Iceland requests $2 billion from IMF to rescue economy

By Sakari Suoninen and Omar Valdimarsson

REYKJAVIK (Reuters) - Crisis-struck Iceland called on the International Monetary Fund for $2 billion in aid on Friday to help fix a broken banking system, restart currency trading and soften the blow from a withering economic downturn.

The Washington-based lender said its staff in Reykjavik and Icelandic authorities had reached agreement on an economic program that would be supported by the financial assistance.

"The goal is to restore faith in the Icelandic economy and stabilize the currency and restructure the banking system," Prime Minister Geir Haarde told a news conference broadcast on national television.

The deal still needs to be approved by the IMF board and Haarde said he expected it would take about 10 days for the review to take place.

Iceland's financial system has all but collapsed and its economy is suffering badly after the country was forced to take over three of its biggest, debt-laden banks this month.

Paul Thomsen, head of an IMF mission in Iceland, said the economy could contract as much as 10 percent next year.

The north Atlantic island of just 300,000 people has become the first national victim of a global crisis that has felled some of the biggest names on Wall Street and sparked panic in financial markets.

International trade in Iceland's krona (crown) has ceased, a nasty dispute has broken out with Britain over deposits held in Icelandic accounts and the country has begun a wide search for assistance.

Ordinary Icelanders have watched in dismay as their country has gone from being a prosperous nation brimming with confidence to having to go cap in hand for funds.

Pall Bjarnason, a 62-year-old architect, drew comfort from the IMF news. "Considering the situation we're in, definitely this is going to help."

He expected a few months of suffering on the island before Iceland would start to rise up again "from the ruins."

"BILLIONS" MORE NEEDED

The prime minister said total funding needs had not been quantified exactly. "With the $2 billion from IMF, that would be a good part of it, but I think we still need several billion in addition," he said in a joint interview with Reuters and Swedish daily Dagens Industri.

But Haarde hopes that with the IMF on board, other countries will follow the lender's lead.

The Fund is to dole out $833 million once it agrees on the two-year deal, money that Iceland badly needs as it seeks to rebuild confidence in its currency and institutions.