Iceland Expects IMF Review This Month as Icesave Is Resolved
Iceland expects to get its first International Monetary Fund review this month as an accord with the U.K. and the Netherlands on depositor claims reaches completion, allowing the island to tap its bailout funds.
“We are still optimistic and it’s technically possible that the first review of the IMF program will take place in September, although we’re cutting it pretty tight,” Finance Minister Steingrimur Sigfusson said in an interview in the capital Reykjavik yesterday.
Iceland’s dispute with the U.K. and the Netherlands has threatened to stall the continued disbursement of its IMF-led bailout. The failure of Landsbanki Islands hf last year left thousands of British and Dutch depositors wondering whether they’d lost their life savings and even prompted the U.K. to deploy anti-terror laws to freeze Icelandic assets until the country agreed to cover the so-called Icesave claims.
The island’s lawmakers have since demanded changes to the government’s accord with the U.K. and Dutch authorities. Iceland yesterday received its first response from the two countries, which showed they don’t accept a clause requesting renegotiation if the loan isn’t repaid by 2024, broadcaster RUV said.
The Atlantic island is relying on the $5.1 billion international loan, including $2.5 billion from the Nordic states of Sweden, Finland, Norway and Denmark, to avert default and a second collapse, Sigfusson has said. To date, Iceland has received $827 million in IMF funds.
Not OK With Delay
“This delay is clearly not something that we are OK with or the fact that the review is connected to the Icesave matter,” Sigfusson said. “However, the official position of the IMF is that as the Nordic loans are contingent on the resolution of the Icesave agreement, the board wants to wait until all the parts of the financing are in place, before the review takes place.”
If the IMF review, which was originally scheduled for February, doesn’t take place by Sept. 25, it will be delayed again until the second week of October, Sigfusson said. It will be clear today “or this weekend whether or not the fund’s board will be able to carry out the review before it’s last meeting in this month.”
The coalition government on June 6 agreed to take a 2.35 billion-pound ($3.83 billion) loan from the U.K. and 1.2 billion euros ($1.76 billion) from the Netherlands to cover the deposit guarantees. However, the government needed parliamentary ratification for a state guarantee, linked to the loans. After three debates in parliament the bill was approved with conditions, including linking payments to economic growth.
Krona Slump
The failure of Iceland’s biggest banks last year forced the government to impose capital restrictions to prevent a sell-off of the krona after the currency lost as much as 80 percent of its value against the euro on the offshore market. The controls have failed to prevent a 7.5 percent decline in the krona against the euro this year, making it the third-worst performer of the 26 emerging market currencies tracked by Bloomberg.
“I believe that the fundamentals of the economy justify a stronger krona than what we see now.” Sigfusson said. “We would like to see the krona’s value increase as we think it’s currently undervalued. I’m not saying that it should gain a lot of strength, but at least reach a realistic long-term value.”
The country’s central bank, which shares Europe’s highest benchmark interest rate with Serbia, on Aug. 13 left the key rate at 12 percent.
At Odds
The bank said last month it won’t lower rates further adding it can’t rule out higher rates if the krona comes under pressure as capital restrictions are scaled back. That policy is at odds with Sigfusson’s view. He says he wants lower borrowing costs to boost the domestic economy.
“It’s important to continue on the path of rate cuts and bringing down inflation,” he said. “The primary objective is to bring about stability. Even though the rate of the krona is low, it is stable.”
Sigfusson, chairman of the junior coalition partner, the Left Green Party, became finance minister at the beginning of this year after the island’s economic collapse led to the ousting of the government former Prime Minister Geir Haarde. His party rules together with Prime Minister Johanna Sigurdardottir’s Social Democrats.