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The IMF relaxes its Icesave demands

So, the International Monetary Fund has decided to relax its stringent stance against Iceland and go ahead with the review of Iceland’s economic program. This is the prerequisite to Iceland receiving more aid from the IMF and also from other European countries [although Norway broke ranks a few weeks ago, as some of you may remember – and of course our sweet cousins the Faroese imposed no such conditions]. This review has been up in the air for several weeks, pending the resolution of the Icesave issue.

Put another way, this was what some people viewed as bullying by the IMF because their British and Dutch members refused to approve aid to Iceland unless Iceland agreed to their terms.

Of course we all know what happened next, i.e. those terms were voted down in the Icesave referendum, and many Icelanders were all about giving the IMF the finger and just going back to the turf huts and living on ram’s testicles and sheeps’ heads.

But anyway, like I said, the IMF has now decided to keep loaning money to Iceland, and in return Icelandic officials had to sign some rather nebulous statement saying they would try to resolve the Icesave debacle as soon as possible.

Meanwhile, there’s been some discussion around here as to whether we really need to be accepting the IMF loans. Presumably we’ll need some aid next year when the State Treasury has to pay off some hefty state loans, but until then it would be completely nonsensical to be accepting any sort of money just to have it sitting in a bank account somewhere – because obviously the interest payments are not exactly lightweight. So it seems it’s more about having credit lines open — at least I hope officials around here have enough sense to exercise prudence in these matters.

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  • Marc April 10, 2010, 7:02 pm

    Just a quick note: in theory, these IMF funds could be used to buy back some of the outstanding debt at a price below the amount Iceland owes. If there is sufficient doubt about the ability Iceland has to repay its debts, those bonds should be trading significantly below par.

    Certainly the IMF would approve of such use (after all, it would replace free-market bondholders with the IMF, and that is precisely what the IMF is all about). Whether it is prudent use of available cash depends on the future access to liquidity. But I guess the Iceland central bank and government are better placed to judge that than anyone else.

  • Michael Schulz April 10, 2010, 7:16 pm

    Sorry, will the IMF review go ahead or is it still a question on the agenda for next week’s IMF board meeting? If the latter, I’m afraid, there could still be stumbling blocks. Not least as the Dutch and Brits are facing elections, and might not be in a decision taking mode.
    Otherwise I share, as a matter of principle, sceptisism towards IMF. ( Does the IMF’s Kahn have political ambitions back home in France? If so, how does that impact on what he does or doesn’t do? But aside from that: should it impact at all!?)
    Cheers, M.
    Ps.: ISG (Ingibjoerg Solrun) took an interesting and enlightened position vis a vis Iceland’s EU/EURO agonies this past week. Very worthwhile monitoring how all that will factor in or out.

  • idunn April 10, 2010, 11:24 pm

    I recall a certain concern if Iceland didn’t immediately acquiesce to foreign demands, and politely. But President Grímsson and the people stood tall, demanded a fair outcome . . . and look who blinked first.

  • Kris April 11, 2010, 7:40 am

    That’s right! All the fear mongering and look what is happening. But, the IMF cash should be avoided like the plague. There was recent news about Pakistan and the IMF. Not exactly a success story.
    And Iceland is not going to be such a big deal as Greece, Spain and Ireland go down in flames. Keep stalling. It is a great (non)strategy.
    Granny always made rice pudding with raisins and cinnamon. It was pretty good.
    How about fish head and leather soup! Yum…

  • Joerg April 11, 2010, 11:08 am

    It would be very interesting to know, what exactly made the IMF change its stance about Icesave now. I remember reading more sceptical views about this recently.

    Complete OT, just had to ask: In the rotating pictures above the post there is a photo with a light blue house next to a beach. I haven’t been to this place yet, but it looks nice. Could you tell, where this picture has been taken?

  • Flygill April 11, 2010, 11:53 am

    The IMF is offering loans to Greece for 3.27%, so now everyone can see the IMF, Brits and NL were trying to screw little Iceland. The Brits and NL are correct in going after the 700 billion ISK – but trying to add a few interest points is really shameful.

    By the way, the IMF payments are not really “aid” (as the newspapers call it) — they are not used for building anything, or even for paying off real debts. The IMF money is used to support the ISK, by allowing some people (probably importers) to convert their ISK into real money. The amount of ISK exchanged for real money is relatively small, but absolutely essential to keep foreign goods (like food and gas) flowing into the country. No foreign currency = no currency exchange = no imports.
    Most of the Icelandic debt held by foreigners has been – and will be – stuck in ISK accounts in Icelandic banks waiting for a day, at some remote time in the future, or maybe never, when it can escape.
    Currency controls and an artificially-high fixed exchange rate — that’s what’s keeping the Icelandic economy from blowing up.
    If currency and money restrictions are ever lifted, or if the ISK goes to its natural level, all hell will break loose in Iceland.

  • alda April 11, 2010, 1:30 pm

    Thanks, everyone.

    Joerg – that picture is from beautiful Flatey. 🙂

  • Michael Lewis April 11, 2010, 3:02 pm

    ” but trying to add a few interest points is really shameful.”

    Whether Icelandic taxpayers should pay or not is open to debate. What isn’t open is the fact that if you accept that debt must be paid – you have to pay market rate for the risk investors take.

    If you think that investors should receive no premium on Greek or Icelandic debt, then I think you are badly mistaken. Why? Why should an investor treat Icelandic or Greek debt as if it had the same risk as say Swiss debt?

    As for Iceland: leave aside the Icesave issue (and personally I don’t think Icelandic taxpayers should be on the hook for that) – the idea that Iceland should borrow at a rate in the open market of less than 4% is frankly laughable.

    Its a similar issue with Germany and Greece. The Greek government would like to borrow at the same rate as Germany. Or rather, they want Germany to borrow, and pass on that domestic rate to Greece. i.e. Whilst people in Greece go on strike about living within their means, they’re expecting German taxpayers to borrow on their behalf and accept no premium for doing so.

    The IMF is there as a lender to states that are bankrupt and can’t really raise any finance.

  • kevin oconnor,waterford ireland April 11, 2010, 3:08 pm

    Interesting graphs etc on
    http://www.indefence.is/?m=10
    Explains the whole thing for me anyway,but I have bigger problems ie that I don’t have a 64gb iPad, despite having a mac mini and an iphone, a great aching emptiness exists in my soul and every waking moment of my life is consumed with how to get my paws on an iPad, I hope this puts the Icesave thing in perspective as now I have greater problems than all of Iceland and while I wait for an iPad to transform my life for ever, actually during a episode of grand theft auto on PS3 , I came up with this great idea to save Iceland namely that a Icelandic programmer could come up with a version called Grand Theft Iceland, it would sell like hotcakes on global scale and all your problems would be over for ever and ever :). On serious note yes stalling is a good tactic and maybe the IMF does not want Iceland to come off the heroin of owing foreigners money and retreating to isolation, lets face it I bet before Jetplanes got invented nobody ever went to Iceland ever, so yes back to isolation, lashings of sheep’s heads marinated in Skyr, who needs exotic foreign goods bought with euros you don’t have. You bluffed and they blinked ha ha.

  • Michael Lewis April 11, 2010, 5:56 pm

    “The IMF is offering loans to Greece for 3.27%”

    Media are reporting around: 5% A compromise, more than Germany, less than Greece would have to pay in the open market. The yield on their bonds touched around 8% last week.

  • Flygill April 11, 2010, 8:06 pm

    he he he, the “Best Party”, a small party founded by a comedian that actually has seats in the Reykjavik City Council, said on tv today that the Best Party promises corruption if they should come to power in Reykjavik. “We will quite certainly favor our friends very much in the Best Party. We will have the corruption out in the open, not hidden. We will favor our friends but there is nothing to fear in this respect because the party has no immoral friends … ” The BP said it could work with whatever party so long as they were amusing — it’s important that the meetings must be fun, otherwise the chosen representatives would not be inclined to do their work…

  • Michael Lewis April 11, 2010, 8:30 pm

    “The IMF is offering loans to Greece for 3.27%”

    Media are reporting around: 5% A compromise, more than Germany, less than Greece would have to pay in the open market. The yield on their bonds touched around 8% last week.

    Actually, my reply was a bit misleading. It’s the EU states that are lending at around 5%. The IMF would lend at a lower rate, i.e. stepping in as a lender of last resort. As it would for Iceland. As it may for the UK eventually …

  • jo6pac April 11, 2010, 9:09 pm

    Hello
    If you have some time read some of this stories for a better understanding of what will happen if the imf come to Iceland.
    http://michael-hudson.com/

    Michael I agree with what your saying but once you let the imf in the door they never go away and you can never pay off the loan. Case in point South America in the 60s/70s or the Baltic states now and soon coming to Amerika.

  • Peter - London April 12, 2010, 10:03 am

    “The IMF would lend at a lower rate, i.e. stepping in as a lender of last resort. As it would for Iceland. As it may for the UK eventually …”

    The IMF lends at different rates for different loans to Greece, depening on economic targets being met I think. The 3.27% is an average.

  • john April 12, 2010, 5:08 pm

    Alda, twice you called the IMF money, ‘aid’, and I really take exception to that. It is debt. In fact, it is more and more debt, Paying off the Visa Card with a new Master Card. How can that ever work out????????????