Disaster in Grindavík affects the government's financial performance
The Central Bank of Iceland reports in its latest Monetary Bulletin that the disaster in Grindavík will impact the government severely, especially if more extensive measures are taken. mbl.is/Eggert Jóhannesson
According to the Central Bank of Iceland (CBI) it is difficult to assess the economic effects of the natural disaster in Grindavík as it continues. It is noted that the impact of the disaster on inflation is not obvious. On the other hand, it is clear that the disaster will affect the performance of the government and its debt.
This is from the latest issue of the issue of the Monetary Bulletin, published by the CBI.
In the bulletin covers the earthquakes and the eruptions on the Reykjanes peninsula, which started in mid-November and has caused a lot of damage in Grindavík and the surrounding area and has led to the evacuation of the residents.
It is noted that the real estate value of residential housing in Grindavík is roughly 72 billion ISK. Additionally, 25 billion ISK is invested in commercial real estate and 7 billion ISK in infrastructure, or a total of about 105 billion ISK, which is roughly 2% of GDP.
The Central Bank of Iceland. mbl.is/Ómar Óskarsson
Difficult to make a financial impact assessment
“The cost of rebuilding in the event that the entire community is declared a total loss need not be the same as the current market value of these assets, however, and it is difficult to estimate the financial impact of disruptions to commercial activities and residents’ lives.”
It is also noted that it is difficult to assess the economic effects of these disasters while they are still ongoing.
Could increase house prices and affect private consumption
“The Bank’s baseline forecast does not assume any extraordinary impact beyond what has already come to light. If the disaster proves to have a stronger impact, a larger share of the community’s housing stock could be lost, potentially pushing house prices upwards and affecting private consumption through a negative wealth effect. A portion of Iceland’s capital stock could also be lost, thereby reducing potential output in the domestic economy. The effects of the disaster on inflation are therefore not clear. A preliminary estimate suggests, however, that the impact on GDP growth and inflation is relatively limited, although the immediate community is severely affected.”
Actions could affect the housing market
Finally, the disaster will also affect the performance of the government and its leverage, especially if more extensive measures are taken, such as the purchase of all real estate in the region.
“ Such measures could affect the domestic economy as well – particularly the housing market –although the impact will ultimately depend on how the Government orchestrates and finances such measures.”
