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News : EU Economy Last Updated: Jan 5, 2010 - 3:15:09 PM

Iceland to cut public spending by 30% over next 3 years; Slams UK and Netherlands
By Finfacts Team
Aug 14, 2009 - 2:34:37 AM

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President Ólafur Ragnar Grímsson chairs the first meeting of Iceland's new Prime Minister Jóhanna Sigurðardóttir's Cabinet, on February 01, 2009 - - Sigurðardóttir is the longest serving member of Iceland's Parliament, the Althingi. She is the first openly gay head of goverment and her spouse, Jónína Leósdóttir, is an author and playwright.

Iceland's prime minister Jóhanna Sigurðardóttir, says in an article published in the Financial Times today that her government plans a 30 per cent cut in public spending over the next 3 years, with extensive contractions in infrastructure spending and wages. She terms it "a heavy burden for our population of 300,000."  In the article, she also slams the UK and the Netherlands for demanding compensation for payments on deposits in respect of a failed Icelandic online bank.

Sigurðardóttir said Icelanders are angry at having to take on burden of compensation for the Icesave savings accounts of Landsbanki  - - a failed, privately owned, commercial bank, which attracted hundreds of thousands of UK and Dutch savers with high interest rates. The amount to be shouldered by Iceland is huge - - about 50 per cent of Iceland's  gross domestic product. She said assets against this debt will substantially lower the net amount, but there is much uncertainty about the valuations and forecasts underpinning such calculations.

Icesave was an online bank of Iceland's second biggest financial institution, Landsbanki, which was nationalised by the government last October.

“The Icelandic government have told me, believe it or not, they have no intention of honouring their obligations there,” Alistair Darling, the Chancellor, told BBC radio.

But citing “exceptional circumstances” he said: “We have decided we will stand behind those savers."

More than 300,000 British customers had around £4 billion deposited in Icesave accounts, which until its closure, offered higher rates of interest than British banks

UK prime minister Gordon Brown, had used the Anti-Terrorism, Crime and Security Act 2001, to put restrictions on Landsbanki, a move that was criticised by the House of Commons Treasury Select Committee.

Prime Minister Sigurðardóttir says in today's FT article: "The FT has reported how the Dutch opposed the IMF lending to Iceland in order to enforce their demands on Icesave, claiming the UK and Germany as allies. The perception is that Treasury officials in the UK and the Netherlands used their bargaining power against a much weaker party when the Icesave deal, now being debated in the Icelandic parliament, was struck."

She concludes: "It is to be hoped that the people of large countries such as the UK and the Netherlands are aware of the lasting impact their governments can have on small countries such as ours at a time of great distress."

Interest rate

Jóhanna Sigurðardóttir
Iceland's central bank on Thursday warned that a likely delay in funding from the International Monetary Fund could be very damaging for the country's economic recovery as it announced it was holding official interest rates at 12 per cent.

Sedlabanki raised its outlook for the economy and now sees a 9.1 per cent contraction this year compared with a previous forecast for an 11 per cent decline. Household spending will slump 19.7 per cent and fixed investment will plunge 48.4 per cent, according to the bank.

Inflation slowed to an annual 11.3 per cent in July, from 12.2 per cent in June, the statistics office said at the end of last month.

Sedlabanki has lowered its benchmark rate four times this year from a record 18 per cent since obtaining a $5.1 billion loan from a group led by the International Monetary Fund.

Sedlabanki Interim Governor Svein Harald Oygard said that 19 of the 20 requirements made by the IMF for its loan payments had been met, and the future for the country over the next few months depended on the remaining one.

"If things are brought to a halt, I think the impact of that on the Icelandic economy will be very unfortunate,"he said at a press conference.

The IMF announced last month that it had put back a review of the loan program, which had been scheduled for August  3rd.

An approval of the review would free up a second tranche of a $2.1 billion IMF loan deal. The funds are part of a $10 billion aid package agreed by the IMF and Iceland's Nordic neighbors and other European countries.

Sedlabanki said Thursday that the hold on the loans, was related to delays in the Icelandic parliament approving a Bill, which would ensure the UK and the Netherlands are repaid for the billions they spent in compensating Icesave account holders.

More visitors

Foreign visitors to Iceland increased by 1.2 per cent in July this year compared to July 2008, according to data issued on Thursday by the Icelandic Tourist Board. Around 82,000 foreign travelers departed from Keflavík International Airport last month - - up by 950 in July 2008.

Since January 1, 2009, a total of 261,000 foreign travelers have left from Keflavík Airport - - a 1.7 per cent decrease from the same period last year. Almost 50 per cent fewer Icelandic travelers passed through the airport during the first seven months of this year compared to January-July 2008.

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