Financial Regulatory Forum

IMF approves Iceland review, to disburse $167.5 mln

By Reuters Staff
October 29, 2009

By Lesley Wroughton
WASHINGTON, Oct 28 (Reuters) – The International Monetary Fund on Wednesday approved a long-delayed review of Iceland’s economic performance under an IMF loan program and said the crisis-hit economy could begin to turn the corner by the middle of next year.

With the approval of the first review, the IMF said it would disburse a $167.5 million loan tranche to Iceland and extend the $2.2 billion program by six months to May 31, 2011 to compensate for delays. In addition, it agreed to reschedule the remaining loan disbursements.

The review was delayed for several months because of an international dispute over what to do about foreign savers who lost money when three of the country’s largest banks collapsed in October 2008, forcing the economy into a deep recession.

IMF rescue efforts were further complicated by the collapse of Iceland’s conservative government which agreed to the IMF accord in November 2008.

IMF Deputy Managing Director Murilo Portugal said in a statement it was important that creditors should be treated fairly and equitably, although he emphasized that the Icelandic government could not further absorb losses from the private sector.

“Facilitating voluntary private sector debt restructuring is a key complement to financial sector restructuring efforts and will play an important role in reviving the economy,” Portugal said, adding: “In light of binding fiscal constraints, the focus should be on targeted voluntary private workouts, underpinned by measures to strengthen the insolvency regime.”

Iceland’s Minister of Economic Affairs Gylfi Magnusson said the IMF’s decision would also free up an additional $625 million in loan disbursements from the governments of Denmark, Norway and Sweden, and help to rebuild confidence.

During a news conference in the capital, Reykjavik, Magnusson said the funds would go toward financing Iceland’s deficit, repaying loans and stabilizing the domestic currency, the crown <ISK=>.

Magnusson also said it would begin to relax currency controls at the weekend by allowing for freer inflows of money and withdrawals.

Iceland introduced forex controls a year ago to stem a massive outflow of funds following the collapse of its banking system and currency.

TURNAROUND SEEN IN 2010
Portugal said there were positive signs in the economy, including a more stable currency and slower pace of inflation.

“With determined and timely policy implementation, the economy could begin to turn the corner in the middle of 2010 and a recovery should follow in the medium term,” Portugal said.

He said interest rate cuts could begin once confidence had returned through progress with financial sector restructuring and fiscal consolidation.

He also agreed with the authorities that capital controls should be removed gradually.

“Capital controls remain an essential feature of the monetary policy framework, given the scale of potential capital outflows, and in line with the authorities’ published plan, should be removed gradually as confidence returns and as balance of payments developments permit,” Portugal added.

He said the government’s medium-term budget plan will help lower the high public sector debt and limit financing risks.

“In light of Iceland’s higher public debt, a full medium-term public debt management strategy needs to be articulated in time for the next fiscal year,” Portugal added.
((Additional reporting by Omar Valdimarsson in Reykjavik, Editing by Gary Crosse)) ((lesley.wroughton@thomsonreuters.com; +1-202-898-8317; Reuters Messaging: lesley.wroughton.reuters.com@reuters.net)) Keywords: IMF ICELAND/

Wednesday, 28 October 2009 18:48:07RTRS [nN28295427] {C}ENDS

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