INTERNATIONAL MONETARY

FUND (IMF)
ICELAND FINANCIAL CRISIS
Professor Castillo
ECON 490 Global Economics

Group Members
David VeraHistorical Background of IMF Policies & Activities
Karen UrbinaIcelands Position & IMF Assessment
Maria AyalaOutcomes 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 (197281) :

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

IMFs 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

Icelands Position
Executive Board of IMF
Assessment

Icelands Fast Growing Economy

The long economic expansion:

initiated by aluminum sector investments

sustained
fueled

by a boom in private consumption

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 krna.

Icelands 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

(Inbillionsofkrna)

PerformanceCriteria

IndicativeTargets

December-2008Ceiling/ March-2009Ceiling/Floor2/ June2009Ceiling/Floor3/

Floor1/

1.Flooronthechangeinthecentralgovernmentnetfinancialbalance.4/

-12

-55

-55

2.CeilingonthechangeinnetcreditoftheCentralBankofIcelandtotheprivatesector.5/

25

50

50

3.CeilingonthechangeinthedomesticclaimsoftheCentralBankofIcelandtothecentral
government

25

25

25

(InmillionsofUSdollars)

..

5.Ceilingonthelevelofcontractingorguaranteeingofnewmediumandlongtermexternal
debtbycentralgovernment7/

4000

4075

4150

6.Ceilingonthestockofcentralgovernmentshort-termexternaldebt7/8/

650

650

650

7.Ceilingontheaccumulationofnewexternalpaymentsarrearsonexternaldebtcontracted
orguaranteedbycentralgovernmentfrommultilateralorbilateralofficialcreditors.8/9/

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 krna

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

Real Economy (change in percent)

2008

2009

RealGDP

7.4

4.4

4.9

1.6

-9.6

Domesticdemand

16

9.9

-1.5

-9.1

-19.7

Unemploymentrate(inpercentoflaborforce)

2.1

1.3

1.4

5.7

Grossdomesticinvestment(inpercentofGDP)

28.4

33.7

27.6

23.9

18.2

-0.2

-13.5

General Government Finances (in percent of GDP)

Financialbalance

4.9

6.3

5.5

Balance of Payments (in percent of GDP)

Tradebalance

-12.2

-17.7

-10.1

0.1

10.3

Grossexternaldebt

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 workforce
Abundant 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 industries
flexible labor market
strong fiscal position
High 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 &

Iceland
Iceland:
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-ofIceland-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.ht
m

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/?
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%20product