The financial crisis in Iceland.
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Transcript The financial crisis in Iceland.
The financial crisis in Iceland.
Economic and social disaster?
Lilja Mósesdóttir
1
The largest bank collapse !
The profit of the liberalised and privatised banking system was
privatised while the debt will be nationalised.
The total debt of the central government (sovereign debt):
A. Pre-crash debt :
653 billion Iskr.
B. Nationalised debt due to the crash:
ICEsave/Edge:
(secured) loans lost by the Central bank
Recapitalisation of the banks
Short sale losses
Fiscal deficit 2009
FIH bank
695
220
385
35
154
63.6
Total
2205.6 millj. Iskr.
billion Iskr.
billion Iskr.
billion Iskr.
billion Iskr.
billion Iskr.
billion Iskr.
National debt becomes 145% of GDP
2
3
The economic situation
%
2007
2008
2009
4.9
-0.1
-9.6
Inflation (CPI)
5
12.4
13.1
Budget Balance
(% GDP)
5.5
-1.4
-13,2
Foreign currency
(average price)
change in Iskr)
-2,5
40.1
22.6
Unemployment
2,3
3.0%
10%
Real GDP growth
Sources: Minstry of Finance, (2009) and Statistics Iceland (2008)
Emergency law in October to ensure full access of Icelanders to their bank deposits
4
IMF backed program in Iceland
The loan(s):
IMF: 2.1 billion US$
Others: 3 billion US$ (Nordic countries, Russia & Poland)
Conditions:
1. Implement IFM economic program
2. Demonstrate commitment to solve the dispute around ICEsave/Edge
IMF program focus on:
1. Currency stabilisation
Currency stability the goal of monetary policy
• Capital controls
• Central bank interest rate up to 18%
2. Bank restructuring
New regulatory structure
Recapitalize (The central bank and the 3 state-owned banks)
3. Fiscal consolidation
Extensive cuts or higher taxes due to large debt-servicing burden
5
Criticism of the IMF program
1. Free floating currency instead of capital controls (right wing)
2. The program fails to take into account :
the real economy
The private sector (fishery sector) technically bankrupt
Fish prices are falling due to the global recession
counter-cyclical measures
Fiscal policy: Fiscal deficit only allowed in 2009
Monetary policy: High interest rate
Almost illiquid currency (Iskr)
Keep Iskr. - limits the size of the banking and corporate sector
Unilateral adaptation of foreign currency – no lender of last resort
EU membership and then EMU membership – takes too long time
6
Threats to social cohesion
1.Inequality:
Rich investors and households :
Better able to hedge in advance and run away
More likely to receive compensation when bank bailouts occur
Better protected when the crisis spreads to the real economy
Urban poverty increases more than rural poverty (may protect the poor)
2. Poverty:
Unemployment (10%) and shorter working hours
Large fall in real wages (16%)
Price indexed housing loans
3. Wealth transfers:
From the poor to the rich
From few domestic investors to even fewer domestic investors
From domestic investors to foreign investors
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Social unrest in Iceland
IMF program does not tackle the indebtedness of firms and
households.
No emergency plan
Social policy measures focuses only on the most needy
Banks accused of applying discriminatory rules when deciding on loans to
firms
So far, no consultation with trade unions and interest groups
Poverty and inequality likely to increase in Iceland:
Full access to deposits –capital owners compensated by the state
Limited progressiveness of the tax system
Price indexed housing loans and high real interest rate
Voluntary pay decreases
Low replacement rates of welfare benefits
8
Tackle poverty and inequality
Social costs of financial crisis large and durable (Finland)
The crisis offer an opportunity to introduce better policies:
Lower real interest on housing loan and changes to the indexation
Progressive tax (flat rate tax rate 37,38%)
Lower tax rate among low earners stimulates demand more than
among high earners
Women’s labour supply more sensitive to tax changes than men’s
Policies focused on reducing poverty essential and more acceptable during
crisis (IMF constrains)
Income support
Workfare - infrastructure and R&D
Knowfare (opportunity cost of schooling falls)
Centralised wage negotiation to protect those in vulnerable position
9
Tackle wealth transfers
Real estate
Bubble 1997-2007
250%
Household debt as % of GDP (2008,Q3)
115%
Price fall 2008-2010
30%
Solution: real estate turned into housing cooperatives??
Stock market (OMX Iceland 15)
Bubble 2001-2007
500%
Firm debt as % of GDP (2008,Q3)
316%
Price fall (last 12 months)
94%
Solution: Restructuring fund (RSF) – the state (+pension funds)
Depreciate/subordinate debt and injecting capital (share holder/owner)
Depreciate /subordinate debt and allow employees to take over firms
Relax rules concerning bankruptcy of households and firms
Investment companies should be forced into bankruptcy
10
Growth strategies
Source: Ívar Jónsson (2003)
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Growth strategy for Iceland?
Export-led growth strategy based on the utilisation of natural
resources and foreign direct investment in aluminium & ferrosilicon
Falling fish prices
Falling energy prices
Too capital intensive strategy
Likely to involve economic growth without much employment growth
Require relatively low skill level
How to manage ownership and utilisation of natural resources
Import-substitution strategy
Manufacturing production instead of service provision
Natural resources used to produce for domestic or foreign markets
Free trade agreements constrain
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