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Iceland Faces ‘Difficult’ Membership Negotiations, EU Says

October 12, 2011

Oct. 12 (Bloomberg) -- Iceland faces “difficult negotiations” in areas such as the free movement of capital, fishing and agriculture in its talks to join the European Union, the bloc said.

Iceland started EU entry talks in July 2010 and will probably vote on accession in early 2013. Support among Icelanders for joining the bloc is waning as the island’s economy recovers from its 2008 banking collapse. A June poll by Capacent Gallup showed 51 percent of Icelanders want to drop the application, compared with 38.5 percent who want to complete the process.

“Iceland’s accession process has made headway over the past year,” the EU said in its 2011 Progress Report published today in Brussels. “Difficult negotiations can be expected in a number of key areas such as free movement of capital, fisheries, agriculture and rural development, environment including whaling, taxation and customs unions, regional policy and food safety. The Icesave dispute remains unsolved.”

Iceland, whose banks defaulted on $85 billion in 2008, completed a 33-month International Monetary Fund program in August. Its economy is likely to grow faster than the average for the euro area this year and next, the IMF estimates, while credit default swaps on Iceland trade lower than the average for the EU.

“Vulnerabilities in the private sector continue to impede a stronger recovery of domestic demand, and banks are still suffering from weak asset quality,” according to the EU report. “The refinancing of the banking sector has been largely completed even though further” steps need to be taken in order for the banks to resume lending.

Icesave

The Icesave dispute, named after the high-yielding Internet accounts of failed Landsbanki Islands hf offered abroad, soured Iceland’s relations with the EU after the bank’s collapse left about 350,000 depositors in the U.K. and the Netherlands in the lurch. The island is obliged under European rules to guarantee a minimum 20,000 euros for each account holder with the lender. Iceland is facing legal proceedings as the European Free Trade Association’s Surveillance Authority considers whether to take the matter before the EFTA Court.

U.K. and Dutch depositors were compensated by their own governments after the failure. A government agreement on Iceland’s repayment terms of the $5.3 billion used to repay depositors was rejected by Icelandic voters in an April referendum, prompting the infringement proceedings.

The EU report raised concerns over high unemployment and the indebtedness of households and businesses. Iceland has started easing currency restrictions, which the central bank estimates have locked in about $4.3 billion in krona assets.

“Inflation is on the rise,” according to the report. “Currency restrictions are still in place, although first steps have been taken to prepare for a phased lifting of such controls.”

The island opened four chapters in its accession talks to join the EU on June 27 and closed two of them provisionally. The north Atlantic island could vote on accession talks as early as 2013, according to Foreign Minister Ossur Skarphedinsson.

--With assistance from James Neuger in Brussels. Editor: Jonas Bergman, Tasneem Brogger.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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