NBI, and Islandsbanki, and the Icelandic government intended to use the valuation to decide whether and how to compensate depositors from across Europe who lost their deposits when the banks collapsed. All Icelandic depositors received a full government guarantee for their savings.
The wider outlook for Iceland's economy was poor. The Organisation for Economic Co-operation and Development (OECD) stated that "the economy is projected to shrink until early 2010 and unemployment to soar over the next two years." The OECD further predicted that past unbalanced growth and high inflation would impede recovery. The IMF was more optimistic, however, with its Head of Mission in Iceland, Mark Flanagan, stating that "a late-year turnaround remains within reach".
Historical Context
Iceland was first colonised in approximately 870 by Norse settlers who built an economy based on farming and fishing. The inhabitants established the Althing, the predecessor of the current legislature, in 930 to agree laws and settle disputes. Power remained vested in the Althing through the introduction of Christianity in 1000 and the arrival of more settlers until Iceland recognised the Norwegian king as their sovereign in 1262. Sovereignty over Iceland later passed to Denmark and power within the country moved to the clergy and a small number of families. Denmark established exclusive trading rights with Iceland from the 17th to the early 19th century. From the mid- to late-19th century Iceland was granted increasing levels of autonomy.
In 1918 Iceland became a self governing kingdom linked to Denmark by a personal union. Denmark retained responsibility for defence and foreign policy. In 1940 German forces occupied Denmark and in response UK forces occupied Iceland to prevent a German invasion of the country. The Icelandic government remained neutral but co-operated with the occupying British. The UK garrison was replaced by a US garrison in 1941. The Althing declared Iceland to be an independent republic in 1944 while still occupied by US forces. King Christian of Denmark opposed the move but accepted independence after it was declared. After the conclusion of World War II, US troops remained in Iceland and the country joined NATO, despite having no armed forces.
In the post-war period, the Icelandic economy experienced problems with high inflation and poor industrial relations. The currency, the krona, was repeatedly devalued and financial assistance was received from the IMF in 1968. The fishing industry was vital to Iceland's economy and export capacity and a series of disputes arose with the UK and other European countries over access to fishing grounds. Between the 1950s and the 1970s Iceland several times unilaterally expanded its territorial waters leading to the "cod wars" with the UK and West Germany. In 1976 Iceland declared a 200-mile fishing limit around its coast, a claim eventually accepted by foreign fishing fleets.
The krona was allowed to float on international currency markets in 2001 in a move welcomed by the IMF as further integrating Iceland into the world financial system. Iceland's banking system grew rapidly and in 2003 the last state owned bank, Agricultural Bank of Iceland, was part privatised. The expansion of the banking system and the aluminium smelting industry increased Iceland's prosperity and Iceland moved to the top of the UN Human Development Index in 2005. The fishing industry remained important as an employer and source of exports as good conservation of stocks and the exclusion of foreign fleets kept yields high.
