“We will get back on our feet again”
Ambassador points finger at rating agencies.
The ambassador of Iceland, Hannes Heimisson represents his country in Finland and also the Baltic states and Ukraine. MOT’s Matti Virtanen spoke with him in Helsinki on November 25th, 2008.
MOT: Your excellency, last Friday the Finnish public saw a TV1 reportage (A-zoom) from Reykjavik, about how the Icelandic people are reacting to the economic crisis. What's your own feeling about what the psychological situation of the people in Iceland is right now?
Heimisson: The population is very angry, and there are many questions emerging. We are asking ourselves what happened; why did this happen? I am angry myself. I have a few friends and family members who lost a job and lost a good carrier in the financial sector. We have to note that this was not a volcanic eruption or an earthquake, or an avalanche or loss of life at sea. This was a disaster of different type, and different nature. Kind of a man made thing. And now we are simply evaluating and the public is asking questions, why did this happen. And we are in the process of trying to answer that now. But there is a lot of anger. We are all very angry.
MOT: There have been some speculations that many Icelanders will be moving abroad because of this anger. Do you see a large-scale immigration possible?
Heimisson: No, I do not. I’ve seen some news in the Finnish media, about a massive emigration, and those news are very, very overdriven. They are overdramatized. Of course there will be some who go – there is a demand for talented people abroad. Icelanders are hard-working people, and there is demand for hard-working people abroad. We are one of the youngest nations in Europe. The level of education is very high in Iceland. There is demand for such people in many neighbouring countries. But we also realize that Iceland is not the only country faced with some economic difficulties at the time. There are problems in other neighbouring countries. I think this talk of any mass emigration of people is totally out of proportion. There will be emigration, yes, but no mass emigration.
MOT: In its’ treatment of the financial crisis it seems that, Iceland is looking at the Finnish experience from the 1990’s and our big depression. How strong do you see the analogy between the Finnish depression and the Icelandic situation now – and do you think that there is something that Iceland could learn from the Finnish experience?
Heimisson: There is no doubt in my mind that we can learn a lot from the Finnish experience. But the Finnish depression from 1990 to 1994 was of another, different nature. Your depression was caused by the banking crisis and also the loss of business with the collapse of the Soviet Union. But still, there are some things which are similar in our perspectives. And we can learn from how you tackled that: how you created new political goals, how you created kind of new values, a new society, and how you restructured your financial system, and not only that – how you kind of restructured the whole society with the focus on high technology, education, et cetera.
Yes, we can learn a lot from the Finns, and we are actually looking to the Finns now. There is a well-known Finnish gentleman Kaarlo Jännäri who has accepted our proposal for becoming an advisor to our government on the restructuring of our financial system. He is a well known person, having been the director of the Finnish bank inspection for ten years. We need such professional advice now, and we are actually very happy to receive him. And we are also thankful and happy for the good advice and the friendly gestures we are getting from Finland now, because you went through similar depression only 15-16 years ago, and that is not a long time.
MOT: How would you describe the political consequences of the crisis for Iceland? There's been speculation of Iceland moving towards Russia, for example. Is there any change of it?
Heimisson: This Russia-speculation is totally out of the question. We looked, at certain time, we looked at friends around the spectrum: our Nordic friends, the European Union, North America, Russia, our trading partners, or our political partners. And we have been negotiating different types of loan arrangements, and Russia is part of that. We haven't made any particular loan agreement with the Russians, but we are optimistic that they will grant us, say, a loan at this crucial time. But as you know, we have just made an agreement with the IMF and other friends of ours like the Nordic countries, Holland, UK, and last but not least the Faroe Islands, who are our brothers in the North Atlantic, who have been extremely generous to us. But notably, these are loans. Nobody is giving away any money. We are paying interest on those loans. But the timing is very important. We are getting this type of assistance at a crucial time when we are starting the rebuilding of our economy.
MOT: It was said in the past years that the Icelandic economy stood on three legs. There was the fishing, the traditional industries; then the aluminium boom; and then the financial services. Now that the one leg is gone, how do you foresee that a new third leg could be built?
Heimisson: I do not agree with those three legs. We have to understand that yes, we lost 85% of our financial system over a week. That was a crucial thing for us, and a big loss. But the cores, the foundations are still very much the same. You mentioned the seafood sector. There is demand for seafood products. There is actually more demand than supply, and we have probably the best-run seafood sector in the world. And we are getting excellent prices now. Iceland is an island with abundant energy resources. We have utilized only about 15% of our energy potential, and we have used that energy to build up heavy industries like the aluminium sector which is very important for us. Then you should also know that tourism is very important and has for many years been one of the basic pillars for our economy. As I said earlier, we are the youngest nation in Europe. We have an excellent educational system. Our pension funds are very strong. And we are hard-working people. Like the Finns, we never give up.
MOT: What if the recession hits the economy hard and raw material prices including aluminium go down. Is there a risk the companies will roll back their investments?
Heimisson: Well, the aluminium sector has been a very important part of our economy for the past 40 years. That is true. And we are actually in the middle of a political debate about should we focus more on the aluminium sector; should we build one or two more aluminium plants. There are people who are advocating it. Others are saying: "No, we have enough aluminium plants. We need not to build more." And there are of course environmental concerns. We are fully aware of the market prices of aluminium. At the moment, those prices have been going down slightly. But before that, they have been rising quite substantially. And this sector for our society has been very important. But we believe that, I mean, there are pros and cons to that. And we believe that aluminium in the long term is a very favourable export product for us.
MOT: So the bottom line is that the economy's fundamentals are sound, and Iceland has a capacity to repay the debts that are being built up to save the banks now. How many years do you think it will take before Iceland is back on its feet so that you are over with this crisis?
Heimisson: We expect that the next two-three years will be very difficult. We will see unemployment rise. We will see unemployment rise to new levels in our society. The unemployment level in Iceland has traditionally been between 1.5–2 percent, which is very low. We have actually been importing foreign workers into Iceland. Last summer approximately 7% of Iceland's labour force was imported. So there have been a lot of job opportunities created. But we believe that the next two to three years will be difficult ones. Unemployment might rise to 10%, which is very high. GDP will most likely drop 10%, even more. We will be faced with economic hardships that we haven't seen before. But the most important thing is that, the long-term prospects are good and actually admirable to us, according to the IMF. So I am not that worried about the future, but now we are in a temporary kind of a liquidity crisis. We need assistance from our friends to get on our feet again. We will get on our feet again. It might take us two to three years. But after that, I am not worried at all about that. And it should be noted for example that, we are committed to pay back the IMF grant no later than 2015. And one important thing is that, part of our strength at the moment is the fact that our treasury was relatively out of foreign debt before the crisis. So we are a little bit stronger to deal with those masses of foreign capital at the moment, due to the lack of debt of our treasure before. So that is a very important thing.
MOT: I'd like to go back to what happened here in Finland with the Icelandic banks and investors who came with a high profile and bought assets in Finnish companies. How closely have you followed the development of Icelandic investments in Finland?
Heimisson: Very closely. I actually happened to live here in Finland for two years, from -97 to -99. We opened our embassy in 1997. I was actually the first Icelandic diplomat to live in Helsinki. I stayed here for two years. After that time our export to Finland, our trade and commercial ties, were relatively simple. We were exporting salted herring, we exported some lamb meat, seafood products, and we just started the direct flight service Helsinki-Reykjavik in 1998 – Icelandair. At that time there were no Icelandic financial activities in Finland. So I have a comparison. Now I'm here again in Helsinki as of 2005, and then we experienced this massive change of activities. And Finland was part of this economic expansion of those financial companies. Not only to Finland: they moved around to 12 other European countries. Yes, I have observed it quite well. I know that those Finnish entities here, Glitnir and Kaupthing, for example, were well-run operations. These were actually profitable operations. And they were managed by Finnish young, ambitious professionals who did an excellent job. Therefore I'm a little sad to see that those companies are not existing here anymore. But besides the banks, there are other Icelandic activities in Finland. I mean, the world hasn't ended here. We are still in business here. But the size is of course much smaller. We have Icelandic shipping companies here. We have a big pharmaceutical company here called Actavis. We are exporting seafood to Finland; I don’t think I have to tell you where the best herring comes from, the Islannin silli. You know all about that, of course. And the travel and tourism sector: Icelandair is running a very strong marketing here. And for this year there will be a record in that, we have never had so many Finnish tourists visiting Iceland. And those two companies, Icelandair and Finnair, they are actually working very closely together. They are feeding passengers into each other's lines. Quite many Finns fly to North America with Icelandair, and Icelandair is feeding quite many passengers from the North America to the Asian routes. And it's a good business. And despite the economic turmoil the prospects are pretty good.
MOT: But if you look at the total assets that the Icelanders bought in Finland during the past four-five years, how much of that is left now?
Heimisson: It’s difficult to tell exactly, because many of these companies are kind of not necessarily Icelandic ones. These are international funds, international companies. The owners may have an Icelandic passport, but the companies are international ones. So it’s difficult to say. But would say that – in very rough terms – less than one third might be still left in Finland in different types of sectors, in more traditional sectors and even in sectors that are not visible in media all the time. At that is very important. Finland is an important trading part for us. But please, I don’t have exact figures.
MOT: How many Icelandic expatriates actually worked in Finland in the past years in the financial sector?
Heimisson: There were no Icelandic citizens working in those three big banks here. All of them were Finnish citizens. I’m very happy to see that most of them have found new jobs. But some of them have lost their jobs, and I’m very unhappy about that, very sad about that. But these were skilled, young, well-educated Finns that have now moved into new carriers with different companies. I think (for example) that the Glitnir issue was solved very well. I’m happy about that. It’s back to FIM, which I think was the natural way. I know that parts of Kaupthing have been sold to different Finnish companies, and I should also note here that I was impressed to see how Kaupthing reacted when they were going through some sensitive times here on these repaying schemes of the deposit funds. I have some friends who actually own money there, and I saw how well they kept the public informed about the development and they kind of prevented any chaos in the issue. I think they did it really skilfully.
MOT: There is a lot of talk about that the situation was seen coming in the banking sector in Finland. They had indicated all kinds of indications from the derivatives market, for example, that the situation, although it’s businesswise sound, there’s not a strong enough economy behind it. And the lender of last resort is missing because of the Icelandic crown’s independence which was not good. When did you yourself realize that there is a big risk inside?
Heimisson: We have always been, you know, you are always concerned when you see such a fast expansion of financial sector like ours. And we saw how this financial sector grew out of proportions, became-, the annual turnover of the financial sector was twelve times the GDP. And those figures are kind of abnormal in a way. So of course those figures have raised concerns for a while. And you have been wondering about the capabilities of our central bank to, you know, create the right environment for such an expansion. And we have of course been concerned about the size of our currency. We have the world’s smallest independent currency, and that currency has been very weak, quite frankly, and has been fluctuating. So yes, I’ve has some concerns for, well, earlier this year I had some concerns. But still we were looking at, for example, we should not forget, for example, many of those rating agencies. What did they say? Fitch, Moody’s, Standard & Poor’s, giving the Icelandic banks the, I wouldn’t say the highest, but quite good ratings until the end. And so these are things that we have to take into consideration. And we have to learn from mistakes which we made. We admit that we made mistakes. We are evaluating those mistakes now. But I believe that there are quite many mistakes also being made which were made by (others) and by international rating agencies and this international financial environment. And I sincerely hope that we will be able to learn from those mistakes to prevent them to happen again.
MOT: I still have a question about our Friday reportage from Reykjavik. They have the weekly demonstration in front of the Parliament, and people are shouting at the Prime Minister, and throwing vegetables and eggs at the building. How do you feel when you see a scene like that?
Heimisson: I must admit that, we are not used to scenes like that. The biggest unrest in Iceland last time was in March 1949 when the Parliament approved our application to become a founding member of NATO, 1949. We are probably a bit like the Finns. We are not used to uproar in the streets, people throwing eggs and tomatoes. So quite frankly it was a, I wouldn’t say a shock, but it was very disappointing to see that. But still, this is simply a reflection of the anger that exists. And quite frankly, I fully understand that. The political debate goes on: There was a big public meeting in Reykjavik yesterday, more that 500 in a large meeting in a large cinema in Reykjavik. Many members of the government met there: the Prime Minister was there, the Foreign Minister was there, and many members of the Parliament. There was an open, honest debate about the issue. I think we are in the middle of a very fierce political debate. I have a feeling that there will be some positive outcome of this. We will see, hopefully, new political goals created. But we are going through a turbulent time, both economically and also politically.
MOT: Do you foresee an EU membership or the European currency in Iceland sometime in the future?
Heimisson: Two of our leading political parties have decided to hold their party conventions now in January, and the main themes of those conventions will be the European Union and the possible application by Iceland to that. The second largest party, the Social Democratic Party, has actually had that officially on its agenda for a few years. We are seeing public opinion polls, 75% of Icelanders would like to apply for EU membership now. And when you are living in a country where the currency is very weak, inflation is rising, then of course people are longing for a more stable currency. And euro is on the top of the list. Yes, I – from a personal perspective – I would foresee an EU application by Iceland. This is a personal perspective.
MOT: You follow the handling of the Icelandic crisis in the Finnish media and you’ve talked to Finnish politicians. Probably you know how the Finns have reacted. How has the reality of the situation been conveyed to the Finnish public and what are maybe the biggest misconceptions about what’s happening?
Heimisson: Well, I’m actually quite impressed by the quality of the Finnish media, because I have seen a substantial interest in Iceland not only starting this summer. I came here in November 2005. Soon after that we had this so-called mini-crisis in the spring of 2006. We have seen quite a lot of coverage about Iceland in the Finnish media. People are looking at the banks and people are asking where the money is coming from, and all those traditional questions. So the interest was not created last summer. We have seen a large member of Finnish media journalists going to Iceland discovering themselves, telling about their own experiences. So the overall quality of the media coverage here has been relatively good. But still, I have sometimes noted that there is a tendency for over-dramatizing. But that’s part of the job. I’m a journalist myself. I’ve worked in the media before joining the Foreign Service some 20 years ago. So, I mean, that’s part of the media. It’s part of the reality of today. But overall, I’m relatively satisfied with it. It’s not fair to complain about it.
MOT: You haven’t noticed any Schadenfreude?
Heimisson: Well, perhaps I have. Perhaps I have. But in a way you understand it. You have been through difficult times. You made your own mistakes. We are going through similar times now and we made our own mistakes ourselves. And we probably will make some mistakes. But it’s not deep-rooted. There is, yes, this concept is – you hear it, but it’s not deep-rooted. And we have many friends here in Finland.
MOT: I’d like to ask about the talented leading bankers and young businessmen who actually brought this crisis on. Now most of them have immigrated to London with their money, and the people in the streets of Reykjavik are blaming them. Somebody said that there were just about 20 or 30 guys who caused this whole problem. Will there be any sort of official investigation of what they did, any legal consequences?
Heimisson: There will be an official investigation of the whole issue, not only the involvement of individuals who were heading the banks at the time, but of the overall issue, overall spectrum. And that has been claimed by the government. Research and investigation will take place, and most likely with the participation of foreign experts. I think that’s very important. But it’s too early to say or to talk of any legal issues or prosecutions. I mean, that’s too early to say. But there is a lot of criticism and persons who have been visible in the media for long time of course they continue to be visible, and people continue to discuss them and debate them. And you mentioned, well some of them are living abroad, but not all, not everybody. I mean, it’s an open, free society. And some of those persons are actually active in the debate and everybody has a view, and we should be careful not to pinpoint at anybody “hey, you are the one”, or somebody else. It’s an open society, and we have to debate the issues first. But there will be, yes, there will be an investigation, a kind of an overall investigation with foreign experts.
MOT: It will be interesting to see how it ends. Because I remember our debates in the 90s about who was guilty of causing our depression. And the main culprits were sought after all over the society, and eventually nobody was pinpointed as the guilty one. The guilt was sort of divided all over in the society. Greed was one factor, and insufficient banking oversight, too optimistic expectations, and everything. So it sort of was diluted, the guilt was diluted in the society. There were just too many guilty persons around.
Heimisson: There are different times, different, external times; different circumstances existing. And we, at least I hope that our discussion will be an open and frank one, and a serious one. And the most important thing is not to find some guilty persons. The most important thing is to create a new system, a solid system with trust, and with trust preventing those things from happening again. I don’t want so see this, I don’t want to be in this mess again.
MOT: Your Excellency, thank you for the interview.
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