The Fact That Iceland Is Repaying Its IMF Loans Early Seems To Suggest Defaults Work

Iceland Lagoon Resort

Photo: Patrick Gage via Flickr

Iceland was one of the countries worst hit by the financial crisis — the small country’s economy had rested heavily on its under-leveraged banking sector and was nearly wiped out in 2008.But then, it did something different. It let its banks default.

Flash forward to this week, and Iceland announces it will be pre-paying a fifth of its IMF loans:

In March, the Treasury of Iceland and the Central Bank of Iceland will prepay loans from the International Monetary Fund (IMF) and the Nordic countries in the amount of 116 

The transaction represents the prepayment of SDR 289 million (the equivalent of 55.6 to the IMF, and 366 million euros (the equivalent of 60.5 to the Nordic countries. 

The prepayment amounts to just over 20% of the funding from the IMF and the Nordic countries in connection with the IMF-led Stand-By Arrangement.

We’ve talked multiple times about how unique Iceland’s response to the crisis was — putting bankers and former heads of state on trial, and forgiving 13 per cent of the country’s debts.

The prepayments of the IMF loan seem to suggest that these tactics, along with the defaults, have worked. While the IMF has said it has some reservations, the Icelandic economy will grow 2.5 per cent, and will be at 2.5 to 3 per cent in the medium term.

So, are these tactics a viable option for Greece?

UPDATE: To be clear, Iceland did not default on its sovereign debt (we’ve had queries about this). What it effectively did was allow domestic banks to default on foreign creditors.

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