1. INTERNATIONAL MONETARY FUND (IMF) ICELAND FINANCIAL CRISIS Professor Castillo ECON 490 Global Economics

2. Group Members David Vera- Historical Background of IMF Policies & Activities Karen Urbina- Iceland’s Position & IMF Assessment Maria Ayala- Outcomes of the Bailout

3. Historical Background of the IMF Policies & Activities

4. History  Great Depression of the 1930s  Breakdown in International Monetary Cooperation

5. 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

6. 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

7. 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

8. 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

9. 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.

10. 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

11. Iceland’s Position Executive Board of IMF Assessment

12. 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

13. Iceland Economic Activities  In 2001, banks were deregulated  Households took on a large amount of debt  Investors overestimating the true value of the króna.

14. Iceland’s GDP in 2007

15. 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

16. Currency Exchange Rate

17. 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.

18. Iceland Bailout  $2.1 Billion Loan Plan  Stand-By Arrangement  $827 million immediately available  $155 million remainder in eight equal installments

19. Iceland Bailout Agreement Terms Performance CriteriaIndicative 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 2. Ceiling on the change in net credit of the Central Bank of Iceland to the private sector. 5/ 2550 3. Ceiling on the change in the domestic claims of the Central Bank of Iceland to the central government 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/ 400040754150 6. Ceiling on the stock of central government short-term external debt 7/ 8/ 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/ 000

20. Iceland Bailout Objectives 3 Main Objectives:  To stabilize the exchange rate  Restructure the Banking System  To Create a mid-term fiscal sustainability

21. Outcomes of the Bailout

22. 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

23. 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

24. 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.

25. 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

26. Iceland's Future Iceland: Selected Economic Indicators Projection 20052006200720082009 Real Economy (change in percent) Real GDP7.44.44.91.6-9.6 Domestic demand169.9-1.5-9.1-19.7 Unemployment rate (in percent of labor force)2.11.311.45.7 Gross domestic investment (in percent of GDP)28.433.727.623.918.2 General Government Finances (in percent of GDP) Financial balance4.96.35.5-0.2-13.5 Balance of Payments (in percent of GDP) Trade balance-12.2-17.7-10.10.110.3 Gross external debt285.7445.9551.5670.2159.5

27. 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

28. 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

29. 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

30. 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

31. Questions?

32. 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.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 http://www.statice.is/?PageID=444&newsid=2950&highlight=gross%20domestic% 20product