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Iceland’s Hardardottir Committed to Euro

Posted by seumasach on January 5, 2012

Bloomberg

5th January, 2012

Iceland’s Finance Minister Oddny G. Hardardottir said she’s committed to the island nation adopting the euro as the bloc will emerge stronger from its debt crisis amid tightening fiscal ties and discipline.

Iceland opened talks on joining European Union in 2010, two years after the nation’s banking system and economy collapsed. The country, which has since relied on capital controls to protect its currency, is pushing ahead with membership talks as Europe struggles to contain a debt crisis.

“I’m not concerned about the future of the euro,” said Hardardottir, who was named finance minister in a Cabinet shake- up last week, in an interview yesterday in Reykjavik. “The demand is that countries become more disciplined in their economic management. That’s something that we should also take to heart, although we’ve shown great effort and performance in that regard following the economic collapse.”

As the economy (ICGPSAQ) emerges from its slump, Iceland has started easing currency restrictions, which the central bank estimates locked in about $4.3 billion in krona assets. The country will probably vote on accession to the EU next year. A November poll by Capacent Gallup published by Frettatiminn showed 53.1 percent of Icelanders want to complete accession talks, while 46.9 percent want to withdraw the bid.

Joining the euro won’t take place “overnight,” Hardardottir, 54, said. While the krona may “always need some sort of capital controls,” it’s now important to get rid of a “majority” because “they impede business and economic growth,” she said.

Cabinet Shake-up

Hardardottir, Iceland’s first female finance minister, took over on Dec. 30 when Prime Minister Johanna Sigurdardottir dismissed Economy Minister Arni Pall Arnason and Fisheries and Agriculture Minister Jon Bjarnason to create more unity in the Cabinet. Bjarnason said in a statement that he left the government because of his opposition to joining the EU. Former Finance Minister Steingrimur J. Sigfusson took over as economy minister.

Iceland, whose banks defaulted on $85 billion in 2008, completed a 33-month International Monetary Fund program in August. The Washington-based fund expects Iceland’s economy to grow faster than the average for the euro area this year. It also costs less to insure against an Icelandic sovereign default than it does to hedge against such an event in struggling European countries such as Spain and Italy, derivatives show.

Issuing Debt

Iceland expects in “coming years” to whittle its debt level down to 60 percent of gross domestic product from 88 percent and to meet the euro area’s deficit requirements “well within that time,” Hardardottir said.

The government presented a budget in October that included the equivalent of a value-added tax on lenders, raised taxes on natural resources, increased capital gains taxes and reduced spending. The budget targets a government deficit of 1 percent of GDP this year, compared to an estimated deficit of 2.6 percent last year.

The country may sell another bond to international investors this year, after issuing a $1 billion five-year bond in June, Hardardottir said. “It would be desirable to issue debt with longer maturities, such as 10 or 15-years. Still, no decisions have been made in this regard and we can’t comment on what yield on Icelandic Eurobonds we deem to be acceptable.”

Easing Controls

Iceland’s central bank is trying to ease capital controls without triggering a krona slump that risks fueling inflation. Policy makers are also seeking to protect the economy from the fallout of the euro crisis, which threatens to sap global growth. The bank left rates unchanged at its latest meeting in December, after raising borrowing costs twice last year.

The krona has slipped 3.5 percent against the euro over the past year, while inflation has hovered at about 5 percent since July. The bank targets 2.5 percent price growth.

The economy grew at the fastest pace since the second quarter of 2007 in the three months through September, the statistics office said on Dec. 7. GDP grew a quarterly 4.7 percent, after shrinking 3.6 percent in the previous period, the office said. The rebound was driven by a 6.8 percent increase in exports, while household spending grew 1.1 percent.

Iceland’s $12 billion economy will grow 2.4 percent this year, the Organization for Economic Cooperation and Development said in November. The euro area, by comparison, will grow 0.2 percent this year.

Icesave Pay out

A decision in 2008 to ignore banks’ obligations to bondholders and shield the economy from a payout several times the size of its national output helped spur Iceland’s recovery, according to Nobel Laureate Paul Krugman. Moody’s Investors Service last month said it maintained Iceland at the lowest investment grade level as potential liabilities for losses stemming from failed lenderLandsbanki Islands hf (LAIS)’s Icesave accounts are lower than previously estimated.

The failure of Landsbanki in 2008 threatened the savings of about 350,000 British and Dutch depositors. They were repaid by their governments, which then turned to Iceland for compensation of about $5.2 billion. Iceland last year started payments on as much as $11 billion to depositors from the estate of the failed lender.

“The most important task now, when we’re getting close to bridging the gap in the budget which we expect by 2014, is to look further ahead and map the country’s finances into the future,” Hardardottir said.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavikvaldimarsson@bloomberg.net.

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net.

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