WRAPUP 1-Iceland eyes recovery steps, Russia tempers aid talk

REYKJAVIK/MOSCOW Nov 17 (Reuters) - Iceland said on Monday it may need to introduce currency controls, raise interest rates beyond already record levels and ultimately borrow as much as $24 billion to fix its broken economy.

Prime Minister Geir Haarde, announcing elements of a plan agreed with the International Monetary Fund (IMF), indicated immediate needs were not as acute as once thought and $5 billion was sought rather than the $6 billion mentioned a few weeks ago.

But Russia, one of the countries Iceland has turned to for aid along with the IMF, sought to dampen expectations for how much it could lend the island.

Haarde held a news conference, his second in as many days after a breakthrough on a dispute over compensation for foreign savers, to tell Icelanders about the debts the country would incur and the possibility of further hardship.

Iceland's economy collapsed last month under the weight of tens of billions of dollars in debts incurred by its banks. Trade in the currency has all but stopped and the country is braced for a sharp economic contraction in the coming year.

Haarde said the IMF plan allows for the possibility of further interest rate rises following an unexpected six-percentage-point boost last month to 18 percent.

Before that increase, Iceland had only just slashed rates once it became clear the currency and banking sector had no hope of a quick recovery. The central bank and government indicated the higher rates had been recommended by the IMF.

The prime minister said the plan could mean the introduction of currency controls, although he added that once the crown stabilised Icelanders could look forward to lower rates and a relaxation of any foreign exchange restrictions.

The total cost of the IMF plan was estimated at some 80 percent of gross domestic product (GDP), with current debt at about 29 percent of GDP and future debt under the plan at 109 percent of output. In total, Iceland expects it could need to borrow some $24 billion over several years to ensure its financial system and currency can function properly again.

"We believe there are overwhelming indications this plan will be enough," Haarde told the news conference.

Iceland last month had said it needed an extra $4 billion on top of $2 billion expected from the IMF to deal with immediate needs. Its Nordic neighbours, the European Union, the U.S. Federal Reserve and Russia were listed as potential lenders.

On Monday, Haarde said: "$6 billion was an overestimation" and $5 billion was more in order.

MANAGING EXPECTATIONS

But while Iceland scaled back its short-term needs, Russia indicated that big loans would not be possible in any case.

Iceland surprised the international community last month by raising the possibility of a Russian loan of up to 4 billion euros ($5.06 billion) to help prop up its battered currency.

An Icelandic delegation came to Moscow last month to discuss the possible deal. The loan has not yet materialised but the Russian offer sped up the efforts of other international lenders due to worries over what Russia may ask in return.

"Now, $4 billion is too much, and for us it is too much," Dmitry Pankin, Russia's deputy finance minister, told journalists. Media speculated the Russian offer could be linked to a large amount of Russian stock held in Icelandic banks as collateral on corporate loans.

Pankin specified he now meant dollars, not euros as negotiated initially.

Iceland said on Sunday it had reached a deal with several EU states on how to repay thousands of foreign savers with money in frozen Icelandic accounts. The European Commission said that a deal paves the way for international aid.

"This should indeed open the way for an agreement now for the financial aid requested for the country," said Amelia Torres, spokeswoman for the European Union's executive Commission. [ID:nLG487089]. Conflicts over the accounts between Iceland, which is not an EU member, and EU states Britain and the Netherlands have delayed the IMF loan, which is now expected to be approved this week.

Some 300,000 British savers -- roughly equivalent to the entire population of Iceland -- had accounts worth around 4 billion pounds ($6 billion) in Icesave, which attracted overseas customers with high interest rates.

Only Norway and the Faroe Islands have so far granted aid to Iceland.

Sweden said it wanted to see Reykjavik's proposed measures.

"We are of course prepared to stand by Iceland, but if you have problems of this magnitude with your public finances, you also have to present a plan to get them in order," Swedish Finance Minister Anders Borg told journalists. (Additional reporting by Jan Strupczewski in Brussels and Johan Sennero in Stockholm; Editing by Michael Roddy)