Bloomberg News

Iceland Needs to Shed Emerging Market Status, Gunnlaugsson Says

March 22, 2013

Iceland needs to reclaim its position as a member of the developed world and shed the emerging market status it had during the global financial crisis, according to the head of the party leading in some polls before next month’s elections.

“Iceland’s political instability has caused it to be ranked among nations that it usually doesn’t compare itself with such as Russia, Egypt and countries in South America,” said Sigmundur David Gunnlaugsson, leader of the opposition Progressive Party that was part of the coalition that led Iceland before its 2008 economic meltdown. “It’s fundamental that we reverse this trend.”

Gunnlaugsson’s political goals have helped the 38-year-old chairman garner increasing support for his party, which was pushed out of government in 2007 after losing almost half its seats in parliamentary elections. A poll published on March 15 by Stod 2 and Frettabladid put the Progress Party in the lead before the April 27 vote, with 31.9 percent support. Prime Minister Johanna Sigurdardottir has said she’ll step down as head of the Social Democrats after next month.

While Iceland is emerging from the deepest recession in six decades, it still needs to unwind currency controls in place since 2008 to prevent a krona sell-off. Offshore investors hold as much as $8 billion in kronur assets that risk destabilizing the $13 billion economy if dumped once the restrictions are removed.

‘Huge Concern’

The foreign exchange balance is a matter of “huge concern,” Gunnlaugsson said in an interview from Reykjavik.

He says he wants Iceland to harness its commodities wealth to restore economic balance.

“There are great growth opportunities in the fundamental industries of Iceland,” he said. “Before too long, we might reach a point where the fish filet is the least expensive part of the fish because the rest of the fish is utilized in a manner that creates even greater value.”

Growing exports will make it easier for Iceland to repay its foreign debts using kronur. Gunnlaugsson also said he doesn’t expect Iceland to abandon the krona for another currency regime “over the short or medium term.”

“Due to this we need to agree that we create better foundations for the krona, whatever we may do in the future,” he said. “This entails that Iceland needs to adjust to the Maastricht requirements” that guide European Union budgets, he said. “Not necessarily because we’re going to adopt the euro, but rather because they are sensible economic goals.”

IMF Praise

The north Atlantic island’s policy makers have won praise from the International Monetary Fund as well as the debt rating companies for their approach in handling the crisis, in part because they put households’ wellbeing ahead of bank creditor claims and because of the use of krona controls.

Iceland emerged from an IMF-backed program in August 2011 and is now outgrowing most of Europe. The economy expanded 1.6 percent last year, according to Statistics Iceland. The euro area, mired in its fourth year of fiscal crisis, contracted 0.6 percent in 2012, the European Commission said Feb. 22.

“We should make up our minds when we are better equipped to understand how the union is developing and also once we’re in a better position economically to decide whether we want to become a part of this,” said Gunnlaugsson.

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

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net.


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