How Iceland Recovered from its Near-Death Experience


 By Poul M. Thomsen

(Versions in Español and Français)

When I traveled to Reykjavik in October 2008 to offer the IMF’s assistance, the situation there was critical. The country’s three main banks—which made up almost the entire financial system—had just collapsed within a week of each other. The sense of fear and shock were palpable—few, if any, countries had ever experienced such a catastrophic economic crash.

There was a lot of concern that a disorderly depreciation of the exchange rate would be ruinous for households and companies if nothing was done or that deposit runs would cripple what was left of the financial system. The scale of the uncertainty was staggering―the three banks had assets worth more than 1,000 percent of GDP, and no one knew at that point how large the losses would turn out to be and how they would be divided between Icelanders and foreigners.

Today, three years later, it is worth reflecting on how far Iceland―a country of just 320,000 people―has come since those dark days back in 2008. Continue reading

Unwinding Crisis Policies in Europe: Are We There Yet?


By Marek Belka

Much is riding on getting the timing of the exit right from the stimulative policies used to combat the global economic and financial crisis. This is something that IMF Managing Director Dominique Strauss-Kahn has repeatedly emphasized. Exiting too early may jeopardize the recovery. But exiting too late may sow the seeds for the next crisis, as Wolfgang Munchau and others have argued recently. I also agree with Jean Pisani-Ferry and his colleagues that exiting in an uncoordinated fashion will lead to a renewed build up of financial instability.

To successfully unwind the extraordinary policy measures taken in response to the crisis, we need more than just a good sense of the state of the economic recovery and the degree of financial stability. We also need to know to what extent the global economy currently is influenced by those supportive policy measures. Is it safe yet to change course?

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Year in Review: Lessons from History–No Way Back to Cheap, Easy Credit


By James Boughton

The world economy is beginning to awaken from a nightmare. What hit us, and what was the tossing and turning all about? The popular simile is a comparison with the Great Depression, as in “This is the worst downturn since the 1930s.”

In fact, unless we get hit with another hammer before we fully wake up, the Great Recession is very unlike what the world went through some seven decades earlier.

The Great Depression, like the recent collapse, began with a banking crisis, but of a different kind. Instead of emanating from huge financial institutions in major money markets, the earlier one spread outward from small midwestern banks in the United States and led eventually to a near total loss of confidence.

Depositors pulled their money out into cash or gold, and the U.S. banking system shut down. Investors in other countries also moved heavily into “safe” assets.

Cars in line at U.S. gas station in 1979: the world in which consumption could flourish amid cheap and readily available energy was gone forever (photo: R. Krubner/ClassicStock/Corbis)

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Aristotle as an IMF Economist: Asia’s Difficult Balancing Act


By Anoop Singh

It was Aristotle who said “one swallow does not a summer make, nor one fine day.” Perhaps if Aristotle had been an IMF economist living in current times, he might have said “a few green shoots do not a recovery make.”  Despite budding green shoots in Asia, policymakers in the region will need to be cautious about how they sustain this fragile recovery. In the coming year, they will need to pull off a difficult balancing act.

On the one hand, they need to continue providing extensive macroeconomic support to their economies until it is clear that the recoveries are sufficiently robust and sustainable.  On the other hand, they have to make sure that stimulus is not maintained for so long that it ignites asset price bubbles, inflation pressures, or concerns about fiscal sustainability.

THAILAND-FINANCE-ECONOMY

Where policymakers strike this balance will depend on a prior assessment: they will need to decide whether private demand has become strong enough to substitute for a withdrawal of public sector demand.

And if that isn’t difficult enough, this assessment will need to be forward-looking, at a time when the economic outlook has become exceptionally uncertain. 

In figuring out how to pull off this delicate balancing act, the lessons of the past may prove instructive. So, Chapter II of the latest Regional Economic Outlook for Asia and the Pacific, launched last week in Seoul and Tokyo, looks at the experience of Japan, when it emerged from its 1990s banking crisis.

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Unlocking Central Asia’s Huge Potential


By Masood Ahmed

The IMF has just finished its Annual Meetings in Istanbul, the traditional start of the old silk road and the gateway to Central Asia. 

Strategically located between East Asia and Europe, and South Asia and Russia, Central Asia is rich in resources and faces tremendous opportunities—yet to be made the most of. Since the outset of their transition to a market economy, the countries of the region have made visible progress toward decentralizing their economies, creating market institutions, expanding international links, and intensifying efforts to diversify and increase production and trade. 

As a result—and owing also to sound macroeconomic management, high commodity prices, and strong foreign inflows—this landlocked region, the size of the European Union and home to 60 million people, enjoyed near double-digit growth on average during 2001–07. 

Oil wells in Baku, Azerbaijan: With global energy demand increasing again, Central Asia's energy exporters should see growth rates increase in 2010 (photo: David Mdzinarishvili /Reuters)

Oil wells in Baku, Azerbaijan: With global energy demand increasing again, Central Asia's energy exporters should see growth rates increase in 2010 (photo: David Mdzinarishvili /Reuters)

But, as elsewhere in the world, the global economic crisis has taken a toll on Central Asia, with average growth for the region as a whole sinking from 5.7 percent in 2008 to 1.2 percent in 2009. Nevertheless, this average masks important differences across countries. 

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Fixing the Financial System


By John Lipsky in Jackson Hole

Despite tentative signs that the global recession is ending, it’s clear that a full recovery will remain inhibited until financial markets are restored to health. While financial market conditions have improved—reflecting among other things massive public sector support—key credit channels remain strained, creating a drag on growth.

One of the keys to strengthening financial markets will be to put securitization markets on a sounder footing, an issue I discuss below.

Rebuilding active and innovative financial systems will be critical for sustaining a new global expansion. After being propped up by government intervention, a recovering economy increasingly will need to rely on private capital.  As confidence and trust are restored, government guarantees will be rolled back gradually, and the crisis-driven expansion in central bank balance sheets will be unwound.

The latest financial market developments have provided positive signals. Most markets have strengthened in recent months, and some asset prices are higher today than prior to last September’s severe turmoil. Equity prices have risen notably, while investment grade corporate and sovereign emerging market debt spreads have narrowed, mainly in response to reduced risk perceptions, but in the case of corporate debt also reflecting better-than-expected economic data.

Jackson Hole conference: A Grand Teton Perspective. . .


By John Lipsky

Every year at this time, senior Federal Reserve officials and central bank heads from around the world gather in Jackson Hole, Wyoming—together with leading economists from universities and the private sector—to hear presentations on key policy topics and to discuss the challenges facing the global economy. The spectacularly beautiful setting at the foot of the Grand Teton mountains provides calm and perspective.

Last year’s gathering took place on the eve of historic financial turmoil and subsequent economic downturn. One year later, it is clear that progress is being made to overcome the crisis, but also that many fundamental changes will flow from the past year’s challenges, even though the exact nature and course of these changes remain far from certain. The mountains’ grandeur remains unaltered, of course, providing inspiration while insinuating an appropriate sense of humility.

The story of the past year is well known: Faced with the very real possibility of a global financial meltdown, and the reality of the sharpest global economic downturn of the post-World War II period, policymakers around the world responded with a series of unprecedented actions—including massive monetary and fiscal stimulus, plus new governance initiatives. One year later, the signs are clear—if still tentative—of renewed growth, although opinions are divided regarding how effective specific policy actions have been, or about how soon the global economy will regain the pre-crisis level of output, or reestablish pre-crisis trend growth rates.

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