Friday, November 14, 2008

Iceland Struggles to Save Economy with IMF Loan

Sources: Bloomberg: Icelanders Protest Government Failure to Clinch Loan

Guardian.co.uk: Iceland must agree Icesave deal before IMF loan-Dutch minfin

Dow Jones Newswires: IMF: Rescue Package for Iceland Held up by Creditor Concerns

Iceland is floundering amidst uncertainty about the status of its requested $6 bn loan from the IMF (in conjunction with the EU and other countries).  As previously reported on this blog, the IMF preliminarily agreed on Oct. 24th to loan Iceland $2.1 bn contingent upon approval by the IMF executive board.  That approval has been delayed several times, raising speculation about its certainty.  The remaining $4 bn from the EU and other countries will not be released unless the IMF first approves its own agreement.

While the IMF has never officially explained the delay, it is widely understood that the principal stumbling block is Iceland’s failure to reach an agreement with the Netherlands to reimburse the thousands of Dutch consumers who lost their deposits when Iceland was forced to nationalize its largest banks, including Landsbanki.  The deposits in question were made with Landsbanki’s online bank Icesave which was nationalized with its parent bank.  The Dutch say that Iceland must come to an agreement for at least partial reimbursement before any further loan arrangements can be finalized. 

Iceland has been in talks with the Netherlands to work out an arrangement in which Iceland would compensate Dutch clients of Icesave for up to $26,360 and the Dutch government would agree to cover any remaining losses up to $100,000 euros.  The Netherlands would also loan Iceland 1.3 billion euros to cover Iceland’s part of the agreement. Experts have speculated that Icesave’s total debt to its clients could be as high as $8.2 bn, a sum that essentially equals the size of Iceland’s economy.  But Icelandic officials have yet to finalize the deal, a move that Dutch officials say is slowing the IMF loan approval process.

The delay in procuring emergency funds to support the Icelandic economy and the Krona (its currency) has infuriated many Icelandic citizens who fear that the economic situation could soon be irreparable.  Officials say that the number of protesters in downtown Reykjavik could soon reach 6 percent of Iceland’s total population.  Iceland is facing 15.9 percent inflation as well as the collapse of the krona.  Loan funds are desperately needed to support the economy and to permit the government to float the currency, which it has been unable to do since the crisis hit Iceland’s borders last month.  The amount of money that Iceland needs to repay its debts currently surpasses the island nation’s entire GDP.

Discussion:  When countries in arguably less dire financial circumstances have been able to reach a lending agreement with the IMF in less than two weeks, is it fair for the IMF to withhold funds in Iceland’s situation?  Does the IMF have a responsibility to move quickly to approve a loan to a nation in desperate need of emergency funds?  How should nations deal with client repayment when banking extends across borders, as in this situation?

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