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Russia tells Iceland: $4 billion loan is "too much"

MOSCOW (Reuters) - Lending tiny Iceland $4 billion would be too much for Russia, a senior Russian official said on Monday amid new pledges of a swift international aid package from the European Union.

Iceland surprised the international community last month by raising the possibility of a Russian loan of up to 4 billion euros 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 materialized 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 European Union 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.

Iceland faces a severe recession after the global financial crisis led to the collapse of its crown currency and the government takeover of three of its largest banks. It badly needs funds to revive currency trade and restart the economy.

STAND BY ICELAND

The IMF is expected to discuss the package later this week.

Conflicts over the accounts between Iceland, which is not a member of the EU, and EU states Britain and the Netherlands have been delaying an International Monetary Fund-led package worth as much as $6 billion for the country.

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.

Iceland reached a provisional deal for a $2 billion IMF lifeline in October and other lenders, including the EU and Nordic neighbors, had indicated they could be willing to stump up cash once the IMF program won official approval.

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

“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.

Russia has been spending its reserves to prop up the ruble and support the economy, but $4 billion would still be less than one percent of the remaining cash pile. Russia’s own bailout package for its economy and markets is worth $200 billion.

According to IMF data, $4 billion equals around one-fifth of Iceland’s 2007 gross domestic product (GDP). Pankin said an acceptance of banking liabilities by the Icelandic government would boost sovereign debt to over 100 percent of the GDP.

“On the whole we will look at how Iceland’s macroeconomic problems are resolved, and whether they succeed in reaching agreement with other creditors,” Pankin said, noting that Iceland’s handling of its banking sector’s debt was a key issue.

Russia’s Finance Ministry initially denied there was an agreement with Iceland regarding the loan in September but then reluctantly confirmed it when Iceland’s central bank said the loan had been negotiated with Prime Minister Vladimir Putin.

Pankin said Russia’s final decision would be influenced by the positions of other international lenders, such as the IMF, Great Britain, the Netherlands and Nordic countries.

(Additional reporting by Jan Strupczewski in Brussels and Johan Sennero in Stockholm)

Reporting by Gleb Bryanski; Editing by Victoria Main

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