The IMF, the Credit Crunch and Iceland

Abstract

Iceland was badly hit by a fundamental mismatch between the assets and international liabilities of her banking system, with severe consequences for the welfare of the population. The country now has an International Monetary Fund programme. The paper asks three questions of the programme: Is it too tight? Is the balance of payment’s target appropriate? How will the country cope with the potentially huge transfer problem associated with the now frozen external liabilities of the failed Icelandic banks? The paper notes several problems, and argues that an appropriately structured and expanded fiscal policy is needed, together with burden sharing between Iceland and the international community.