Research Papers

Has the International Monetary fund changed its approach to conditionality attached to emergency loans? Iceland's 2008-11 programme was the first in any advanced country since 1976. Compared with the earlier programmes implemented in emerging markets, the Icelandic package imposed less unilateral conditions, less immediate austerity, was more consultative with civil society groups and more supportive of capital controls. One reason for the differences with previous programmes was to do with Iceland's specific political and economic conditions at the time of the crisis in September-October 2008, the Iceland factor. A second reason was an IMF factor and explains the motivation behind IMF's keen interest in taking on the case of Iceland. The third reason was the "Nordic factor", such that other Nordic governments were influential in shaping the IMF programme, including in shaping the IMF pressure on Iceland in the dispute over the failed Icelandic bank's branches in the UK and Netherlands. This paper traces the initiation of the Icelandic programme through primary documents and interviews with key policy-makers, experts and academics in order to establish its main characteristics. It finds the IMF coming out of its own existential crisis during the boom years in the 2000s, with tarnished reputation after South East Asia in the 1990s and ready for some policy experimentation after the lessons learned. It finds the tiny but advanced industrialised economy of Iceland experiencing the world's most spectacular financial collapse in recent history in which 85% of the banking system collapsed over night after 18 consecutive years of right-wing neo-liberal aligned governments. The research reveals an IMF programme which is different from IMF's earlier approaches to financial crises and explains how the distinctive features of the Icelandic policy package resulted from a combination of IMF's needs to show it had become more "borrower-friendly" and Iceland's politicians' determination not to be seen to be succumbing to IMF pressure, but rather to be seen autonomous and in control while defending the Icelandic welfare state; a determination which prevailed in the IMF partly because in spite of the size of the Icelandic collapse, after all, the country's public debt had been low relative to its GDP and partly because, notwithstanding some controversies at that critical point in time, Iceland was a part of the Nordic community and thus seen to be part of that powerful block within the IMF which also were the main funders of the Icelandic emergency loan.