The International Monetary Fund published its report yesterday on the economic stabilization program for Iceland. According to the report, Iceland’s foreign debts could amount to 310 percent of gross domestic product (GDP) this year.
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More than 20 percent of the country’s largest companies are at a risk of bankruptcy or moratorium on their payments. Every fifth household has a negative capital position and the percentage will rise if realty prices continue to drop, Morgunbladid reports.
However, the report points out that Iceland’s debt situation is not as poor as earlier thought and the IMF believes Iceland can handle the debt. It is assumed that economic growth will be reported again in 2011, measuring 0.9 percent, and continue to rise in the following years. In 2014, a four percent economic growth is expected.
The report also mentions various risk factors. The largest risk factor is the debt that could fall on the Icelandic state if the emergency law that was passed in October 2008 is annulled in court. In that case, ISK 620 billion (USD 4.9 billion, EUR 3.1 billion) could fall on the Icelandic state and increase its debt by 40 percent of the country’s GDP.
In regard to the banks, it is believed that they have to review and even write off two of every three loans held by Icelandic companies. Bankruptcies have increased significantly this year, by 20 percent compared to 2008.
Minister of Finance Steingrímur J. Sigfússon said it is clear that uncertainty surrounds many factors and time will tell how successful the current efforts will be. “It will be decided by whether there is sufficient capital to meet these write-offs, such as revealed in the evaluation of the loan collections.”
The loan collections of the new banks are also mentioned in the IMF report, which states that their situation is poor since up to 60-70 percent of some loans are likely to be written off.
In spite of that, Sigfússon and Minister of Business Affairs Gylfi Magnússon believe that the banks have been sufficiently refinanced. “They started with a considerably higher equity ratio that the international minimum and that reflects this uncertainty,” said Magnússon.
The IMF report states that many Icelanders believe that a quick solution to the country’s economic problems is the adoption of the euro. However, the government has admitted that if that solution is chosen, its execution will take many years.
The IMF reviewed the economic stabilization program for Iceland last week, which enables the disbursements of foreign loans.
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