ICELAND HAD to borrow about $10 billion (€7.99 billion) yesterday, roughly the size of its entire gross domestic product, to prevent its economy collapsing.
The move underlined the damage wrought by last month's disintegration of the country's banking system. Iceland finally secured a $5.1 billion (€4 billion) bailout for its crisis-stricken economy, comprising $2.1 billion from the International Monetary Fund (IMF) and additional loans of up to $3 billion from Denmark, Finland, Norway, Sweden, Russia, Poland and the Faroe Islands.
It also agreed to borrow £2.2 billion (€2.6 billion) from the British government and €1.3 billion from the Netherlands government, which will be used to compensate depositors in Icesave, the online arm of collapsed bank Landsbanki.
The loans will expose 320,000 Icelanders to a brutal recession, soaring inflation and an enormous debt burden that will haunt them for years in the form of taxes, threatening to trigger mass emigration.
The rescue package and its damaging domestic effect mark the official end of a 17-year experiment in free-market economics that transformed Iceland from a fishing-based backwater to a booming tiger economy and now to the humiliation of an IMF-led bailout.
The IMF-led loans, which will be used to bolster Iceland's foreign exchange reserves, clear the way for the country to refloat its currency - regarded as a crucial next step towards restoring its international credibility.
"It is imperative that the authorities move quickly to stabilise the currency and lay the foundations for economic recovery and a normalisation of financial flows," said Paul Rawkins of Fitch Ratings.
The krona has lost about 70 per cent of its value since the crisis. Authorities are braced for a new wave of selling by foreign owners of up to IKr400 billion (€2.4 billion) of Icelandic bonds that could push it even lower.
The social and political implications of the crisis and the loans needed to bail the country out will be apparent in the months to come. The government has already agreed to reverse its long-standing opposition to joining the EU and adopting the euro.
