IMF says bailouts Iceland-style hold lessons in crisis times

Aug. 13 (Bloomberg) -- Iceland holds some key lessons for nations trying to survive bailouts after the island’s approach to its rescue led to a “surprisingly” strong recovery, the International Monetary Fund’s mission chief to the country said.

Iceland’s commitment to its program, a decision to push losses on to bondholders instead of taxpayers and the safeguarding of a welfare system that shielded the unemployed from penury helped propel the nation from collapse toward recovery, according to the Washington-based fund.

“Iceland has made significant achievements since the crisis,” Daria V. Zakharova, IMF mission chief to the island, said in an interview. “We have a very positive outlook on growth, especially for this year and next year because it appears to us that the growth is broad based.”

Iceland refused to protect creditors in its banks, which failed in 2008 after their debts bloated to 10 times the size of the economy. The island’s subsequent decision to shield itself from a capital outflow by restricting currency movements allowed the government to ward off a speculative attack, cauterizing the economy’s hemorrhaging. That helped the authorities focus on supporting households and businesses.

“The fact that Iceland managed to preserve the social welfare system in the face of a very sizeable fiscal consolidation is one of the major achievements under the program and of the Icelandic government,” Zakharova said. The program benefited from “strong implementation, reflecting ownership on the part of the authorities,” she said.

Euro Aid

As of March this year, the IMF had program arrangements with 11 European countries, representing about 65 percent of its funds, according to its website. Governments inside the euro zone have struggled to comply with the austerity terms prescribed in joint aid packages provided by the IMF and the European Union, leading to revised terms and extended deadlines for nations such as Greece.

At the same time, bond markets have reflected a lack of confidence in recovery programs, sending debt yields higher and adding to pressure on government finances. Countries inside the euro area or with pegged currencies such as Latvia have relied on wage cuts and reduced welfare services as a means toward delivering on bailout goals.

In Iceland, the krona’s 80 percent plunge against the euro offshore in 2008 helped turn a trade deficit into a surplus by the end of the same year. Unemployment, which jumped nine-fold between 2007 and 2010, eased to 4.8 percent in June from a peak of 9.3 percent two years ago.

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