August 24th, 2012
I’m surprised that these admissions came from the IMF, which routinely promotes the types of absurd policies that lead to the economic crisis in the first place.
If investors want to roll the dice on some country’s sovereign debt, and that stuff blows up, in any sane world they should take the hit and not cry about it. If I trade some financial instrument and lose on the deal, should I be able to get a government to point a gun at its people and extract taxes from them to bail me out of my bad trade? You would think that I’d lost my mind for suggesting something so ridiculous. But look around and you’ll find that this insanity has been standard operating procedure for decades.
Well, not in Iceland.
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.