## IMF Survey: Iceland Gets Help to Recover From Historic Crisis

_IMF News, December 2, 2008_

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**Canonical URL:** [IMF Survey: Iceland Gets Help to Recover From Historic Crisis](https://www.imf.org/en/news/articles/2015/09/28/04/53/soint111908a)

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## Bibliographic details
- Authors: Camilla Andersen IMF Survey Online December
- Published: December 2, 2008

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### Overview of the IMF Arrangement and Context
- IMF approved a $2.1 billion loan to Iceland to help recover from the financial crisis and restore confidence in its currency.
- Package announced on October 24 under the Fund's fast-track emergency financing mechanism.
- IMF Executive Board approved a two-year Stand-By Arrangement on November 19, making $827 million immediately available; the remainder to be paid in eight equal installments, subject to quarterly reviews.
- IMF mission chief for Iceland: Poul Thomsen.
- Iceland population cited as 300,000.

### Causes and Immediate Impact of the Crisis
- Banking system expansion: bank assets rose from being worth slightly more than 100 percent of GDP to being worth close to 1,000 percent of GDP after privatization completed in 2003.
- Crisis dynamics:
  - Within a week the three banks collapsed.
  - The króna's value dropped by more than 70 percent.
  - The stock market lost more than 80 percent of its value.
- Small, import-dependent economy faced a crisis of huge proportions as confidence evaporated and investors pulled out.

### Objectives and Short-Run Policy Measures of the IMF-Backed Program
- Primary short-run goal: stabilize the króna and restore confidence in the foreign exchange market over the next couple of months.
- Monetary and exchange rate policy to be used; short-run implication is higher interest rates.
- Restrictions on capital outflows will remain in the near future; capital controls had been de facto in place since early October.
- All restrictions on the current account have now been lifted as a first step.
- Program envisages IMF loan filling about 42 percent of Iceland's 2008-10 financing gap; remainder to be met by official bilateral creditors.

### Fiscal Stance and Medium-Term Fiscal Strategy
- In the first year, automatic fiscal stabilizers will be allowed to work in full.
- Primary fiscal deficit projected to increase from about ½ percent of GDP in 2008 to about 8½ percent of GDP in 2009.
- IMF is not advocating fiscal consolidation during the deep recession; consolidation to be implemented once the recession has bottomed out.
- Estimated public sector cost of dealing with banking problems: about 80 percent of GDP.
- Development of a strong medium-term fiscal consolidation plan to be launched in 2010 is included in the program.

### Bank Restructuring Framework and IMF Role
- Government strategy: new bank/old bank approach — new banks to service domestic needs; old banks to sort out most foreign liabilities.
- IMF assistance will include:
  - Valuation of assets of both new and old banks in line with international best practice.
  - Compensation from new banks to old banks for discrepancies in fair value of assets and liabilities taken over.
  - Recapitalizing new banks with the aim of eventual privatization.
  - Maximizing asset recovery in the old banks.
  - Overhauling bank supervision and regulation.
- Commitment to recognize obligations to insured depositors and to fair and equitable treatment of depositors and creditors of intervened banks.

### Economic Outlook, Risks, and Success Criteria
- Near-term outlook: expectation that GDP could fall by 10 percent next year, with a possible further small decline in 2010.
- Longer-term outlook: Iceland’s economy described as very flexible with potential for a fairly fast rebound after the sharp downturn.
- Success would look like:
  - Stabilization of the króna and normalization of foreign exchange operations so exporters and importers have access to the foreign exchange market within the next couple of months.
  - Gradual reduction of interest rates in 2009 once currency stabilizes.
  - Gradual lifting of capital controls and beginning to tackle fiscal problems.
  - Expectation that by the end of the two-year program Iceland’s economy will be growing again.
- Alternative without IMF financing (as articulated by mission chief):
  - Further significant decline in the króna.
  - Significant strain on households with mortgages fixed in foreign exchange.
  - A wave of defaults in the corporate sector with loans fixed in foreign exchange.
  - Much higher increase in unemployment and an even bigger decline in GDP than the 10 percent currently predicted.

### Program Summary — Key Program Components
- Prevent further sharp króna depreciation by maintaining an appropriately tight monetary policy in the context of a flexible exchange rate policy; restrictions on capital outflows to remain in the near term.
- Develop a comprehensive and collaborative strategy for bank restructuring by:
  - putting in place an efficient organizational structure to facilitate the restructuring process,
  - proceeding promptly with the valuation of banks' assets,
  - maximizing asset recovery in the old banks,
  - ensuring the fair and equitable treatment of depositors and creditors of the intervened banks,
  - strengthening supervisory practices and the insolvency framework.
- Ensure medium-term fiscal sustainability: allow automatic fiscal stabilizers to work in full during 2009 and develop a strong medium-term fiscal consolidation plan to be launched in 2010 to address the substantial increase in public sector debt related to recapitalizing the banking system and fulfilling deposit insurance obligations.

*IMF Survey: Iceland Gets Help to Recover From Historic Crisis (IMF Survey Online, December 2, 2008).*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Survey Interview](https://www.imf.org/en/news/search)
- [Iceland and IMF](https://www.imf.org/external/country/ISL/index.htm)
- [IMF press release](https://www.imf.org/external/np/sec/pr/2008/pr08296.htm)
- [Video: Restoring confidence](https://www.imf.org/external/mmedia/view.asp?eventID=1329)
- [IMF talks to crisis countries](https://www.imf.org/external/pubs/ft/survey/so/2008/new102208a.htm)
- [Quick, cooperative action needed](https://www.imf.org/external/pubs/ft/survey/so/2008/NEW100908A.htm)
- [Stress hits emerging economies](https://www.imf.org/external/pubs/ft/survey/so/2008/POL110908A.htm)
- [Iceland video briefing](https://www.imf.org/external/mmedia/view.asp?eventID=1328)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/soint111908a_