Iceland economy minister warns of Icesave fallout

Coins are thrown as people protest outside the parliament building in Reykjavik, where discussions are being made on Icesave accounts, June 8, 2009.

STOCKHOLM (Reuters) - Iceland's economy minister said on Wednesday an IMF aid program and efforts to loosen capital controls were on hold until the country resolved its "Icesave" impasse, with a risk of a prolonged economic slump.

"It looks like the IMF program is delayed," Economics Minister Gylfi Magnusson said in a telephone interview. "You could say it's put on ice until the problem has been solved."

Magnusson added: "Any further lifting (of currency controls) is almost certainly going to wait until this has been resolved."

The government, according to a draft bill seen by Reuters on Wednesday, is proposing a Feb 20 referendum on the Icesave bill, which authorizes repaying Britain and the Netherlands more than $5 billion lost in failed bank accounts.

A rejection would lead to more economic pain, the minister said. "We haven't tried to put a figure on it but basically what we had envisioned was a slow economic recovery (this year)," he said.

"If no external financing is available then almost certainly the planned investments will not materialize and that means that economic growth will be less or actually that we will almost certainly have a contraction this year."