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News : Global Economy Last Updated: Jul 3, 2013 - 8:48 AM

Iceland and economy in need of some sunshine
By Michael Hennigan, Finfacts founder and editor
Jul 2, 2013 - 8:34 AM

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The number of sunshine hours in Reykjavík, Iceland's capital, was unusually low in June, at 121.7 hours, 90 hours less than the average for June over the last ten years. Reykjavík has not seen such little sunshine since 1995, visir.is reports. The economy also needs some sunshine.

Iceland’s economy is recovering at a moderate pace and is now more balanced than before the crisis, although more remains to be done in private-sector deleveraging, reducing non-performing loans and lowering external indebtedness, according to the Organisation for Economic Cooperation and Development (OECD). Economic growth should gain momentum in 2014, led by a large increase in energy-intensive investment. To increase economic growth on a lasting basis and better manage risks, capital controls need to be removed in an orderly fashion, monetary and financial stability arrangements strengthened and the government debt-to-GDP ratio reduced to more prudent levels.

Iceland's latest 5-year average real growth (%) is at -1.1%.

Growth was 1.6% in 2012 and is projected to be 1.9% this year, and in 2014 could rise to 2.6%, the OECD said in its recent biannual survey.

The economy is volatile due to Iceland‘s small size - - population is at about 320,000 people - - - and "heavy reliance on natural resources as the main source of exports" including fisheries, the OECD said.

Icelandic lenders have forgiven household debt equal to about 12% of gross domestic product since the bank failures of 2008. Through the end of 2012, the island’s lenders had written off 212.2bn krona ($1.7bn), according to the Icelandic Financial Services Association. The group estimates a further 35.3bn krona will be forgiven this year.

The OECD noted that according to Statistics Iceland, nearly half of Icelanders are having trouble making ends meet every month, despite the country's strong economic recovery since the financial crisis of 2008, when its top three banks collapsed. "Household debt has fallen significantly from the crisis peak relative to both GDP and total assets," it said.

But the decline "has not, however, translated into a large reduction in the proportion of households in financial difficulty, which has only come down from a peak of 52% in 2011 to 48% in 2012," it added.

Government debt shot up to 120% of GDP in the wake of the financial crisis. The government and the IMF agreed that bringing debt down to more prudent levels needed to be a central pillar in the economic recovery programme. Accordingly, the government embarked on a substantial, multi-year fiscal consolidation programme aimed at reducing general government gross debt (Maastricht definition, which excludes funding deficits in government employee pension schemes) to 60% of GDP.

Ásgeir Jónsson, an assistant professor of economics at the University of Iceland, says in an article on Deutsche Welle dealing with the economy and the recent general election:

[The clear winner of the elections, the Progressive party, which is traditionally the agrarian party in Iceland, rode to victory on the platform of using "vulture funds" money to write down household mortgage debt. It is a simple but winning formula. About 85% of household debt is inflation-indexed and the average homeowner has seen the principal of his loan rise in excess of 40% due to the inflationary wave that followed the collapse of the Icelandic krona (ISK) in 2008. At the same time, the asset recovery of the failed banks has actually been much better than forecasted.

The political discourse is now dominated by all kinds of feel-good policies, goals and promises to the public, many of which are mutually exclusive or not even attainable. It is for example impossible to simultaneously promise the abolition of capital controls and low inflation and higher purchasing power in the short run. Nor is it possible to maintain fixed exchange rates while simultaneously stimulating domestic demand - - if exports are lacking.]

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