Iceland accepts the hairshirt

From the growing list of countries in discussions with the IMF for a crisis loan program, Iceland has made the first concrete move.  As explained in today’s statement from the Fund, there is an agreement between the staff mission and the government on a huge $2.1 billion loan (huge relative to Iceland’s size) in return for what is billed as a macroeconomic confidence-building program, a program which takes as its premise that the liabilities of the banking system will need to be fully recognized as fiscal liabilities.  In particular, other governments that end up refunding deposits of Iceland banks (not least Britain and Germany) will presumably have to get their money from Iceland’s government sometime down the road.   It remains to be seen (a) who else Iceland might have lined up to provide additional support and (b) whether the Fund’s board will balk at the size of the loan to a small and recently wealthy country.

3 thoughts on “Iceland accepts the hairshirt

  1. Yes that’s the strange part. It looks like there are loans from UK and Netherlands and maybe Germany to pay back depositors. It would be an interesting choice for Iceland down the road if things got even worse and they had to decide which debt to default on.

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