ICELAND’S GOVERNMENT said yesterday it will get $5 billion (€3.93 billion) in an International Monetary Fund-led loan program, $1 billion less than it had previously estimated it would receive.
“The latest review indicates that the $6 billion was over-estimated,” prime minister Geir Haarde said.
The funds will help prop up the krona, which plummeted following the collapse of the country’s three biggest banks last month, the government said in a press release. The loan will push national debt to 109 per cent of gross domestic product by the end of next year, it added.
Iceland yesterday struck a deal with the UK and the Netherlands to repay depositors at the internet unit of one of its failed banks. That agreement opened the door to approval for the IMF-led loan, scheduled for Wednesday.
The island, which had the fifth-highest per capita income in the world last year, needs the financing for imports and to create enough foreign reserves to support a free-floating currency.
The $5 billion loan would not be used to repay depositors in Landsbanki’s internet unit, known as Icesave, Mr Haarde said.
The defence of the currency would be a priority for the central bank, which was prepared to raise rates “even further”. The bank raised its benchmark rate to 18 per cent on October 28th, the highest in at least seven years, after the government first agreed the IMF loan. Under a preliminary agreement reached last month, the IMF will provide a $2.1 billion loan, with the rest of it coming from a group of countries. Nordic countries would “play the biggest part” in the package after the IMF, according to Mr Haarde. Norway has pledged €500 million, the Faroe Islands 300 million kroner (€39 million) and Poland $200 million. Denmark’s central bank is also “considering” extending a swap facility, of which €300 million have yet to be drawn. The krona collapsed last month, losing two-thirds of its value since the start of the year.
Policy makers are now striving to resurrect the currency through daily auctions with local banks. Iceland had been told in “no uncertain terms that nobody will take part in lending” to the country until the Icesave [bank] dispute was finished, Mr Haarde told reporters yesterday.
Deposits at Icesave may amount to as much as £5.5 billion, the size of Iceland’s economy, according to a report by an economist at the London School of Economics. – (Bloomberg)
Editorial comment: page 15
