Ísl in addition to Kreppa1 Causes Juan Suarez2 Govt response Andrew Fincham3 IMF response B
Soenarie, Angelique, Mesa Business Reporter has reference to this Academic Journal, PHwiki organized this Journal Ísl in addition to Kreppa1 Causes Juan Suarez2 Govt response Andrew Fincham3 IMF response Bradley Feingerts4 Lessons Guillaume BriantIcel in addition to at RiskRapid Growth BubbleInvestments fuel rapid economic growth in Icel in addition to from 2000 to 2008GDP growth outpaces growth in Denmark, Norway, in addition to Sweden by 2-4% in 2003-06Easy access to mortgages increased home investment in addition to personal debthousehold debt grew to 213% of disposable income by 2006 (U.S. household debt: 169%)Inflation rises to 14% by 2008 Rapid Privatization of Banking Sector in 2000Heavy reliance on external debtfinances hot local mortgage market as long as eign acquisitions Icel in addition to s banks grow through as long as eign internet bank deposits outpacing currency reserves in addition to deposit insurance2006: Loans of Icel in addition to s three main banks exceed $150 Billion, 8 times GDPthe U.S. equivalent: $110 Trillion 3 largest U.S. banks $6 Trillion in assetsIcel in addition to is TinyPopulation: 319,000 (U.S. Population: 308,000,000)GDP (2008 est.): US$12.97 Billion (U.S. GDP: $13.84 Trillion)70% of export earnings are derived from fishing
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TimelineFebApr 2006:First jitters as concern about overextended banks leads to them facing difficulty in refinancing29 Sep 2008:Government announces taking 75% stake in Glitnir.6 Oct 2008:Much interbank lending ceases; Althing passes emergency legislation authorizing intervention in financial system.78 Oct 2008:FME places L in addition to esbanki in addition to Glitnir banks into receivership; Glitnir nationalization cancelled. All domestic savings guaranteed under deposit insurance in addition to domestic branches to remain open; as long as eign accounts frozen; RB member says as long as eign depositors likely to recover only 5%15%.Early Oct 2008:Adverse media (esp in UK) starts run on banks9 Oct 2008:FME places Kaupthing into receivership; trading on ICEX suspended; kr: at 340:1912 Oct 2008:UK Govt suspends L in addition to esbanki assets in UK using anti-terrorism law; guarantees UK depositors; Governments in Luxembourg, Manx, Switzerl in addition to , Finl in addition to similarly seize assets.14 Oct 2008:ICEX reopens with a 77% fall in the OMXI15 (eventually falls by 95.6%)Sep 2008:kr: has fallen 35% since Jan 2008, from 90:1 to 131:1.15 Oct 2008:Norway, Denmark make 400m loan available to ICB.3 Dec 2008:kr: at 150:120 Oct 2008:New L in addition to esbanki, Glitnir, Kaupthing banks established, take over domestic operations.26 Jan 2009:Govt resigns.24 Oct 2008:IMF agreement in principle to $2.1b loan. Not finalised.19 Nov 2008:Final agreement on IMF loan package:$2.1b IMF,$2.5b Sc in addition to inavia,$6.3b UK, Germany, Netherl in addition to s as long as depositors.Late Nov 2008:$650m loans from Pol in addition to , Faeroe Is, Russia.Step 1. The subprime mortgage crisis spreadsForeign banks become increasingly unwilling to finance Icel in addition to ic banks.Confidence in Icel in addition to banks faltersStep 2. Banks begin to failFrozen credit markets hamper banks ability to finance debtIt becomes obvious that Icel in addition to s Central Bank is utterly incapable of making emergency loans necessary to cover the gigantic debt burden of the domestic banks Step 3. Icel in addition to Takes Control of BanksStep 4. Crash:Stock market crash.After bank receivership, currency trades grind to a halt as no domestic bank can act as a clearing house as long as the Krona.The govt announces ef as long as ts to peg Krona to Euro but currency crashes.Huge debt fuels inflation; govt responds with heightened interest ratesEvaluation: GovernmentResponse 1: Announcing 75% stake in Glitnir:Although this set off the run, wasnt avoidable. Just the news that burst the bubble.Should have known that news would set off a run on banks in addition to currency. Yet couldnt af as long as d to bail out all three banks in addition to stabilize currency. So had to change plans within a week.Probably should have been talking to IMF earlier to arrange st in addition to by facility; but would IMF have been willing to set this up secretlyResponse 2: Placing banks in receivership, suspending as long as eign accounts while continuing/guaranteeing domestic:Banks clearly insolvent (or soon to be, given run) so a bankruptcy-style asset freeze makes sense.But local economy probably would have stopped without access to banks, so local unfreezing probably necessary. Difficult to say whether ex post 100% local a/c guarantee necessary; justified on st in addition to ard bailout national interest groundsShould govts bailing out treat non-taxpayers in addition to taxpayers alike 1. Non-issue here as govt couldnt af as long as d anyway. Private insurance available as long as Icel in addition to ic bank deposits.2. National interest arguments: If local insurance explained as a bailout (avoiding counterfactual harm), then little reason as long as as long as eigners to qualify, except on basis of reputational effects3. Arguments against this kind of economic nationalism.Response 3: Agreeing to terms of IMF/ as long as eign loans:Should govt had agreed to underwrite as long as eign depositors ex post Probably would not have gained loan otherwise. Even if possible, see arguments above.Evaluation: IMF $2.1 billion – strings attachedGoal 1: Stabilize the KronaRaise the policy interest rate to 18 percent.$10 billion from IMF loan in addition to bilateral loansMassive capital controlsSUMMARY: Short-term successStatus: Behind schedule due to disagreement over accounting methodology. Delayed until the end of Feb or early Mar. Capital injection into the three new banks, using tradable government bonds on market terms, to raise the capital adequacy ratio to >10%. By end-Feb 2009.Status: Delayed due to asset valuation issues.Hire an experienced banking supervisor to assess the regulatory framework in addition to supervisory practice. By end-Mar 2009.Status: Expert hired in addition to report expected on timeSUMMARY: Delayed.Goal 3: Fiscal Consolidation Establish a committee comprising reps from PMs Office, FME, Central Bank of Icel in addition to , Min. of Finance & Min. of Commerce to coordinate policy input.Status: CompletedImprove medium-term fiscal framework to reduce got deficits in addition to debt accumulation. By end-Jun 2009.SUMMARY: Progress, but results are mainly to be determinedGoal 2: Restructure the BanksFME to review business plans of each of the new banks. By Jan 15, 2009.Status: As of Dec 2008, 2 of 3 banks had submitted plans.Intl Auditing Firm to value old in addition to new banks in accordance with int l best practice. Complete by end-Jan 2009.
Icel in addition to Conditionality under the 2008 Economic ProgramMain Idea: (i) Place a floor on international reserves; (ii) Limit the government deficit; in addition to (iii) Limit the creation by the central bank of liquidity1. Icel in addition to s economic prospects International assistance provided Icel in addition to with some reliefHowever, Icel in addition to s financial problems are not resolved yetHuge debt relative to Icel in addition to s size.Crisis cost exceeds 80% of Icel in addition to ‘s GDPBy comparison: the S&L crisis cost the U.S. taxpayer about 3% – 5% GDP,the reparation dem in addition to ed from Germany by the Treaty of Versailles after WWI was 85% of GDP.Possible solution to promote Icel in addition to s economic stability despite its small size: joining the Euro currencyPros: currency stability.Cons: Icel in addition to , currently a member of the European Economic Area will have to join the European Union first. The process will take a few years in addition to face some internal political opposition,the Euro-membership/currency does not prevent small countries from being in crisis: Greece.One third of the population is considering emigration.2. Increased financial nationalism Failure of Icel in addition to s banks Icel in addition to s deposit insurance fund did not compensate as long as eign depositors. Foreign governments stepped in by (a) freezing offshore assets; in addition to (b) blocking the IMF loan until Icel in addition to guaranteed their depositors. Political agenda: keep bailout money at homeFree rider problem.Buy American clause debated as long as the stimulus bill.Protectionism: Risk of a less efficient cross border banking system.The U.S. Smoot-Hawley Act of 1930 raised import duties on as long as eign products. Retaliation from other countries aggravated the effects of Great Depression.
3. IMF re as long as mGlobal crisis highlighted the lack of coordination in policy responses around the world.IMFs weakness in responding to the Icel in addition to ic crisis. Need to re as long as m IMF:Crisis lessons as long as the IMF, speech by John Lipsky, First Deputy Managing Director, on Dec 17, 2009.Committee on IMF governance re as long as m will publish its report in April 2009.Re as long as m axes:Increase the IMFs resourcesIncrease IMF fund from $250 billion to $500 billion.Japan offered up to $100 billion in emergency loan.3. Explicit financial stability rolePrudential analysis.Early warning of vulnerabilities in addition to advice on remedial policies to reduce global risk in addition to increase system stability.2. Re as long as m the Fund’s governance in addition to increase convergences with other international organizationsImprove balance between members voting rights (developed v. emerging countries).Convergences with the G-20.Working closely with the Financial Stability Forum (joint letter on November 13th, 2008).
Soenarie, Angelique Mesa Business Reporter
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