Iceland to get $6 billion from IMF, Europe

10 Nov 2008


Poland's finance ministry has said that Iceland, on the brink of bankruptcy and facing deep recession, would get a $4 billion loan from a group of European countries over and above the $2.1 billion pledged by the IMF. 

The struggling  island country in in the North Atlantic Ocean between mainland Europe and Greenland, Iceland has not yet received the $2.1-billion loan, which the IMF had pledged last month (See: IMF approves $2-billion loan for Iceland).

The IMF, which had pledged Ukraine with a loan of $16.5 billion (See: IMF bails out Ukraine with a whopping $16.5 billion loan)  and Hungary with $15.7 billion (See: Hungary receives $25.1 billion from IMF, EU, World Bank) has already approved these loans last week although Iceland's loan was the first that the IMF had pledged.

Iceland, which requires $6 billion to solve its economic crisis, is now getting help from the European group along with the IMF loan of $2.1 billion. The European group plans to offer Iceland $4 billion, out of which Poland, which itself is under pressure from the EU competition commision to sell off two loss-making shipyards to reclaim illegal state aid, has committed $200 million, while Norway has pledged $644 million, with the tiny Faroe Islands chipping in $51.6 million. The rest would come from other countries within the EU.

The IMF has delayed approving Iceland's loan as it blamed the Nordic countries on coordinating with the IMF for their share of the loan. The IMF was waiting for the Nordic countries to commit money beforehand, while the Nordic countries were waiting for the IMF's confirmation before they pledged support.

Prime Minister Geir Haarde said that the IMF executive board which was scheduled to approve the loan by 30 October has postponed the decision until 10 November.

Some commentators say that the IMF has delayed the approval until Iceland solves its conflict with Holland and Britain over the hundreds of millions lost by its people and institutions in the now nationalised bank Landsbanki.

Last month Britain took the unprecedented step of using anti-terror legislation in freezing around £4 billion in Icelandic bank assets in Britain with the British treasury department's home page depicting Iceland on a list of terrorist entities along with Al Qaeda, Sudan and North Korea, among others.

This move prompted an almost complete freeze on banking transactions between Iceland and overseas banks.

After huge protest, both within Britain and Iceland the UK government removed Iceland from the terror list and said it would lend Iceland $1.27 billion to compensate account holders of Icesave branch of the failed bank Landsbanki.

The Dutch government has also agreed to loan Iceland money to help Iceland pay Dutch Icesave clients up to $26,840 each and the Dutch government would guarantee amounts up to €100,000.

Iceland, whose economy was in shatters due to the collapse of its three major banks, Kaupthing Bank, Landsbanki Islands and Glitnir Bank, as the banking sector overtook the rest of the country's economy with its assets growing to nine times the size of the country's $19-billion GDP, and its debts exceeding $100 billion or almost 12 times the size of the economy.

Iceland's currency, the krona collapsed following the government takeover of the three banks, which were unable to secure short-term funding.

Last month, the central bank, Sedlabanki, raised interest rates by a massive 6 percentage points to 18 per cent to meet the requirements of the IMF and help support its ailing currency - the krona, and warned that that inflation could push to 20 per cent next year.

Sedlabanki, now auctions the krona on a daily basis at the rate of approx 164 per euro as it tries to hold back and save foreign exchange for essential purchases like food, fuel and medicine.

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