REYKJAVIK/STOCKHOLM Feb 17 Iceland's government
feels it can shun international investors while enjoying
economic growth - witness its dismissive response to a $5
billion lawsuit over Icesave debts and a tough stance on paying
The centre-right administration, elected last year, has
turned its back on talks to join the European Union, largely
opting to go it alone in rebuilding an economy shattered by a
That had forced the nation of 320,000 to take an
international bailout and slash public spending, but now the
economy is growing at the fastest pace since before the crisis
and better than many EU countries - expanding by 3 percent in
Meanwhile, the tough stance over creditors remains popular
with voters despite capital controls that hamper foreign
"There are no good reasons for Iceland becoming financially
isolated, and we have seen things developing in the right
direction," Icelandic Prime Minister Sigmundur Gunnlaugsson told
Foreign visitors have flocked to the island. Tourist
revenues for the year to the end of September were 267 billion
Icelandic crowns ($2.3 billion) up from 73 billion in the whole
of 2008. Earnings from fishing and aluminium are up 60 percent
and 25 percent respectively in the 2008-2012 period.
"Iceland has recovered faster than most others," Eirikur
Bergmann, professor of politics at Iceland's Bifrost University,
said. "Of course, capital controls skew the economy, so in the
long run it needs to be sorted, but there doesn't seem to be any
immediate need to rush into doing that."
Indeed, economists say the protective shell around the
economy also makes things difficult for local businesses while
the island's financial markets are being distorted.
But for now, there is little public appetite for the
compromises needed for reintegration into the financial
Earlier this week Iceland's Depositors' and Investors'
Guarantee Fund said Britain and the Netherlands had filed a
$4.87 billion claim with a Reykjavik court over money they paid
out to cover domestic savers losses in Icesave accounts when
Landsbanki collapsed in late 2008.
Iceland's prime minister dismissed the suit, saying that the
two countries would not get much for their efforts as there was
no state guarantee for the debt.
His lack of concern reflects a sense of wounded pride
following the banking collapse and the Icesave spat when the
British used anti-terrorist laws to seize Icelandic assets.
Support for joining the EU has slumped and there has even
been talk of adopting Canada's currency, not the euro.
"I actually thought the Icesave dispute had ended and this
suddenly popped up," 41 year-old Gudrun Gunnarsdottir said.
"It's another case of the big countries trying to use their
strength against a smaller nation."
NOT TOO BIG TO FAIL
Iceland's main banks had assets worth around 10 times the
value of the country's economy when they collapsed in late 2008.
Iceland bailed out domestic savers, but not those overseas with
money in Icelandic banks, leading to a bitter dispute with the
Dutch and the British.
Much of the money has been paid back from the assets of the
collapsed banks, but the new claim is a nasty reminder that
foreign creditors still feel they have been short-changed.
Equally intractable is a standoff between holders of bonds
issued by failed banks and the government over an estimated $3.4
billion worth of assets.
The estates of the banks and the creditors cannot finalise a
deal without an okay from the government. It will not agree to a
solution unless it can remove capital controls, put in place in
2008 and still in place five years later.
"To date, there has not been meaningful engagement by the
Icelandic authorities on these issues," Matt Hinds, partner
at Talbot Hughes McKillop, financial adviser to the Informal
Creditor Committee of Glitnir, said in an emailed comment.
"What the creditors now need is engagement from the
But the government appears happy to play a waiting game.
Icelandic PM Gunnlaugsson has built his political capital
from his opposition to Icesave deals that would have seen
Iceland pay heavy interest costs to Britain - proposals rejected
A similarly tough stance over payments to bank creditors -
many of which are hedge funds that bought the assets after the
island's lenders collapsed - is popular with many Icelanders.
But there are risks going it alone.
Capital controls are a drag on growth and foreign direct
investment, at about 130 billion crowns in 2012, is around one
third of the level it was prior to the crisis.
Jon Bentsson, economist at Islandsbanki, says there are
concerns over asset bubbles as money that would otherwise be
invested abroad is pumped into domestic markets.
He said that so far, there had only been mild distortions of
the equity, bond and real estate asset prices.
"But every year that passes ... the amount (of money)
increases and that puts corresponding pressure on Icelandic
markets," he said.
Businesses are also suffering. In a poll by Capacent of
CEO's of 158 start-up companies in Iceland, around 38 percent
said they could move their company abroad in the next couple of
years. The key reason was to access foreign investment.
Removing the controls, however, is proving tough and even if
they are ended, a free-floating currency puts Iceland's tiny
economy at risk when global markets hit turbulence again.
"In the long run, the outlook for GDP growth has improved
markedly from the middle of last year - but within the capital
controls, it is like a bubble," Regina Bjarnadottir, head of
research at Arion Bank. "If you want sustainable long-term
growth, you need to lift the controls."