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INTERNATIONAL MONETARY FUND IMF Iceland financial crisis

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Historical Background of IMF Policies & Activities. Karen Urbina ... Collapse of Landsbanki, Glitnir & Kaupthing. Insufficient reserves to repay banks debt ... – PowerPoint PPT presentation

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Title: INTERNATIONAL MONETARY FUND IMF Iceland financial crisis


1
INTERNATIONAL MONETARY FUND (IMF) Iceland
financial crisis
  • Professor CastilloECON 490 Global Economics

2
Group Members
  • David Vera-
  • Historical Background of IMF Policies
    Activities
  • Karen Urbina-
  • Icelands 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 (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

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
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.

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
  • Icelands Position
  • Executive Board of IMF Assessment

12
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

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
Icelands 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
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
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/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
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