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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

(
  
 
  
   

History

: Great Depression of the 1930s

: Breakdown in International Monetary Cooperation

phe Bretton Woods Agreement (BWA)

|MF was formed through the BWA:

: BWA was conceived in July 1944

: International Monetary Fund (IMF) formal existence

was in December 1945

: Par value system

phe End of the BWA

?nd of Bretton Woods system (1972±81) :

: phe 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:

: phe fall of the Berlin wall in 1989

: Expansion to fulfill responsibilities

: Soviet Block pransition

: Debt relief for poor countries

IMF Organization

: MF is an organization of 185 countries

: pheir 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 )

: phe GAB enables the IMF to borrow specified

amounts of currencies from 11 industrial countries at
market-related rates of interest.

: phe 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

2ontinued Globalization (2005-present):

: phe 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

 | eland¶s Position
?
e utive Board of |MF
Assessment
Iceland¶s Fast Growing Economy

: phe 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.

| !#$!%&
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
'! () *!+
Steps to Shore up Confidence

: phe 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 perms
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Iceland Bailout Objectives
 Main Obje tives:

: po stabilize the exchange rate

: Restructure the Banking System

: po Create a mid-term fiscal sustainability

Out omes of the Bailout
Positive Bailout Results

Obje tive 1: Stabilizing the ?
hange Rate for

| eland:

: Restoring the interbank foreign exchange market.

Appreciating currency by lifting capital controls and
reducing interest rates

Restoring confidence

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Positive Bailout Results ( ont.)

Obje tive 2: Bank Restru turing

: 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.)

Obje tive : Mid-term Fis al 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
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Iceland's Bright Future

: phe 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
| eland:
: 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.

|MF:
: IMF needs to put in place preventive measures for
economic crisis
: phey will have to adapt at a much faster pace than ever
before because of economic integration & the effects of
globalization
]
 

' 
4 http://www.telegraph.co.uk/finance/comment/edmundconway/2787581/Fear-of-
Iceland-bail-out-could-signal-new-future-for-the-IMF.html
4 http://www.iht.com/articles/2008/11/20/business/imf.php
4 http://www.imf.org/external/pubs/ft/survey/so/2008/new101608a.htm
4 http://www.imf.org/external/pubs/ft/survey/so/2009/INp022409A.htm
4 http://www.vi.is/files/phe%20Icelandic%20Economic%20purmoil_925879388.pdf
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