Iceland: Bank restructuring

Domestic demand collapsed following the failure of Iceland's three main banks in October 2008, plunging the economy into a very deep recession. The economy is projected to shrink until early-2010, when it should be buoyed up somewhat by investment in large energy-related projects.

The unemployment rate is likely to soar to 10% next year. Inflation should fall to very low levels and the current account should improve to near balance in 2010.

Restoring the smooth functioning of the banking system is the top priority. This entails completing the bank restructuring process quickly so that the new banks can resume lending, especially to firms. Removing exchange controls as soon as feasible would facilitate access to foreign credit markets. The large, and necessary, fiscal consolidation programme provides an opportunity to enhance the efficiency of public expenditure, but will also require significant spending cuts and tax increases.

Click here to see all OECD Observer articles on Iceland

See also www.oecd.org/iceland

You can order the latest Economic outlook at www.oecd.org/bookshop

©OECD Observer No 274, July 2009




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