Iceland: Office of the Prime Minister

Yale University

Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Documents (Series 1) Browse by Media Type 11-17-2008 The Icelandic Government's Program with the IMF Iceland: Office of the Prime Minister Follow this and additional works at: https://elischolar.library.yale.edu/ypfs-documents Recommended Citation Iceland: Office of the Prime Minister, "The Icelandic Government's Program with the IMF" (2008). YPFS Documents (Series 1). 13172. https://elischolar.library.yale.edu/ypfs-documents/13172 This Document is brought to you for free and open access by the Browse by Media Type at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in YPFS Documents (Series 1) by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact elischolar@yale.edu. November 17, 2008 In the wake of the recent international �nancial turmoil, Iceland’s economy is facing a bankingcrisis of extraordinary proportions. The economy is heading for a deep recession, a sharp risein the �scal de�cit, and a dramatic surge in public sector debt – by about 80%. Potentiallysubstantial capital out�ows could lead to a further large loss in the value of the króna. In thecontext of the high leverage in the economy, this would produce massive balance sheet effectsand a substantial contraction in domestic activity. The immediate challenges are, therefore, torestore a functioning and viable banking system, and to stabilize the króna. Looking furtherahead, the challenge will be to reduce a very high level of public debt, by embarking on aprocess of sustained �scal consolidation.Banking sector restructuring and insolvency framework reformThe Icelandic government is committed to progressing a sound and transparent process asregards depositors and creditors in the intervened banks. Constructive work is being carriedout towards comparable agreements with all international counterparts for the Iceland depositinsurance scheme in line with the EEA legal framework. Under its deposit insurance systemIceland is committed to recognize the obligations to all insured depositors. This is done underthe understanding that pre�nancing for these claims is available by respective foreigngovernments and that Iceland as well as these governments is committed to discussions withinthe coming days with a view to reaching agreement on the precise terms for this pre�nancing.Furthermore, it is recognized that the payment by the new banks of the fair value for the assetstransferred from the old banks is a key factor in the fair treatment of depositors and creditorsin the intervened banks. Accordingly, we have instituted a transparent process involving twosets of independent auditors to establish the fair value of the assets. More generally, the fair,equitable and non-discriminatory treatment of depositors and creditors will be ensured in linewith applicable law.Prime Minister's Of�ce/The Icelandic Government's programwith the IMFGovernment of IcelandGovernment of Iceland | The Icelandic Government's program with the IMF https://www.government.is/news/article/2008/11/17/The-Icelandic-Gov...1 of 4 5/4/2022, 5:38 PMThe bank regulatory framework and supervisory practice will be reviewed to strengthen thesafeguards against potential new crises. Previous senior managers and major shareholders inintervened banks who are found to have mismanaged the banks should not assume similarroles for at least three years.The insolvency framework to manage deleveraging and recovery in the banking, corporate andhousehold sectors in an ef�cient manner will be reviewed.Fiscal policyPreliminary estimates suggest that the gross cost to the budget of honoring deposit insuranceobligations and of recapitalizing both commercial banks and the Central Bank of Iceland couldamount to around 80 percent of GDP and the general government de�cit will be 13.5 percent ofGDP in 2009. Overall, gross government debt could rise from 29 percent of GDP at end-2007 to109 percent of GDP by end-2009. The net cost will be somewhat lower on the assumption thatmoney can be recovered by selling assets from the old banks.In order not to exacerbate the recession, the �scal de�cit will be allowed to widen to theextent that this is driven by higher expenditures and lower revenues due to the effects of theeconomic cycle. But given the high �nancing need and the dramatic increase in public sectordebt, a planned discretionary �scal relaxation in 2009 will be signi�cantly scaled back.The intention is to reduce the structural primary de�cit by 2–3 percent annually over themedium-term, with the aim of achieving a small structural primary surplus by 2011 and astructural primary surplus of 3½-4 percent of GDP by 2012. A thorough analysis of the �scalframework will be conducted and recommendations made, including on how local government�nances can be better aligned with the governments’ overall �scal plans.Monetary and exchange rate policyThe immediate challenge facing the Central Bank of Iceland is to stabilize the króna and setthe stage for a gradual appreciation. It can be expected that the króna will face near-term risksof pressure when the normal functioning of the foreign exchange market is restored.Extraordinary measures are therefore needed to deal with short-term risks and preventsubstantial capital out�ows.In the very short-run, we intend to adopt the following pragmatic mix of conventional andunconventional measures:To raise the policy interest rate to 18 percent. The Central Bank stands ready to increase itfurther, but it is unclear that higher interest rates alone will suf�ce to stem capitalout�ow.Tight control over banks’ access to Central Bank credits will be maintained to avoidGovernment of Iceland | The Icelandic Government's program with the IMF https://www.government.is/news/article/2008/11/17/The-Icelandic-Gov...2 of 4 5/4/2022, 5:38 PMThis process of normalization and lower in�ation and interest rates can start as soon as thekróna stabilizes in the foreign exchange market, all demand for foreign exchange in respect ofcurrent account transactions is met in the foreign exchange market, and there is no longerneed to support the market by drawing on the reserves. Following the above mention actions,the króna could strengthen quickly and annual in�ation will have fallen to 4½ percent atend-2009. Additional strengthening of the króna and further disin�ation is expected in 2010.This will allow us to begin to ease control over Central Bank’s credit volume and increasinglyrely on the policy interest rate as the primary monetary policy instrument, in the context of a�exible exchange rate policy.Incomes policyIt will be important to have a national consensus consistent with the objectives of themacroeconomic program. Historically, income policy in Iceland has been very effective, withpast agreements supporting the economic adjustment when dif�cult circumstances demandedit. Social partners recognize the need to enter an agreement that is commensurate with theseverity of the situation.Publishing and Parliamentary ProcedureA Letter of intent was sent to the IMF on November 3, signed by the Minister of Finance and theChairman of the Board of Governors of the Central Bank. The Executive Board of the IMF willput Iceland’s plan on its agenda on Wednesday November 19. At the same time IMF’s StaffReport will be published.Today, November 17, the plan was put before the Parliament and will be discussed there laterthis week.A special information Web Page has been opened as a part of the Web Page of the PrimeMinister’s Of�ce, www.forsaetisraduneyti.is/Aaetlun_um_efnahagsstodugleika/. Among itscontents are the Letter of intent in Icelandic and English, explanatory texts on every article ofthe LOI and other relevant information.excessive liquidity being drawn down through this route.The Central Bank stands ready to use foreign reserves to prevent excessive krónavolatility.Furthermore, the Central Bank is willing to temporarily maintain restrictions on capitalaccount transactions. Such restrictions have considerable adverse implications and theintention is to remove them as soon as possible.Government of Iceland | The Icelandic Government's program with the IMF https://www.government.is/news/article/2008/11/17/The-Icelandic-Gov...3 of 4 5/4/2022, 5:38 PMRelated LinksLetter of Intent (pdf �le)IMF - Staff Report (pdf �le)Iceland and the IMF (imf.org)Joint statement from the Ministers of Finance in Denmark, Finland, Norway and Swedenregarding help to Iceland (Nov. 19/20)Government of Iceland | The Icelandic Government's program with the IMF https://www.government.is/news/article/2008/11/17/The-Icelandic-Gov...4 of 4 5/4/2022, 5:38 PM

The Icelandic Government\u27s Program with the IMF

https://elischolar.library.yale.edu/context/ypfs-documents/article/14220/viewcontent/PMO_2008.11.17_Program_IMF.pdf

The Icelandic Government\u27s Program with the IMF

Abstract

Similar works

Full text

Available Versions

Yale University