The potential initial public offering of Arion Bank in Iceland is the latest chapter, albeit a more upbeat one, in what has been a chastening story for the country since the 2008-09 financial crisis.
Arion was ‘spun off’ when failed bank Kaupthing went into administration in 2009, and is now seeking to list on the Stockholm and Reykjavik exchanges, with a potential value of $1.6bn (£1.3bn).
Iceland’s capital controls that were also imposed at the nadir of the crisis are also being lifted, in what is a big step forward for the country as it continues its rehabilitation and reintegration into the global markets.
The country is generating very material levels of GDP, far higher than many western counterparts, and with a headline interest rate at 5 per cent to offset fears of the economy overheating, it paints quite a stark contrast to some of the peripheral European economies such as Greece.
The Icelandic krona has rallied well of late, and is certainly up from its lows of late 2009. However, it is still 23 per cent lower against the euro, and 43 per cent down against the dollar, since the start of 2008 – offering competitiveness that many members of the EU could only crave for. While Iceland enjoys real GDP growth of close to 7 per cent year on year, Greece remains entrenched in negative GDP and high unemployment.
In local currency, both the Icelandic and Athens stockmarkets are down approximately 80 per cent from 2007, but over three years Iceland is up around 70 per cent, while Athens is down roughly 50 per cent.
Investors who owned stock in 2007 are unlikely to ever see losses recouped in either market, but starting with fresh capital there is undoubtedly only one market to back.
By taking the discomfort early, Iceland is now in a very envious position of low unemployment, high growth and the privilege of a 5 per cent interest rate.
Icelandic journalist Sigrun Davidsdottir summarises the juxtaposition between Greece and Iceland rather well: “Iceland didn’t do what Europe has been doing, not tackling the big issues. We can see the European banking sector is struggling with Italian banks, with Deutsche Bank and so on, and this is down to the fact that the painful things have been avoided. Iceland shows that a quick stab is better than a lingering pain.
“Iceland took the quick stab, it was painful at the time but things have and are being cleared out and that makes a huge difference compared with so many European countries where the pain is still there.”
It is my belief that while the single currency remains in place, a number of peripheral economies will never see the good times again.
Investors who are canny will be able to make a turn here and there along the way, but for the people who live and work in such economies, it must be an exhausting and rather disheartening experience.
That in many ways is both the beauty and the grubby disconnect that exists between markets and reality.
James Sullivan is investment director at Coram Asset Management
