Thawing out – Iceland and the UK

Mark Leftly meets politicans and bankers looking to attract British investors back to the country

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The Independent Online

Insurance companies described the 1,000-degree lava bombs that the Eyjafjallajokull volcano fired 150 metres into the air as an "act of God", a legal term designed to get them out of compensating air passengers grounded by the resulting ash clouds.

Three-and-a-half years on and that eruption has been something closer to a Godsend for Icelanders. Disaster tourists have flocked to the volcano, helping to slowly rebuild an economy that was so disproportionately hit by the financial crisis.

"It really wasn't planned," says Hoskuldur Olafsson, the chief executive at Arion Bank, with a smile. "But the eruption turned out to be a positive. The rest of Europe discovered that we are not that far away."

Mr Olafsson was one of Iceland's business and political leaders who were in London yesterday at a Mergermarket conference to push for foreign investment in the country.

Arion was created out of the ruins of Kaupthing, one of the Icelandic banks whose failures necessitated a $2.1bn (£1.3bn) bailout from the International Monetary Fund in 2008. Earlier this year, Arion was the country's first financial institution to raise money from the international bond markets since 2007, a significant step to restoring Iceland's reputation for sound finance.

The 60 investors in that near-$90m bond issue included institutions from the UK, historically an important trading partner due to the countries' shared focus on high finance. Today that relationship is shaky at best due to the fall-out of Iceland's problems.

"We will not forget," says Mr Olafsson, the smile disappearing from his face. "But at least Gordon Brown has gone."

In 2008, Mr Brown's government used anti-terrorism legislation to freeze the UK assets of Landsbanki. Within weeks, about 40,000 Icelanders – well over 10 per cent of the population – had signed a petition protesting at the British government demonising them alongside al-Qaida and the dictatorship of Sudan.

The UK then chased Iceland for £2.3bn the Treasury had paid to cover the savings of 230,000 British customers in Landsbanki's Icesave. It took until January this year for the European courts to finally conclude that the UK's compensation claim was invalid and that Iceland had done nothing wrong.

"It [the Icesave dispute] has disturbed this very close relationship," Mr Olafsson says.

"On a government level, the UK is tarnished. There are legacy issues … but we have to move on."

However, he argues that in recent months Arion and other banks are seeing increased contact from British and other foreign businesses about setting up and working in Iceland.

He points out that Iceland's GDP is now at "an acceptable level" and that unemployment is back down to 4 per cent [see box], important in a low-population country where "every hand needs to be working".

Although strict currency controls introduced in 2008 continue to complicate investment, the country's recently installed centre-right administration is looking to scale back this regime.

Iceland's industry minister, Ragnheidur Elin Arnadottir, says that she is "looking to build that trust again" between Reykjavik and London. Unlike Mr Olafsson, she is keen to stress that the nations' tensions have been "resolved within the court system – there is no need to worry about investing [in Iceland]".

Any tensions will certainly need to have been sorted out should Iceland push ahead with a plan to build a 727-mile power cable across the ocean floor to Scotland. This would link Iceland to the European energy market, helping to develop and sell its untapped power reserves.

Ms Arnadottir recently commissioned a second study into this "huge project", as there have been wide disparities on the subsea cable's potential profitability.

She hopes to put this report to her cabinet and parliament by the end of the year, but has already stated that she would be unwilling to press ahead if the project endangered taxpayers' money.

Ms Arnadottir is speaking by telephone from the east of Iceland, ahead of meeting a company that controls street lamps in Germany. "I don't know how they do that, but I will in half-an-hour," she laughs, stressing that start-up companies are now flourishing in a country that became such a symbol of the crisis.

"We have recovered," she says. "The mood is getting better and we need to increase investment."

Whether or not Iceland forgets its travails with the UK, the country will at least need to forgive any perceived injustice if it is to secure British investment.

Road to recovery: Economy growing

Analysts at Arion describe Iceland's economy as being on "a slow, but fragile road to recovery", pointing out that the country's banks collapsed after "access to what seemed to be unlimited foreign borrowing".

The acute recession saw unemployment peak at 9 per cent, though this had nearly halved to 4.7 per cent by June this year.

Similarly, inflation shot up to around 20 per cent, but in August was only 4.3 per cent – albeit still a distance from the 2.5 per cent target.

Most importantly, the country's economy has been growing since 2011. This follows 10 consecutive quarters of contraction, which saw the economy shrink by between 10 and 11 per cent.