A tale of two economies: Iceland rises again as Ireland sinks | business | Hindustan Times
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A tale of two economies: Iceland rises again as Ireland sinks

business Updated: Dec 09, 2010 21:17 IST
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Iceland's central bank on Wednesday cut its headline interest rate, giving a signal that the island's bankrupted economy was edging back towards health. The country's base rate fell one percentage point to 4.5%, after figures showed the economy growing at a faster pace than expected after seven successive quarters of contraction.

But while a resurgent Icelandic economy means rising income levels for the country's 320,000 inhabitants, it causes problems for Irish politicians. Far from the worst being over for Ireland, as its politicians and bankers have claimed over the last year, the situation is getting worse. The huge bailout brokered by the EU and the IMF last week and agreed by the Dail (the Irish Parliament) on Tuesday is seen by many analysts as perpetuating Ireland's recession for many years to come.

Irish finance minister Brian Lenihan, as he pushed through the €85 billion rescue package, with his opposite number, Steingrimur J Sigfusson. An upbeat Sigfusson issued a notice saying negotiations over the debts of Icesave, the savings bank that went bust with billions of pounds of British and Dutch savers' cash, were nearing a conclusion. Sources close to the Icesave talks said the 5.5% interest rate demanded by the Dutch and British earlier in the year, and rejected in the referendum, would probably be revised down to less than 2.8%.

Icelanders believed the huge overhang of claims for repayment would overwhelm the country's capacity to maintain a decent, albeit much reduced, living standard and repay debt at the same time. The country's response was to let its currency plunge by more than 80% in value and impose capital controls preventing foreigners from taking cash out of the country.

By contrast, Lenihan has accepted paying up to 7% interest on new loans from the EU and Britain.

Analysts said the likelihood was that Iceland's return to growth would be seen by its population as vindication for taking a tough stance with foreign governments and the investment community.

In sharp contrast to the message sent to Irish citizens that non-payment would make them pariahs among investors, the analysts argued Iceland's punishment would be short-lived and its government would be able to borrow again within a few years.