Thursday, September 03, 2009

[IWS] OECD: ECONOMIC SURVEY of ICELAND 2009 [2 September 2009]

IWS Documented News Service
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations
-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor
---------------------- Stuart Basefsky
New York, NY 10016
-------------------------------Director, IWS News Bureau

Organisation for Economic Cooperation and Development (OECD)

Economic Survey of ICELAND 2009  [2 September 2009],3343,en_2649_33733_43569147_1_1_1_1,00.html
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[full-text, 12 pages]

Against the backdrop of the global financial turmoil and recession, Iceland
has been struck by a banking crisis of unprecedented proportions and
the economy has plunged into a deep recession.
The plight of the banking
system was in part the consequence of the sudden shutdown of global
capital markets. But Icelandic banks' aggressive expansion strategies in an
atmosphere of ineffective supervision rendered them highly vulnerable.
Faced with events having potentially dramatic economic and social
consequences, the government sought the assistance of the international
community in support of the medium-term adjustment programme to
restore policy credibility and economic growth. While progress has been
made in implementing the programme, much remains to be done.

Weaknesses in financial supervision revealed by the crisis need to
be corrected.
Following their privatisation in 2003, the banks expanded
rapidly and became so big in relation to the economy that they could not
be rescued when they got into trouble. They also became so complex and
interconnected that the financial supervisors, with their limited powers,
could no longer effectively restrain their activities. In the future, financial
stability will require a smaller and simpler banking system, tougher
supervision and a strong macro- and micro-prudential framework, focusing
on both systemic and individual risks.

For the economic recovery to take hold, the banking system needs to
function smoothly once again.
In the wake of the crisis, the authorities
created three new banks by transferring all domestic deposits and claims
on residents previously held by the old banks. While an effective temporary
solution, the present setup is not viable over time. The new banks hold
impaired assets, they are too big and they should not stay forever in state
ownership. The authorities should take the necessary steps to prepare their
full privatisation and should encourage foreign banks to participate.

Removal of capital controls should be started as soon as feasible. The
programme supported by the IMF Stand-By Arrangement introduced
restrictions on capital flows to prevent massive outflows, stabilise the
exchange rate and protect households and firms with large un-hedged
foreign currency exposures. These restrictions should be lifted as soon as
can be safely done to allow the resumption of normal financial relations
with foreign markets.

If it were to become an EU member, Iceland would be advised to seek
entry into the euro area as soon as possible, so as to reap the economic
Past monetary policies based both on exchange rate and inflation
targeting have produced unsatisfactory results. By joining the euro area,
Iceland would share the benefits of the ECB's credibility, including lower risk

Substantial fiscal consolidation is required to put public finances
on a sustainable path.
The collapse of Iceland's financial institutions
has increased government debt, while the recession and rising debt
servicing costs entail a sharp widening of the budget deficit. Corrective
fiscal measures should continue to be implemented. Initially most of the
consolidation will occur through tax increases but subsequently the weight
of expenditure reductions will have to grow. There is substantial scope to
reduce health and education expenditure without adversely affecting the
quality of services provided, as discussed in previous OECD Economic Surveys
of Iceland.
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

Stuart Basefsky                   
Director, IWS News Bureau                
Institute for Workplace Studies 
Cornell/ILR School                        
16 E. 34th Street, 4th Floor             
New York, NY 10016                        
Telephone: (607) 255-2703                
Fax: (607) 255-9641                       

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