Iceland – One Year Later
Remarks to Icelandic National League of North America Convention
May 5, 2011, Brandon, Manitoba by Donald K. Johnson, O.C. , LL.D.
Ladies and gentlemen, I am delighted to be addressing such a distinguished group of Icelandic
Canadians this evening. Of course, like you, I, have Icelandic roots. I was born in Lundar, Manitoba
and raised by Canadians of Icelandic descent. I am thrilled that my sister, Margret Reykdal and her
daughter, Diane, who both live in Edmonton are here, together with my brother Paul and his wife,
Ollie, who live in Winnipeg.
For those of you who attended the INL Convention last year in Edmonton, you may recall that the
focus of my remarks was on a relatively simple proposal to resolve the Icesave dispute between Iceland
and Britain and the Netherlands. Our proposal was that the Parliament of Iceland would commit to
forward to the British and the Dutch 100% of the cash proceeds from the sale of Landisbanki’s assets,
and Britain and the Netherlands would, in turn, agree that Iceland would have no further obligation.
Today, I’ll focus my remarks on three issues:
• An update on the status of the Icesave saga
• The remarkable recovery of Iceland following the financial and economic crisis of 2008, and
• My perspective on the pros and cons of Iceland adopting the Canadian dollar as its currency,
replacing the Icelandic krona. This has been the subject of considerable media speculation
during the past few weeks.
Update on the Icesave Saga
As many of you know, we wrote a letter on June 8, 2011 to U.K. Prime Minister David Cameron,
Dutch Prime Minister Mark Rutte and Prime Minister Johanna Sigurdardottir with copies to their
ministers of finance, signed by 17 prominent Icelandic Canadians from across Canada. The letter
urged them to arrive at the compromise which we proposed.
We understand that the government of Iceland discussed the terms of our proposed resolution of the
Icesave dispute with the governments of the UK and The Netherlands. However,, the UK and The
Netherlands rejected this proposal. Last December, the European Free Trade Agreement (EFTA)
Surveillance Authority referred the case to the EFTA court in Luxembourg. In March of this year,
Iceland lodged its defence with the EFTA court. Other EFTA and EU member states will now be given
an opportunity to submit their observations during a hearing in the second half of this year.
Importantly, it now appears virtually certain that the liquidation of the assets of the Landisbanki estate
will be able to cover 100% of the principal amount owing to the UK and The Netherlands by the end
of this year. Sixty-seven percent of the amount owing has already been dispersed from the sale of
Landisbanki assets. It would appear that the Icesave saga will come to a successful conclusion by the
end of 2012. This conclusion will remove one significant barrier to the relationship between Iceland,
the UK/The Netherlands and other members of the EU.
Iceland’s Remarkable Recovery
There has been considerable media coverage about the remarkable economic and financial recovery of
Iceland compared to the situation in Ireland.
While Iceland probably did not have much choice, the government did not bail out the banks and
burden its citizens with a huge amount of additional debt. Also, Iceland was fortunate to have its
own currency, which was allowed to depreciate by 58% during the financial crisis. The country
created “good banks” and “bad banks” with questionable assets being transferred to the “bad banks”.
Primarily as a result of these factors, Iceland’s economy has stabilized and experienced 3.1% GDP
growth during 2011 and a similar growth is expected this year. The unemployment rate in Iceland
is approximately 7.2% and Iceland’s debt to GDP ratio peaked at 85% and is declining. Iceland
has emerged from the International Monetary Fund (IMF) Assistance Program and returned to
international capital markets a year ago to raise USD 1 billion. The Fitch Rating Agency upgraded
the country’s bonds to investment grade. Nobel Laureate Joseph Stiglitz stated: “Iceland is a success
story” and “It has managed to return the worst crisis to recovery”.
By comparison, the government of Ireland bailed out the banks and the country’s taxpayers are now
burdened with a huge amount of additional debt. Debt to GDP has risen to 120%, the unemployment
rate is 15% and the economy is not growing. Because Ireland was a member of the EU, Germany and
other EU countries insisted on Ireland bailing out their banks because banks in their countries held a
significant amount of Irish bank debt. Also, because Ireland had adopted the euro, it did not have the
flexibility to allow its currency to depreciate like Iceland did.
Iceland’s Currency Choice
There has been considerable media speculation about Iceland’s currency alternatives – adopting
the Canadian dollar, adopting the euro, adopting the Norwegian kroner, or simply sticking with the
Icelandic krona which it has used for 137 years. Media speculation began when Iceland’s new Minister
of Finance stated that she was in favour of Iceland joining the euro, notwithstanding the huge fiscal
and economic challenges facing all members of the European Union. Naturally, for good reason, many
Icelanders were not in favour of giving up their sovereignty and becoming a member of the European
If Iceland had been a member of the EU during its financial crisis of 2008, it would likely be in
a similar position to that of Greece and Ireland today. It would not have been able to devalue its
currency to restore its competitive position, because its currency would have been the euro.
There are also significant challenges associated with Iceland’s fishing industry and its ability to enter
into free trade agreements like the one that currently exists between Iceland and Canada..
The other three alternatives to continuing with the krona were to consider adopting the US dollar,
the Canadian dollar, or the Norwegian kroner. Logically, Iceland should prefer the Canadian
dollar to the US dollar, given the close ties between Canada and Iceland and given the fact that the
Canadian economy is in much better financial condition than the US. Iceland might also prefer the
Canadian dollar to the Norwegian kroner because it may not wish to cede its sovereignty to another
Scandinavian country, given the historical relationship between Iceland and Denmark, Norway and
Sweden. Consequently, the rest of my remarks will be focus on the pros and cons of Iceland adopting
the Canadian dollar.
Pros and Cons of Iceland Adopting the Canadian Dollar
The decision on whether or not to pursue the possibility of Iceland adopting the Canadian dollar will
be made by the government of Iceland, but it would likely be subject to a referendum. Also, it is not
known if Canada would be interested in discussing this possibility. Before the government decides
whether or not to pursue this possibility, it needs to take into consideration the potential benefits and
the potential risks of such a decision.
There are a number of benefits to the business sector in Iceland of adopting the Canadian dollar,
• Access to broader range of investors for Icelandic bank, corporate, and government debt with
potential lower borrowing costs.
• Access to a first-rate financial regulatory system
• Removal of foreign exchange controls would facilitate direct foreign investment.
There are significant political challenges and risks associated with such a decision. These include:
The population of Iceland is only 1% of the population of Canada – 320,000 vs 33 million.
Iceland would be giving up all control over monetary policy. Monetary and fiscal decisions for
Iceland’s economy would be made in Ottawa, not Reykjavik. There is a long distance between
Ottawa and Reykjavik as well as a four hour time zone difference
• If Iceland had not had its own independent currency, the krona, during its fiscal crisis of 2008,
but had already adopted the Canadian dollar prior to that date, it would never have been able to
position its economy for the dramatic economic and financial recovery that it has achieved.
• In the future, the exchange rate of the Canadian dollar vis-à-vis other major currencies may be
inappropriate for Iceland’s economic situation.
• Not many Icelanders would recognize the pictures of former prime ministers of Canada on
some of our currency
I am sure all of us in this room would like to strengthen the relationship between Canada and Iceland
through increased trade, investment, tourism, sharing our unique cultures, student exchanges and
capitalizing on our mutual interest in the Arctic. However, even if both countries are interested in
strengthening our relationship, we can still achieve this objective even if we don’t have a common
currency. The relationship between Canada and the United States is a classic example
The pros and cons of Iceland adopting the Canadian dollar should be subject to an extensive public
debate in Iceland. The first opportunity actually arises in Toronto on May 15 when the Fraser Institute
is hosting a Policy Briefing on “Understanding Iceland: Lessons for Greece? Currency Partner for
Canada?”. A prominent delegation of 11 Icelanders representing the business, academic and political
sectors will be attending. I plan to attend this event and look forward to a spirited discussion on this
That concludes my remarks. I would now be happy to answer any questions!
Donald K. Johnson is a Memory of the Advisory Board, BMO Capital Markets. He is a long-time
member of the ICCT, and sponsored the Opening Reception at the INL of NA 2012 Convention