INTERNATIONAL MONETARY FUND IMF Iceland financial crisis

1
INTERNATIONAL MONETARY FUND (IMF) Iceland
financial crisis

• Professor CastilloECON 490 Global Economics

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Group Members

• David Vera-
• Historical Background of IMF Policies
  Activities
• Karen Urbina-
• Icelands Position IMF Assessment
• Maria Ayala-
• Outcomes of the Bailout

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Historical Background of the IMF Policies
Activities
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History

• Great Depression of the 1930s
• Breakdown in International Monetary Cooperation

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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

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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

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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

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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

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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.

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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

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• Icelands Position
• Executive Board of IMF Assessment

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Icelands 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

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Iceland Economic Activities

• In 2001, banks were deregulated
• Households took on a large amount of debt
• Investors overestimating the true value of the
  króna.

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Icelands GDP in 2007
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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

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Currency Exchange Rate
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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.

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Iceland Bailout

• 2.1 Billion Loan Plan
• Stand-By Arrangement
• 827 million immediately available
• 155 million remainder in eight equal
  installments

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Iceland Bailout Agreement Terms
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Iceland Bailout Objectives

• 3 Main Objectives
• To stabilize the exchange rate
• Restructure the Banking System
• To Create a mid-term fiscal sustainability

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• Outcomes of the Bailout

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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

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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

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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.

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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

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Iceland's Future
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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

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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

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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

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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

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Questions?
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Resources

• http//www.telegraph.co.uk/finance/comment/edmundc
  onway/2787581/Fear-of-Iceland-bail-out-could-signa
  l-new-future-for-the-IMF.html
• http//www.iht.com/articles/2008/11/20/business/im
  f.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/The20Icelandic20Economic
  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/?PageID444newsid2950high
  lightgross20domestic20product