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INTERNATIONAL MONETARY FUND (IMF) Iceland financial crisis. Professor Castillo ECON 490 Global Economics. Group Members. David Vera- Historical Background of IMF Policies & Activities Karen Urbina - Iceland’s Position & IMF Assessment Maria Ayala- Outcomes of the Bailout.

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INTERNATIONAL MONETARY FUND (IMF) Iceland financial crisis

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International monetary fund imf iceland financial crisis l.jpg

INTERNATIONAL MONETARY FUND (IMF) Iceland financial crisis

Professor CastilloECON 490 Global Economics

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Group Members

David Vera-

Historical Background of IMF Policies & Activities

Karen Urbina-

Iceland’s Position & IMF Assessment

Maria Ayala-

Outcomes of the Bailout

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Historical Background of the IMF Policies & Activities

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  • Great Depression of the 1930s

  • Breakdown in International Monetary Cooperation

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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

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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

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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

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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

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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.

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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

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Iceland’s Position

Executive Board of IMF Assessment

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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

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Iceland Economic Activities

In 2001, banks were deregulated

Households took on a large amount of debt

Investors overestimating the true value of the króna.

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Iceland’s GDP in 2007

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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

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Currency Exchange Rate

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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.

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Iceland Bailout

  • $2.1 Billion Loan Plan

  • Stand-By Arrangement

  • $827 million immediately available

  • $155 million remainder in eight equal installments

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Iceland Bailout Agreement Terms

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Iceland Bailout Objectives

3 Main Objectives:

  • To stabilize the exchange rate

  • Restructure the Banking System

  • To Create a mid-term fiscal sustainability

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Outcomes of the Bailout

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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

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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

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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.

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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

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Iceland's Future

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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

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    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

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    • 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

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    Recommendations for IMF & 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 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

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