Anyone needing an umbrella when it’s raining has to show that he can get alternative one on demand. Loans from the IMF and others are our umbrella. In the third place, co-operation with the IMF is important not only because of the access to credit contingent on the progress of the programme. The Fund serves as a sort of validation agency for the economic policies of countries that find themselves in economic difficulties. Its stamp of approval is a precondition for obtaining credit not only from other countries, but also from foreign banks and investors. In many instances it is a premise for foreign investment in domestic industry. This view has been clearly expressed in interviews with numerous foreign bankers, who are prepared to take Iceland to the global credit market as soon as the uncertainty delaying the progress of the programme is eliminated. Many find the medicine prescribed by IMF bitter, and have requested a more palatable economic strategy without the Fund’s involvement. Of course, it would be desirable to use automatic fiscal stabilisers or discretionary fiscal policy to mitigate the economic cycle. Countercyclical fiscal policy, however, is a privilege reserved for countries whose credit rating has not been tarnished. Iceland does not enjoy this privilege any more than Greece, Latvia, and various other states. To toss away the IMF’s umbrella and set off empty-handed to meet with foreign creditors in an attempt to refinance the loans maturing in the next two years would be a fatal error.
In fact, the loans that have already been received have guaranteed foreign exchange reserves sufficient to enable the Treasury to service its debt for the next two years without major foreign currency purchases. However, foreign reserves would fall to a level that is not acceptable. The cost would be a lower exchange rate than otherwise, and it would be inadvisable to relax the capital controls at the same time. Fourth, it is important to take the first steps towards removing the capital controls as soon as possible after the objectives described above have been achieved. The objective is to make the disappearance of the last vestige of controls an event that will hardly be noticed. We learned from the financial collapse that fair weather can turn foul at short notice. Once the storm has passed, however, the skies can also clear more quickly than most people expect. BIS Review 64/2010  3