The press conference held by the IMF delegation in Iceland this afternoon stressed the point that presently data is being gathered to evaluate the situation. The Icelandic government also has to decide whether the conditions of the IMF are acceptable.
Paul Mathias Thomsen from the IMF then said that the IMF management will hold meetings in Washington DC to discuss further steps.
“GDP has collapsed causing severe disruptions. The deposits however, are safe. The domestic bank exchange has been working well, but the external trade is severely affected.” He added that the situation has severe implications for the entire economy and warned that a difficult period lies ahead.
The major short term risks are that once the exchange market is reopened, there will be a great surge of money and sharp pressure as people will want to get their money out of the Icelandic banks. This will cause significant depreciation of the Icelandic krona and disruptions in the real estate sector having an effect on the employment rate in Iceland.
“Immediate and urgent channels are now necessary to stabilise the Icelandic krona,” Thomsen said. “We also need to ensure the fiscal stability.”
He then said that Iceland is experiencing a great change from negligible to high public debt, it will take years until the value of the total assets is established.
“First we need to stabilise the Icelandic krona and the fiscal stability of the country. Good functionality of the banking system must be secured,” he said.
There will be fiscal consolidation as the fiscal deficit will substantially increase. Thomsen emphasised the point that the credibility of the fiscal problem should be reinstalled.
“The monetary policy will have to be relatively tight to prevent capital from going out,” Thomsen continued. “We need to push the impact on the market in coming weeks and months to help stabilise the krona.”
“We have to create lasting conditions and decrease inflation by 4.5% by the end of next year.”
Petya Koeva Brooks, IMF, pointed out that the second huge aspect, besides stabilising the krona, is creating a viable banking system to ensure the recovery as soon as possible. She then added that this will involve setting up an organisational structure to maximise the recovery of the assets. Also, the devaluation of assets in the old and new banks must be done immediately.
The aspect of the regulatory supervisory services and facilitating the process are other necessary steps. “We must have collaborative approach to make the overall recovery performed as well as possible,” Brooks added.