On his visit to London last month, Iceland’s prime minister flew into a firestorm as concerns grew over the sharp decline of the krona. But Halldór Ásgrímsson is a man not easily ruffled, as Courtney Fingar found out.

In the lobby bar of his Knightsbridge hotel at the end of what must have been a long day, Halldór Ásgrímsson, Iceland’s prime minister, looks tired but his bright blue eyes have retained their glint. Mr Ásgrímsson is in London to meet his UK counterpart, Tony Blair, and outposts of Icelandic companies in the UK.

Despite the sudden concerns over the Icelandic currency and warnings its economy was overheating, he remains calm and cool. “I am not particularly worried,” he shrugs.

Iceland has been here before. “Many people underestimate the flexibility of the Icelandic economy. We proved this in 2001 when there were a lot of worries about the economy but in the end everything went well,” says the prime minister.

At that time, Mr Ásgrímsson was minister of foreign affairs and external trade, a post he assumed in 1995 and held for nine years. A certified public accountant by training, he was an economics and business professor before moving into politics in the mid-1970s. In addition to foreign affairs, his ministerial portfolios have included justice and ecclesiastical affairs, fisheries and “Nordic co-operation”.

Farmers and fishermen

He became prime minister in September 2004, taking over from Independence Party leader Davíd Oddsson after 13 years. Mr Ásgrímsson’s liberal Progressive Party, which has its roots in agriculture and still commands great support from farmers and fishermen, governs in coalition with the centre-right Independence Party.

“The economy has been growing very fast – 4%-5% for the past four or five years – and, of course, that creates some problems,” he says.

A surging stock market and soaring house prices, coupled with frenzied spending, helped to fuel solid GDP growth. More recently, however, that scenario had given way to one of rising inflation and a widening current account deficit. Accompanied by an announcement by Fitch that it was downgrading its outlook on Iceland’s AA- rating from stable to negative, the value of Iceland’s currency dropped, as did stock market and government bond prices. The fall in the krona prompted a general sell-off in Icelandic assets, as well as of several emerging market currencies, as traders scrambled to liquidate profitable positions to fund their Iceland losses.

The central bank has mooted a possible rate rise to boost the krona and ward off inflation. (Interest rates had already doubled in the past two years to nearly 11%.) Either way, the days of heady growth would appear to be ending, at least for now. Islandsbanki expects the economy to contract by 0.1% next year.

Mr Ásgrímsson sees no reason to panic, however. He insists the underpinnings of the economy remain solid. “We have a strong economy, fiscal policy is very sound, we have been privatising banks and telecoms and using that money to pay down debt so it is now very low. We have a large surplus. Banks and the public have been taking outhuge loans but behind them is property.”

Infrastructure spending

The rapid rise in Iceland’s GDP allowed the government to reduce taxes while boosting spending on health services and education. The government has also invested heavily in infrastructure improvements – crucial for a large landmass populated by just 300,000 people.

While fisheries still account for a sizeable chunk of the economy, it is a smaller portion than it used to be and efforts are being made to diversify the economy, as evidenced by a growing services sector.

Always heavily dependent on international trade, the boom years have certainly not made the cost of living any more reasonable. But Mr Ásgrímsson is sanguine about this too.

“You could say it has always been expensive to be an Icelander,” he says, sipping a tall glass of water. “But we can afford it.”


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