Title: INTERNATIONAL MONETARY FUND IMF Iceland financial crisis
1INTERNATIONAL MONETARY FUND (IMF) Iceland
financial crisis
- Professor CastilloECON 490 Global Economics
2Group Members
- David Vera-
- Historical Background of IMF Policies
Activities - Karen Urbina-
- Icelands Position IMF Assessment
- Maria Ayala-
- Outcomes of the Bailout
3Historical Background of the IMF Policies
Activities
4History
- Great Depression of the 1930s
- Breakdown in International Monetary Cooperation
5The 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
6The 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
7IMF Becoming a Universal Institution
- The fall of the Berlin wall in 1989
- Expansion to fulfill responsibilities
- Soviet Block Transition
- Debt relief for poor countries
8IMF 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
9IMFs 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
12Icelands 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
13Iceland Economic Activities
- In 2001, banks were deregulated
- Households took on a large amount of debt
- Investors overestimating the true value of the
króna.
14Icelands GDP in 2007
15What 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
16Currency Exchange Rate
17Steps 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.
18Iceland Bailout
- 2.1 Billion Loan Plan
- Stand-By Arrangement
- 827 million immediately available
- 155 million remainder in eight equal
installments
19Iceland Bailout Agreement Terms
20Iceland Bailout Objectives
- 3 Main Objectives
- To stabilize the exchange rate
- Restructure the Banking System
- To Create a mid-term fiscal sustainability
21 22Positive 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
23Positive 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
24Positive 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.
25Negative 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
26Iceland's Future
27Iceland'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
28Future 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
29Conclusion
- 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
30Recommendations 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
31Questions?
32Resources
- 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