The IMF in Iceland

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"The IMF in Iceland"

Reykjavik, Iceland (photo by me, available under cc license)

Reykjavik, Iceland (photo by me, available under cc license)

Felix Salmon on the UK’s shameful bullying of Iceland:

I’m quite ashamed of the bullying tactics being used here by the UK government. What happened was that an Icelandic bank, Landsbanki, started attracting UK depositors through its Icesave brand. When Landsbanki failed, the UK government bailed out those depositors in full. And now it wants that money back from the Icelandic government, which never guaranteed the Icesave deposits. If you thought the cod wars were bad, this is much worse.

If the UK were picking on a country its own size, here, I wouldn’t feel so bad. But Iceland is tiny, and has no real means to fight back, other than essentially saying “OK, then, hit me.” Which is what it’s just done. I hope that the UK doesn’t follow through on its threats — even if that means damaging its own credibility going forwards.

You can make a decent case for the policy decision of the UK government. Failing to bail out the Landsbanki depositors could have launched a panic and caused runs on other banks—British banks—with British depositors. The costs of dealing with that would plausibly have been higher than the costs of bailing out the Landsbanki depositors. But either way, the choice was made by the UK government. The idea that the government of Iceland somehow owes an obligation to make it up is bizarre.

The really outrageous thing, however, isn’t the behavior of the UK—people want money—but the IMF, which seems to be making emergency loans to Iceland contingent on knuckling under. The IMF is supposed to prevent international finance crises by throwing lifelines to countries in need of help. Instead it’s acting like a member of an extortion racket. The harsh treatment the IMF inflicted on several countries in the nineties when they needed help did an enormous amount of human damage. Then by encouraging Asian countries to rack up massive piles of reserve dollars to prevent future punitive IMF conditionality wound up doing even more harm by introducing distortions into the global economy. Now it seems to be taking that even another step further, pressuring a country in need to take on additional debt by honoring this UK request.

It seems nuts to me. One thing we badly need coming out of this crisis is an IMF that actually works. The institution serves an important role, but that underscores the fact that we need the role to be filled well not sadistically.

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