## How Iceland Recovered from its Near-Death Experience

_IMF Blog, October 26, 2011_

## Source details

**Canonical URL:** [How Iceland Recovered from its Near-Death Experience](https://www.imf.org/en/blogs/articles/2011/10/26/how-iceland-recovered-from-its-near-death-experience)

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## Bibliographic details
- Authors: Poul M Thomsen
- Published: October 26, 2011

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### Crisis context (October 2008)
- The country’s three main banks collapsed within a week of each other.
- The three banks had assets worth more than 1,000 percent of GDP.
- The scale of uncertainty included unknown total losses and how losses would be divided between Icelanders and foreigners.
- Concern that a disorderly depreciation of the exchange rate or deposit runs would be ruinous for households and companies.

### Recovery outcomes (three years later)
- Population reference: a country of just 320,000 people.
- Growth has returned and new jobs are being created.
- Unemployment has dropped below 7 percent of the work force (still described as unacceptably high for a country used to near-full employment).
- In June this year, the government successfully issued a $1 billion sovereign bond, marking a return to international financial markets.
- Public debt is currently at around 100 percent of GDP.
- Banks have been shrunk to about 200 percent of GDP and are now fully recapitalized.
- Outstanding unresolved issue: the Icesave case involving disputed liability for lost deposits in the U.K. and the Netherlands.

### IMF-supported program design and rationale
- The program provided breathing room to address large challenges; it was a $2.1 billion IMF-supported program combined with loan commitments from the Nordic countries and Poland.
- Four important elements of the program:
  - Legal action to ensure that losses in the banks were not absorbed by the public sector; although the public sector did step in to ensure new banks had adequate capital, it was insulated from vast private sector losses.
  - Initial focus exclusively on stabilizing the exchange rate, using unconventional measures including capital controls.
  - Automatic stabilizers were allowed to operate in full during the first year of the program, effectively delaying fiscal adjustment to support the economy during severe strain.
  - Conditionality was streamlined and focused on rebuilding the financial sector; broader-economy reforms were acknowledged as eventual needs but were not part of the program.

### Government stance and social protection
- The government sought to implement the program “their way,” with a key objective to protect Iceland’s social welfare state.
- Minister of Economics Árni Páll Árnason is quoted: “The dynamic cooperation with the IMF helped preserve the Nordic welfare model in my country.”

### Policy lessons and external applicability
- The IMF used policy tools not part of its mainstream toolkit for Iceland; this eclectic policy mix proved effective in Iceland’s case.
- The extent to which lessons from Iceland are applicable elsewhere, including the crisis-stricken euro area, is described as far from clear.
- To assess applicability and lessons learned, the IMF and the Icelandic government co-hosted a conference on October 27 featuring prominent economists (including Paul Krugman, Willem Buiter, and Simon Johnson) to debate applicability with civil society, academics, and IMF officials.

*Source: Poul M. Thomsen, October 26, 2011*

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## References

- [$2.1 billion IMF-supported program](http://www.imf.org/external/pubs/ft/survey/so/2008/int111908a.htm)
- [effective](http://www.imf.org/external/pubs/ft/survey/so/2011/SurveyartF.htm)
- [conference](http://www.imf.org/external/np/sec/pr/2011/pr11355.htm)
- [debate](http://www.imf.org/external/np/seminars/eng/2011/isl/index.htm)

_Source: https://www.imf.org/en/blogs/articles/2011/10/26/how-iceland-recovered-from-its-near-death-experience_