Transcript of a Conference Call on Iceland

With Julie Kozack, IMF mission chief to Iceland
Friday, January 14, 2011

MS. NARDIN: Good morning and thank you all for joining our conference call. My name is Simonetta Nardin and I work in the External Relations Department at the International Monetary Fund. This is a conference call on Iceland on the release of the staff report on the fourth review under the Stand-By Arrangement. With me here in Washington is the mission chief to Iceland, Julie Kozack; and from Reykjavik, our resident representative Franek Rozwadowski, is also on the phone.

Question: I was wondering if you could provide a bit more flavor as to the timing and speed at which you estimate that the capital controls should be withdrawn. For instance, to what extent should this be carried out by, say, the end of this year?

MS. KOZACK: Thanks for your question. In terms of the removal of capital controls, the authorities are currently revising their strategy for lifting them. The speed and timing of any reduction or any removal of controls will obviously be discussed in detail in that strategy. But even before the strategy is issued we know that the removal of controls still needs to be very cautious and gradual, and that it needs to be closely linked to policies on debt management and the appropriate level of reserves and also ultimately what the monetary policy framework will look like after capital controls. I would say it is too early now before the revised strategy to discuss specific timing, but we know that preconditions that were mentioned in the original strategy will still be critical to determining the timing of any lifting of controls.

QUESTION: Would you expect to see some progress in terms of this going through the coming months? MS. KOZACK: There has been a lot of progress on a few fronts. First of all, a key precondition was to help to stabilize the fiscal situation and the debt situation, and there’s been tremendous progress made in that area, including with passage of the 2011 budget which targets yet a further fiscal adjustment.

In the second area where we’ve seen a lot of progress has been on the accumulation of reserves. Between the Avens transaction and then the recent transaction that took place at the end of the year, the Central Bank has increased non-borrowed reserves by more than we had expected at this time in the program. So in those areas there has been progress.

Similarly, on the financial sector there has been progress in restructuring banks and bank recapitalization, but there’s still a lot of work that needs to be done in the financial sector, including by advancing corporate and household debt restructuring to help improve bank balance sheets. So there’s been a lot of progress, but there’s still work that needs to be done. That’s basically where we are.

QUESTION: What is the IMF’s main concerns at this point concerning the economic progress in Iceland?

MS. KOZACK: Let me first stress that there has been a lot of positive progress made in the last few years in Iceland. We’ve seen tremendous progress made on the fiscal front in terms of getting the debt to a sustainable path. We’ve seen a lot of progress made in restructuring banks and beginning to heal the financial sector. And we’ve seen, also, that growth is starting to return to Iceland, which is tremendously important for the recovery going forward. In that regard we expect positive growth in 2011 for the first time since the crisis.

But despite all of this positive momentum, we do still see some challenges. Obviously a key challenge is to advance corporate and household debt restructuring. We think the new measures in place will lay the basis for advancing that restructuring. And we also see a key challenge in bringing down the high level of unemployment. For people that are unemployed the crisis continues and we won’t be satisfied until the rate of unemployment declines in Iceland.

QUESTION: The progress has exceeded your expectations?

MS. KOZACK: Yes, I think so. If you look back at the beginning of the program, the original program, Iceland has done very well. Fiscal adjustment has, you know, worked very, very well, and has been -- the authorities have taken significant measures to bring the debt to a sustainable level. Growth has been more or less in line with our projections. And the other key feature in Iceland, which has maybe not exceeded our expectations, but I think has worked very well, is that the fiscal adjustment has been able to be undertaken while still preserving Iceland’s social welfare system.

So there are fits and starts with any post-crisis recovery, but in Iceland, overall the progress has been really quite extraordinary.

QUESTION: One more question. What are the key factors that you consider to have to fall into place before the program can finish?

MS. KOZACK: Well, the program is still on track to expire at the end of August. And at this stage we will begin discussing life after the program with the authorities in the coming months. But ultimately, it’s a decision for the authorities to make and there are a number of options for ongoing engagement or not with the IMF.

QUESTION: Do you think the program will finish in August as planned?

MS. KOZACK: Yes.

QUESTION: We’ve seen quite a lot of protests against Magma Energy’s investment in the geothermal sector, most recently with this karaoke marathon led by Bjork last week. I just wondered if the IMF was concerned -- do you think this is specific to Magma or do you think this reflects a broader opposition to foreign investment in energy and energy-intensive sectors? And given the importance of that to recovery, which is spelled out in the report, is it a source of concern, this opposition to investment in energy?

MS. KOZACK: Investment in the energy sector in Iceland is really an issue of national sovereignty for Iceland to determine what type and how much investment they want in this sector. It is not a condition of our program. It does of course feature into our growth forecast and to the extent that there will be less investment in this sector we would then discuss with the authorities alternative sources for growth. But beyond that, it’s really an issue of national sovereignty for Iceland and we don’t have any conditions on that.

QUESTION: Litigation is another issue touched on in the report. Obviously the Supreme Court ruling, but the other one is this challenge to the depositor priority law that was brought in as part of the emergency legislation during the crisis. I think DekaBank of Germany has already launched a lawsuit challenging that. And obviously the implications of that are pretty serious. If they were to win, presumably it greatly reduces the amount of the I-Save debt that would be recovered from the Landesbank estate if creditors got access to that estate. So how concerned are you about the implications of -- the potential implications of that litigation issue?

MS. KOZACK: Well, litigation risk has always been a key risk to the program, precisely because there have been many, many lawsuits and different litigation measures initiated against Iceland, including against the emergency law. One thing that gives us some comfort is the recent European surveillance Authority (ESA) decision on the emergency law, which essentially -- and we flag this in the report, which essentially said that the emergency law is in line with the EEA Treaty. This gives us some comfort that the emergency law may continue to be upheld.

But as you say, litigation risk still is a concern. We’ve discussed it in nearly all or all of our staff reports. It is a risk for Iceland. And if the emergency law were overturned, it would have far-reaching consequences for Iceland, and we would have to obviously take a very careful look at the program if that were to happen.

QUESTION: Is the Icelandic program giving you any lessons about countries that have such banking crises? For example, do you draw any lessons from the restructuring of debt?

MS. KOZACK: First of all, it’s still early days, so it’s very difficult to draw any lessons from Iceland’s experience after the crisis. We still need a bit more time to see how the recovery continues and to draw clear lessons. From the IMF’s perspective, obviously the policies in each program are tailored to the individual needs of specific countries. And in Iceland, we believe that the policies under the program have worked very well for Iceland.

QUESTION: And how about capital controls? The Fund economists always say that it is not a priority and should not be a priority in countries’ policies. Obviously, it was here something that was badly needed and which you had to implement. Would you provide first assessments on how good capital controls can function for other countries?

MS. KOZACK: Well, I can tell you what capital controls have done for Iceland, or our assessment at least for now, which is that capital controls have provided a lot of benefits to Iceland. First of all, they have helped provide financing to the budget at low cost. They succeeded in stabilizing the exchange rate initially after the crisis, which was critical to preventing even more severe balance sheet effects for households and corporates than what we saw, so this was a critical element in stabilizing the recovery and laying the basis for a gradual and eventual recovery. And as I said already, the capital controls have provided a source of budgetary financing, so this has helped keep the debt on a sustainable path without requiring recourse to very high interest rates for an even more prolonged period. For Iceland, the capital controls have been beneficial, no doubt. They’re an important part of the toolkit for this program. They’re a key policy in this program for Iceland. And they’ve been, at least in our view, very successful.

QUESTION: On Icesave, given its importance to the issue to some of the financing of the program, do you have any comment to make on the new deal and whether the IMF would urge Parliament to approve it?

MS. KOZACK: Well, we obviously welcome the new deal. If approved by Parliament it would represent a milestone in Iceland’s emergence from the crisis. And as you can see from the staff report, the deal presents much more favorable debt dynamics for Iceland than the previous deal. So from that perspective, it helps with one of the key program objectives of helping to ensure public debt sustainability.



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