IMF approves $2-billion loan for Iceland

25 Oct 2008


Iceland, which is on the brink of bankruptcy (See: Iceland headed for bankruptcy; PM seeks $5.44-billion Russian loan), will become the first nation in the present global credit crisis to get a loan of $2 billion from the IMF and the second Western nation after Britain, which received a £3.9 billion from the IMF in 1976 after a collapse of the British pound.

Iceland's Prime Minister Geir HaardeThe IMF team, which had been camping in Iceland since last month to assist Iceland in the wake of the country's dire financial state will now return to Washington to get the necessary approvals from the fund's management committee who will, in turn, pass it to the IMF'S executive board for sanction, which could come as early as the first week of November.

Under the loan programme, Iceland will receive a loan of $2 billion for a period of two years with an immediate withdrawal facility of $830 million.

Iceland Prime Minister Geir Haarde, said "This programme will enable us to secure funding and gain access to the necessary technical expertise required to stabilize the Icelandic krona and to provide support for the development of a healthier financial system."

IMF managing director Dominique Strauss-Kahn said that Iceland had put together "an ambitious economic programme" to restore confidence in the banking system, stabilize the krona and achieve medium-term fiscal consolidation.

Since any loan from the IMF is accompanied by tough budgetary strictures, Geir Haarde added that "As a result, Iceland will commit to a sustainable long-term economic policy, and a plan for the recovery of the Icelandic economy."

With the IMF approving the loan, other Nordic nations, Japan and probably Russia will now come forward to help Iceland overcome its financial crisis.

With a population of a mere 3,00,000, Iceland is paying a very heavy penalty for an economy that had been peaking due to its newly prosperous companies going on an acquisition spree across Europe, and its banks, flush with funds from the steady deposits and pension schemes that financing these acquisitions.

This led to the financial services sector overtaking the rest of the economy with its assets growing to nine times the size of the country's $19-billion GDP, and its debts exceding $100 billion or almost 12 times the size of the economy.

During its prosperous times, the standard of living rose dramatically to among the highest anywhere, and the capital, Reykjavik, became the scene for swanky shops, big cars, chick restaurants but when the credit crunch struck, the three major banks in Iceland could not refinancing their borrowings and the Icelandic government did not have the resources like other countries to offer them bailout packages.

Russia, which had agreed to give Iceland – a NATO memeber - a $ $5.44 billion loan at the beginning of the month, suddenly did a u turn as the negotiating team from Iceland, which had gone to Moscow to discuss the financial terms of the loan had to come back empty handed.

From a $635.8-million credit swap facility from the Norwegian and Danish central banks, Iceland had already withdrawn $256.6 million each from these banks but it has not yet withdrawn from Sweden's central bank with which it has similar facility.

Two other nations, Ukraine and Pakistan are seeking to avail of an IMF loan to overcome its financial problems.

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