Few governments of developed market economies are grappling with as many simultaneous challenges as Iceland.
In its efforts to conclude negotiations over compensation for foreign savers in failed banks, Iceland has been accused of a tendency to imagine a British or Dutch conspiracy behind any bad news.
Iceland has no such tendency. It is battling the effects of severe banking and currency crises and a recession that is affecting our part of the world as much as any other. My government, which took over in February and gained a majority in general elections in May, has to deal with the aftermath of the fall of nearly all of Iceland’s privatised banking sector.
We plan a 30 per cent contraction in government finances over the next three years, with extensive cuts to infrastructure spending and wages – a heavy burden for our population of 300,000. We have, in co-operation with the International Monetary Fund, formulated an economic strategy that is being fully adhered to. Indeed, we have already reached agreements on a recapitalisation of the banking sector, a stability pact with social partners and a strategy for lifting current account restrictions. In that vein, the authorities have sought an agreement with the foreign creditors of the failed banks with the aim of them taking control of two of the reborn banks. We have also finalised loan agreements with several countries as part of the IMF programme and Iceland’s parliament has authorised it to seek membership of the European Union.
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