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INTERNATIONAL MONETARY FUND (IMF)
ICELAND FINANCIAL CRISIS
Professor CastilloECON 490 Global Economics
Group Members
David Vera-
Historical Background of IMF Policies & Activities
Karen Urbina-
Iceland’s Position & IMF Assessment
Maria Ayala-
Outcomes of the Bailout
Historical Background of the IMF Policies &
Activities
History
Great Depression of the 1930s
Breakdown in International Monetary Cooperation
The Bretton Woods Agreement (BWA)
IMF was formed through the BWA:
BWA was conceived in July 1944
International Monetary Fund (IMF) formal existence
was in December 1945
Par value system
The End of the BWA
End of Bretton Woods system (1972–81) :
The system dissolved between 1968-1973.
Since the collapse of the Bretton Woods system, IMF
members have been free to choose any form of
exchange arrangement they wish
IMF Becoming a Universal Institution:
The fall of the Berlin wall in 1989
Expansion to fulfill responsibilities
Soviet Block Transition
Debt relief for poor countries
IMF Organization
MF is an organization of 185 countries
Their primary purpose is to preserve the stability of the
international monetary system
Helps the governments of these countries manage
economic difficulties and benefit from opportunities of
globalization
IMF’s Current General Arrangements to Borrow (GAB )
The GAB enables the IMF to borrow specified
amounts of currencies from 11 industrial countries at
market-related rates of interest.
The potential amount of credit available to IMF
under the GAB totals $25.7 billion in Special
Drawing Rights (SDR) and an additional SDR 1.5
billion from Saudi Arabia.
Current Challenges for the IMF
Continued Globalization (2005-present):
The current financial crisis and the food and oil price
shock
A sharp rise in private international capital flows
Speed of capital account crises
Icelandic Financial Crisis
Iceland’s PositionExecutive Board of IMF
Assessment
Iceland’s Fast Growing Economy
The long economic expansion:
initiated by aluminum sector investments
sustained by a boom in private consumption
fueled by ready access to external financing Negative Contributions:
macroeconomic imbalance and financial vulnerabilities
Iceland Economic Activities
In 2001, banks were deregulated
Households took on a large amount of debt
Investors overestimating the true value of the króna.
Iceland’s GDP in 2007
What Caused the Crisis
the country built up a massive current account deficit by borrowing beyond its means
banking sector was eight times the size of the overall economy
Icelandic banks found it increasingly difficult or impossible to roll over their loans in the interbank market Collapse of Landsbanki, Glitnir & Kaupthing
Insufficient reserves to repay banks debt
Currency Exchange Rate
Steps to Shore up Confidence
The Central Bank of Iceland (CBI) tightened the
policy rate
Enhanced liquidity provision to reduce pressures in
foreign exchange and domestic markets
improved its foreign exchange liquidity access by
entering into currency swap agreements with other
Nordic central banks.
Iceland Bailout
$2.1 Billion Loan Plan
Stand-By Arrangement
$827 million immediately available
$155 million remainder in eight equal installments
Iceland Bailout Agreement Terms
Performance Criteria Indicative Targets
December-2008 Ceiling/
Floor 1/ March-2009 Ceiling/Floor 2/
June 2009 Ceiling/Floor 3/
(In billions of króna)
1. Floor on the change in the central government net financial balance.4/ -12 -55 -55
2. Ceiling on the change in net credit of the Central Bank of Iceland to the private sector. 5/ 25 50 50
3. Ceiling on the change in the domestic claims of the Central Bank of Iceland to the central
government 25 25 25
(In millions of US dollars)
.. 5. Ceiling on the level of contracting or guaranteeing of new medium and long term external
debt by central government 7/ 4000 4075 4150
6. Ceiling on the stock of central government short-term external debt 7/ 8/ 650 650 650
7. Ceiling on the accumulation of new external payments arrears on external debt contracted
or guaranteed by central government from multilateral or bilateral official creditors.8/ 9/ 0 0 0
Iceland Bailout Objectives
3 Main Objectives:
To stabilize the exchange rate
Restructure the Banking System
To Create a mid-term fiscal sustainability
Outcomes of the Bailout
Positive Bailout Results
Objective 1: Stabilizing the Exchange Rate for
Iceland:
Restoring the interbank foreign exchange market.
Appreciating currency by lifting capital controls and
reducing interest rates
Restoring confidence
The key near-term objective of stabilizing the króna
is being met as it continues to strengthen
Positive Bailout Results (cont.)
Objective 2: Bank Restructuring
Assist in fair valuation of new and old assets
maximize asset recovery in the old banks
strengthen supervisory practices
Strengthen the bankruptcy framework
Fair treatment of depositors and creditors
Positive Bailout Results (cont.)
Objective 3: Mid-term Fiscal Sustainability
IMF will ensure that Iceland can continue to pay
its foreign creditors ; short term debt.
A strong plan for 2010 to cut expenditures and/or
to raise taxes.
IMF loan will fill about 42 percent of the country's
2008-10 financing gap, the remainder by official
bilateral creditors.
Negative Results from the Bailout
Out migration of Icelanders may be an issue in the
short-term possible impacting future growth.
Additional request for bailouts
bailout programs have already been announced for
Hungary, Ukraine, Serbia and Pakistan
IMF has created a credit line of as much as $100
billion for healthy countries with liquidity shortages
Iceland's Future
Iceland: Selected Economic Indicators
Projection
2005 2006 2007 2008 2009
Real Economy (change in percent)
Real GDP 7.4 4.4 4.9 1.6 -9.6
Domestic demand 16 9.9 -1.5 -9.1 -19.7
Unemployment rate (in percent of labor force) 2.1 1.3 1 1.4 5.7
Gross domestic investment (in percent of GDP) 28.4 33.7 27.6 23.9 18.2
General Government Finances (in percent of GDP)
Financial balance 4.9 6.3 5.5 -0.2 -13.5
Balance of Payments (in percent of GDP)
Trade balance -12.2 -17.7 -10.1 0.1 10.3
Gross external debt 285.7 445.9 551.5 670.2 159.5
Iceland's Bright Future
The countries endowment:dynamic, technology driven society with a young and
well educated workforceAbundant natural resources such as rich fishing grounds,
vast renewable energy sources, clean water a natural environment and culture that draws tourists
Other major strengths of the economy include:diverse export industriesflexible labor marketstrong fiscal positionHigh anticipation of exports
Future of IMF
IMF was headed down hill after five years of inactivity,
accusations of issuing poor advice, questioning of its
relevance and usefulness, Facing a deficit of its own &
Inability to sell its gold reserves
IMF is gaining relevance once again :
being considered to take on a sovereign wealth fund role to
avoid a repeat of a global credit crisis
Increased regulation & surveillance of the financial system
Conclusion
With the IMF, Iceland can continue to pay its
foreign creditors in the near term and avoid
national bankruptcy
the economy is expected to enter into a recession in
2009-10 although expected to rebound by 2011
Recommendations for IMF & IcelandIceland: Iceland must focus on allowing the Financial Supervisory
Authority to assist them in assessing their financial stability so that preemptive measures can be put in place.
Strengthen their ties with Britain, Sweden and Denmark.
IMF: IMF needs to put in place preventive measures for
economic crisis They will have to adapt at a much faster pace than ever
before because of economic integration & the effects of globalization
Questions?
Resources
• http://www.telegraph.co.uk/finance/comment/edmundconway/2787581/Fear-of-Iceland-bail-out-could-signal-new-future-for-the-IMF.html
• http://www.iht.com/articles/2008/11/20/business/imf.php
• http://www.imf.org/external/pubs/ft/survey/so/2008/new101608a.htm
• http://www.imf.org/external/pubs/ft/survey/so/2009/INT022409A.htm
• http://www.vi.is/files/The%20Icelandic%20Economic%20Turmoil_925879388.pdf
• http://www.imf.org/external/pubs/ft/survey/so/2008/car102408a.htm
• http://www.imf.org/external/np/sec/pr/2008/pr08296.htm• http://www.imf.org/external/np/loi/2008/isl/111508.pdf• http://www.statice.is/?
PageID=444&newsid=2950&highlight=gross%20domestic%20product