Iceland’s New Government Has Cunning Plan Of Tapping Banks To Boost Growth, Improve Infrastructure
We like Iceland, we’ve never been there, but that doesn’t matter. Besides the outstanding natural beauty, Iceland, unlike the US, UK and practically everywhere else, holds bankers accountable. Last time we checked, 29 had been jailed. As we discussed, it also holds its leaders accountable (partially – see below) when they are complicit in exonerating convicted child rapists. Such an event brought down Iceland’s government in September:
Last week, it emerged that Prime Minister Bjarni Benediktsson knew of attempts by his father, Benedikt Sveinsson, to have the Ministry of Justice grant “restored honor” to a convicted child rapist. Benediktsson kept this secret as the rapist, a friend of his father’s, was essentially exonerated.
Restored honor is the controversial process by which convicted criminals can have their crimes expunged and return to society with all rights and privileges restored. It requires that the convicted person serve between two to five years of their sentence on their best behavior and that they have multiple letters of recommendation. Sveinsson provided one such letter.
Iceland held new elections on 28 October 2017 and a new coalition government came in to power this week. Iceland’s economy has been booming, in part due to the influx of tourists visiting its thriving capital city, Reykjavik, along with the Geysir geyser and the Gullfoss waterfalls. On any given day, tourists are likely to account for about 10% of the island’s population. However, as the FT explains, Iceland is paying a price for its success:
These challenges include everything from the poor quality roads and overburdened infrastructure to a lack of accommodation and simmering popular discontent over how tourism is being handled. At Geysir and Gullfoss in central Iceland, dozens of buses and cars park at both attractions for free before disgorging tourists who pay no entrance fee. The roads across Iceland are under intense strain from hire cars, and a tourist died just after Christmas in a head-on collision on a single-track bridge.
“What are we sacrificing when we don’t put a levy on tourists? The roads here are dangerous,” says Asta Helgadottir, an MP for the anti-establishment Pirate party…Accommodation is also a problem. Cranes everywhere in Reykjavik attest to the surge in hotel construction, but the increase in rooms still lags behind the growth in tourism.
However, all is not lost. The new government has a plan…which involves Iceland’s banks and tapping their excess capital. According to Bloomberg.
Iceland’s new left-right coalition government is gearing up for a spending drive to fix the nation’s dilapidated infrastructure after years of austerity, and it could tap its banks for some of the needed cash.
Iceland got a new government on Thursday, in a coalition between the Left Greens, the Progressive Party and the conservative Independence Party. The parties have pledged to spend more on roads and other infrastructure to catch up on an estimated 400 billion kronur ($3.9 billion) in missing investments.
Even in Iceland, it seems, discredited politicians can bounce back into public life almost immediately, which is precisely what’s happened in the case of Bjarni Benediktsson, usually known as “Bjarni Ben”.
Bloomberg spoke to the man himself: “According to Finance Minister Bjarni Benediktsson, the government has an ace in the hole that can help finance the spending: the excess equity in its three largest banks, Arion Bank hf, Landsbankinn hf and Islandsbanki hf. The banks have leverage ratios in the 16 percent to 18 percent range at the end of June, far above the 3 percent minimum, according to Iceland’s central bank.
“We have hundreds of billions of kronur, way more than any other European nation, tied up in financial institutions,” said Benediktsson, a former prime minister who will now take over at the Finance Ministry, in an interview on Thursday “And we in the three parties are ready to shake loose this capital to use it toward an infrastructure build up.”
With a plan like that, the government must have considerable leverage over Iceland’s major banks…and it does.
The government owns most of Landsbankinn and all of Islandsbanki and has a stake in Arion. The banking assets were acquired after the 2008 collapse when the government stepped in to save the financial industry. The crisis is now largely in the rear-view mirror and the new government is being handed a booming economy.
The government will now put together a white paper on the financial system and have a broad discussion in parliament.
We hadn’t fully appreciated how rapidly Iceland’s economy has been growing – last year it grew faster than China (6.7%) and even faster than India (7.1%). However, the growth rate is declining rapidly, so the coalition government’s plan might be timely, if it can be executed.
There are signs that the economy may be cooling after growing at a whopping 7.4 percent last year. Economist surveyed by Bloomberg are forecasting gross domestic product growth at 4.2 percent this year, while the central bank recently lowered its forecast for 2018 to 3.4 percent from 5.5 percent.
Despite the differing left-right ideologies in the new coalition government, Bjarni Ben and the new prime minister are cautiously confident, especially the former.
Internally, the government may find it hard to reconcile the policies of its two biggest parties, the Left Greens and the Independence Party. But both party leaders on Thursday insisted they would make it work.
“The outer circumstances are working in our favor in forming this government,” Benediktsson. “We are the European nation that is growing at one of the fastest rates — we have no unemployment in Iceland to speak of, we have a budget surplus since 2014 and forecasts predict continuing growth, a great increase in tourism next year.”
Taking over as prime minister will be Left Green leader Katrin Jakobsdottir, the first time the party holds the top spot after emerging as the second biggest group in October’s election. While she faced some internal party turmoil for joining with the Conservatives, she is now “optimistic but realistic” that she can make it work.
Having cratered the economy during the crisis, it would be poetic justice if the major Icelandic banks were its saviour as we head towards the next one.
ER recommends other articles by Zerohedge