ICELAND HAS become the first western nation to request a bailout from the International Monetary Fund (IMF) since Britain in 1976 as it seeks to restore confidence in an economy ravaged by the collapse of its banking system.
Icelandic prime minister Geir Haarde said yesterday that the island had asked for a loan of $2 billion (€1.6 billion) from the IMF and that this would be topped up with a multibillion-dollar loan package from other Nordic countries and elsewhere to bolster foreign exchange reserves.
The total size of the package is expected to be about $6 billion.
Iceland's decision to turn to the IMF, which predicted that Iceland's economy could contract as much as 10 per cent next year, represents the end of a 17-year experiment with free-market economics that has seen it grow from fishing-based backwater to booming finance-based state and slump into the ignominy of a bailout.
The IMF loan was announced in tandem with a three-part economic stabilisation programme designed to restore confidence in Iceland's economy and currency, restore fiscal sustainability and implement a sound banking strategy.
In the short term, Iceland will be able to draw down $830 million as soon as the IMF's board has approved the loan, which is expected to happen in about 10 days.
Mr Haarde said it should be possible to refloat the Icelandic krone, although he cautioned there would probably be "considerable volatility" in the beginning ahead of a period of significant appreciation.
The currency has lost about 70 per cent of its value in the crisis.
The IMF programme also involves a severe fiscal consolidation package that will "limit the discretionary relaxation in the current budget proposal and implement significant tightening of the structural balance in the medium term".
The final part of the IMF programme focuses on the banks. Iceland plans to reform the banks' operations and revise financial regulation in accordance with international best practice.
Iceland's collapse was caused by its banking system's overleveraging by massively expanding overseas lending. - ( Financial Timesservice)
