Transcript (imf) presentation subtitle

INTERNATIONAL MONETARY FUND (IMF)
ICELAND FINANCIAL CRISIS
Professor Castillo
ECON 490 Global Economics
Group Members
David VeraHistorical Background of IMF Policies & Activities
Karen UrbinaIceland’s 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 (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 Position
Executive Board of IMF
Assessment
Iceland’s 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 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/ March-2009 Ceiling/Floor 2/ June 2009 Ceiling/Floor 3/
Floor 1/
(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
0
0
0
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/
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 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
4.9
6.3
5.5
-0.2
-13.5
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
Real Economy (change in percent)
General Government Finances (in percent of GDP)
Financial balance
Balance of Payments (in percent of GDP)
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.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