THE TERMS of Ireland’s financial bailout are considerably tougher than the deal agreed for Iceland in its bailout, according to the head of the International Monetary Fund in the Nordic country.
It was “probably true” that Iceland “got off lightly” compared to Ireland in terms of the austerity measures it has had to implement, Franek Rozwadowski, the fund’s country representative in Iceland, acknowledged.
In Iceland, the fund agreed with the government’s insistence on preserving the country’s welfare system, and granted it a one-year break from austerity measures at the start of its programme.
Since the programme was agreed with the fund, Iceland has largely maintained public service numbers and recently agreed wage rises under collective bargaining agreements. The problem of mortgage indebtedness has been tackled by debt forgiveness schemes and some capital infrastructure projects are going ahead.
In contrast, the Irish Government will shortly introduce a fourth successive austerity budget, which will include further substantial cuts in spending and services.
Mr Rozwadowski said Iceland’s programme does include “tough” cuts in the later years but insisted it wasn’t possible to cut spending in the first year because of the size of the recession the country was facing. The Icelandic government had no choice but to let its banks collapse given the fact they were 10 times the size of the economy.
Speaking in Reykjavik this week, Mr Rozwadowski pointed out Iceland was not in the euro zone and could deal with the crisis by devaluing its currency, an option not open to Ireland.
Iceland’s minister for finance, Steingrimur Sigfusson, rejected the notion the fund had been soft on his country in comparison to other bailout countries. He said his country had paid a heavy price for its banking collapse and was not “out of the woods” yet.
Mr Sigfusson, who belongs to the Left Green movement, suggested the reason Ireland was enduring more austerity was because of its reluctance to increase taxes. The alternative – cutting spending – had major social consequences, he said.
Iceland’s economy is recovering well after its financial crash. The economy is growing again, unemployment is half the rate of Ireland’s, and inflation and interest rates have been stabilised.
While Iceland allowed the banks to collapse, Ireland introduced a costly bank guarantee for depositors and investors.
As a result, Ireland is paying the highest price of any European country for its banking problems, at about 50 per cent of gross domestic product (GDP).
The cost to Iceland of fixing its banking sector is about 20 per cent of GDP.
The Icelandic government has been able to put in place measures to help struggling mortgage-holders. Some homeowners have had part of their debt written off, while others are receiving contributions to help with their interest payments.