1. 1 Published on August 10 th 2011 The Icelandic Economic Situation Status Report

2. Iceland 2 Population: 320,000 Capital: Reykjavík Currency: Krona (ISK) Language: Icelandic Size: 100,000 km 2

3. 3 Part A The Financial Crisis

4. ... with assets of the “big 3” banks 11 times Iceland’s GDP 4 In 2008, the banking sector had become gigantic...

5. Then, in October 2008, the “big 3” failed in 3 days 5 7 October 2008 Landsbanki fails 8 October 2008 Glitnir fails 9 October 2008 Kaupthing fails

6. The financial crisis became a currency crisis... 6 Exchange rate for one Euro Capital restrictions imposed Bank collapse

7. ... and the capital markets evaporated 7 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 OMX Iceland 15 Index Performance, 1998-2008

8. Political instability followed... 8... and the first left-wing government in over 30 years was elected

9. The failed banks were split into “old” and “new” banks... 9... with Icelandic operations transfered to “new” banks and international operations staying in the “old” banks

10. In addition to the “old” banks, a part of the “new” banks was placed in ownership of creditors 10 S Landsbankinn (formerly NBI) Arion bank Íslandsbanki Creditors of Landsbanki Íslands hf Creditors of Kaupthing Bank hf Creditors of Glitnir bank hf Resolution Committee Kaupthing bank hf* 19% 87% 95% The FSA appoints the resolution committees Icelandic State Financial Investments Manages the state’s holdings 81%13% 5% Resolution Committee Landsbanki Íslands hf* Glitnir bank hf* *) Old banks, in resolution process Source: Vilhjalmur Thorsteinsson

11. The government also entered an IMF programme to reduce the fiscal deficit 11 24 October 2008 The Icelandic government reaches an agreement with the IMF on a stabilization program, including a $2.1 bn loan 28 October 2009 IMF's Executive Board approves the 1st review of the Economic Recovery Program 16 April 2010 IMF's Executive Board approves the 2nd review of the Economic Recovery Program 29 April 2010 IMF's Executive Board approves the 3rd review of the Economic Recovery Program 11 January 2011 IMF's Executive Board approves the 4th review of the Economic Recovery Program 3 June 2011 IMF's Executive Board approves the 5th review of the Economic Recovery Program 31 August 2011 Scheduled end of the Economic Recovery Program. A 6th and final review will be published before the end of the program.

12. 12 Part B The Current Landscape

13. Iceland went into a recession... 13 Real GDP, 2009 prices... and public debt surged Net public debt, % of GDP

14. However, Iceland’s debt is manageable... 14... and Iceland has not defaulted on any loans Net public debt (% of GDP) Source: OECD

15. Homes struggle with higher unemployment... 15... and a lower living standard Statistics Iceland’s Standard of Life survey

16. Inflation reached 17% when the currency collapsed... 16... but has stabilized again

17. Despite the recession, Iceland still remains competitive compared to other economies 17

18. 18 Part C Recent Developments

19. Debt restructuring of … 19 … and initiatives by the banks and the government have been put in place to speed up the process... households and corporations is ongoing…

20. One of the failed banks operated the online savings bank Icesave in the UK and Netherlands 20 The UK and Dutch governments demanded an Icelandic state guarantee to reimburse the deposits

21. 21 An agreement was reached three times I II III (Jun ‘09 – Sep ’09) (Sep ‘09 – Mar ’10) (Feb ‘11 – Apr ’11)

22. After Icesave III was rejected, the matter is now with the EFTA Supervisory Authority (ESA) It is estimated that the UK and Dutch governments will receive approximately 94% of their claim from the estate of the failed Landsbanki 22 Icesave aftermath

23. 23 Iceland’s current credit ratings Aaa, Aaa1, Aaa2, Aaa3 Aa, Aa1, Aa2, Aa3 A, A1, A2, A3 Baa, Baa1, Baa2, Baa3 Ba, Ba1, Ba2, Ba3 B, B1, B2, B3 Caa, Caa1, Caa2, Caa3 Ca, Ca1, Ca2, Ca3 C AAA, AAA-, AA+ AA, AA-, A+ A, A-, BBB+ BBB, BBB-, BB+ BB, BB-, B+ B, B-, CCC+ CCC, CCC-, CC+ CC,CC-, C+ C Investment Grade Speculative Grade Outlook Negative AAA, AAA- AA+, AA, AA- A+, A, A-, BBB+, BBB, BBB- BB+, BB, BB- B+, B, B- CCC+, CCC, CCC- CC+, CC, CC- C+, C Stable

24. Since the crisis, the Central Bank has lowered interest rates... 24... and Iceland’s CDS spread is decreasing

25. The Central Bank has introduced a plan to remove capital restrictions in two phases: 25 the plan will be complete at the latest by the end of 2015 Phase I Reduction of offshore ISK positions Phase II Removal of onshore ISK controls

26. The IMF fiscal consolidation program has reduced the deficit... 26... and a budget surplus is projected in 2013

27. Despite a deep recession... 27 Real GDP change (%) Norway Iceland UK Ireland Greece... Iceland has recovered relatively quickly

28. Iceland has applied for membership of the EU … 28 … and formal negotiations started in June 2011

29. Other notable events 29 An investigative committee released a report on the causes of the collapse...... and volcanic eruptions in 2010 and 2011 disrupted flights around the world Image source: Flickr user fridgeirsson

30. Other notable events 30 In 2011, a three year wage contract was signed for the bulk of Iceland’s workers...... and in 2010, a constitutional assembly was elected to reform the constitution

31. Other notable events 31 In May 2011, another volcanic eruption disturbed flights in Iceland, the UK, Scandinavia and Germany… … but the eruption is now over and nobody was harmed. The impact of the eruption on daily lives was minor outside area close to the volcano. Images from www.visir.is

32. Despite the crisis, Iceland’s future is bright An educated workforce Natural resources in abundance Innovative and competitive businesses 32

33. The full report with further details is available at chamber.is/statusreport A mailing list is available at chamber.is/mailinglist chamber.is/statusreport chamber.is/mailinglist 33