INTERNATIONAL MONETARY FUND (IMF) ICELAND FINANCIAL CRISIS by cwy33203

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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
Historical Background of the IMF
       Policies & Activities
History




   Great Depression of the 1930s

   Breakdown in International Monetary Cooperation
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
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
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
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
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.
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
   Iceland’s Position
Executive Board of IMF
       Assessment
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
Iceland Economic Activities

   In 2001, banks were deregulated

   Households took on a large amount of debt

   Investors overestimating the true value of the króna.
Iceland’s GDP in 2007
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
Currency Exchange Rate
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.
Iceland Bailout

   $2.1 Billion Loan Plan

   Stand-By Arrangement

   $827 million immediately available

   $155 million remainder in eight equal installments
       Iceland Bailout Agreement Terms
                                                                                                   Performance Criteria        Indicative Targets

                                                                                                  December-2008 Ceiling/   March-2009 Ceiling/Floor 2/ June 2009 Ceiling/Floor 3/
                                                                                                        Floor 1/

(In billions of króna)

1. Floor on the change in the central government net financial balance.4/                                  -12                        -55                         -55



2. Ceiling on the change in net credit of the Central Bank of Iceland to the private sector. 5/            25                          50                         50



3. Ceiling on the change in the domestic claims of the Central Bank of Iceland to the central              25                          25                         25
government



(In millions of US dollars)

                                                                                                            ..
5. Ceiling on the level of contracting or guaranteeing of new medium and long term external               4000                        4075                       4150
debt by central government 7/



6. Ceiling on the stock of central government short-term external debt 7/ 8/                               650                        650                         650



7. Ceiling on the accumulation of new external payments arrears on external debt contracted                 0                           0                          0
or guaranteed by central government from multilateral or bilateral official creditors.8/ 9/
Iceland Bailout Objectives
3 Main Objectives:

   To stabilize the exchange rate

   Restructure the Banking System

   To Create a mid-term fiscal sustainability
Outcomes of the Bailout
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
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
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.
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
   Iceland's Future
                                      Iceland: Selected Economic Indicators

                                                                                         Projection

                                                              2005    2006    2007    2008       2009

Real Economy (change in percent)

                                                  Real GDP     7.4     4.4     4.9     1.6       -9.6

                                          Domestic demand      16      9.9    -1.5    -9.1       -19.7

             Unemployment rate (in percent of labor force)     2.1     1.3     1       1.4        5.7

             Gross domestic investment (in percent of GDP)    28.4     33.7   27.6    23.9       18.2




General Government Finances (in percent of GDP)

                                          Financial balance    4.9     6.3     5.5    -0.2       -13.5



Balance of Payments (in percent of GDP)

                                             Trade balance    -12.2   -17.7   -10.1    0.1       10.3

                                       Gross external debt    285.7   445.9   551.5   670.2      159.5
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
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
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
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
Questions?
Resources
•   http://www.telegraph.co.uk/finance/comment/edmundconway/2787581/Fear-of-
    Iceland-bail-out-could-signal-new-future-for-the-IMF.html
•   http://www.iht.com/articles/2008/11/20/business/imf.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/The%20Icelandic%20Economic%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/?PageID=444&newsid=2950&highlight=gross%20domestic%
    20product

								
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