Vox
November 8, 2011
During the global crisis, Iceland was hit by the biggest banking crisis any country has ever suffered. This column reviews the role of the IMF in Iceland’s recovery. It argues that the IMF programme was not perfectly designed but successful. Iceland re-entered capital markets less than three years after the crisis.
When Iceland’s three main banks collapsed on 7–9 October 2008 it became obvious that Iceland would suffer a balance-of-payments crisis unless it could get outside support. A currency crisis was already under way (Figure 1). After some initial doubts it became clear to the government that it had no other option than to seek help from the IMF. The fund would not only provide financing and expertise, but also some much-needed credibility.
Figure 1. Trade-weightedexchange rate of the krona and Iceland’s CDS spread
Source: Central Bank of Iceland
An agreement with the IMF was reached on 24 October 2008 (IMF 2008). Against the assurance of following the policies of the programme, the IMF and friendly nations lent Iceland $5 billion – 40% of GDP – to serve its external financing needs over the next three years. The programme was completed on 26 August 2011.
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