October 16, 2008 / 6:45 PM / 11 years ago

UPDATE 1-Iceland sees IMF decision within a week

(Adds prime minister’s quotes, Glitnir default)

By Patrick Lannin and Omar Valdimarsson

REYKJAVIK, Oct 16 (Reuters) - Iceland is still considering whether to take a loan from the International Monetary Fund (IMF) to help it through its economic crisis and a decision could come within a week, the prime minister said on Thursday.

Talks with Russia on a loan would also resume soon, he added. Questions remained for investors over the fate of the debts and assets of the island’s top three banks, whose collapse precipitated the decline of the formerly high flying nation.

“We have not decided whether or not to formally apply for a stand by facility from the IMF. We will be looking at what conditions will be attached,” Prime Minister Geir Haarde said.

“We are working in a friendly atmosphere and I hope that we can come to a conclusion very soon,” he told a news conference, adding this could come “within a week”.

Iceland’s crisis is an unusual situation for the IMF. Its economy of some 300,000 people is highly developed and years of rapid growth have brought it unprecedented prosperity.

Icelandic bank Glitnir GLB.IC said in a note the IMF usually imposes conditions in return for aid, though terms for Iceland would differ from those imposed on emerging market nations such as Brazil or Argentina in the past.

Any loan would be used to boost foreign exchange reserves, Haarde added. The central bank said exporters were having problems sending money home, particularly with British banks. It guaranteed payment to recipients if money was routed to it.

Iceland has been angry at Britain for using anti-terrorism leglisation to seize the British assets of Iceland’s largest bank Kaupthing KAUP.IC. Britain said it was protecting depositors’ interests.

Kaupthing, Landsbanki LAIS.IC and Glitnir were the three banks whose liquidity problems in the face of the global financial crisis caused the government to take over their assets in Iceland to save the domestic banking system.

DEFAULT

The Icelandic authorities are going through the assets and liabilities of the banks to assess paying creditors of the foreign debt, which the government has said it will not assume. Thomson Reuters data shows this debt at a combined $62 billion.

Glitnir bank became the first to default when it failed to pay a $750 million loan which came due on Wednesday.

As well as the IMF talks, Iceland has approached Russia for funds. A first round of negotiations on a possible multi-billion loan ended without agreement in Moscow on Wednesday. Haarde said further talks were likely in Iceland soon.

Belgium and Luxembourg were also considering help for Kaupthing, where savers from the two nations had money. Belgian Prime Minister Yves Leterme is due in Reykavik on Friday.

The EU said in a statement after a summit that the international community should support Iceland, but that the country must stand by its international commitments.

In a hopeful sign for the authorities, a second of the new central bank foreign exchange auctions saw the crown fixed at a rate of 150.50 to the euro, just down from 150.0 on Wednesday.

The central bank last week had abandoned attempts to defend a 131 crown-to-euro rate and the currency market froze.

But Landsbanki said in a research note that two markets were developing for the crown, onshore and offshore. The offshore rate for the crown was 275 to the euro, it said.

People on the street were taking the problems in their stride, though the authorities forecast difficult times ahead.

“The government will take care of people, we have a strong social security system. We also have a lot of power in the earth,” said sanitary engineer Oru Karlsson, 52, referring to the geothermal energy which heats Iceland’s homes.

“We are Vikings, we have this blood, we never give up.” (Additional reporting by Ingrid Melander in Brussels; Editing by Louise Ireland)

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