Restoring Trust in Iceland: Iceland’s IMF Programme

Baldursson, F and Portes, R (2018) Restoring Trust in Iceland: Iceland’s IMF Programme. In: The Return of Trust? Institutions and the Public after the Icelandic Financial Crisis. Emerald Publishing Limited, pp. 111-128.

Abstract

During the banking crisis of October 2008, Iceland became the first developed country in decades to seek the assistance of the International Monetary Fund (IMF). Iceland’s IMF programme provided a measure of stability at a time of intense turbulence. The IMF’s credibility was helpful during this period of collapse not just of the banks but also of the public trust towards almost all Icelandic institutions. Importantly, the IMF implicitly supported Iceland’s policy of letting institutional creditors of the banks rather than Icelandic taxpayers bear the costs of their collapse; this provided credibility for the policy and limited repercussions. In a reversal of previous IMF policy, capital controls were imposed. The controls helped stabilise the exchange rate, and inflation subsided. The controls also helped recovery after the crisis by shielding the economy from international financial shocks. The direct fiscal cost of the Icelandic crisis was very high, but the considerable and painful fiscal tightening that was a part of the programme was needed to avoid a sovereign debt crisis. This helped in regaining trust from international markets. Mistakes were made in the design and implementation of the IMF programme, but overall, we judge that its contribution was positive. The programme provided one of the elements for restoring trust in Iceland when it was most needed, both domestically and internationally, during the depth of the crisis in 2009–2010.

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Item Type: Book Section
Subject Areas: Economics
Date Deposited: 30 Jan 2020 16:06
Last Modified: 30 Jan 2020 18:59
URI: https://lbsresearch.london.edu/id/eprint/1359
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