November 20, 2008 / 3:35 PM / 10 years ago

UPDATE 4-Iceland to get $10 bln as Europeans pitch in

(Adds details from Britain, comments from IMF)

By Omar Valdimarsson and Sakari Suoninen

REYKJAVIK/HELSINKI, Nov 20 (Reuters) - Iceland secured pledges of support from European countries on Thursday to help the country rebuild a shattered financial system, boosting total aid after an IMF-led package to more than $10 billion.

After weeks of delays, the International Monetary Fund approved a $2.1 billion loan late on Wednesday, the cornerstone of international efforts to rescue the North Atlantic nation.

Iceland fell prey to the global financial crisis as its currency plunged and its financial system crashed last month under the weight of tens of billions of dollars of foreign debts incurred by its banks, three of which failed.

“The whole IMF package, which includes British and Dutch loans to the Icelandic deposit guarantee agency, is about $10.2 billion, out of which the Nordic countries’ share is about a quarter,” Finland Finance Ministry Under-Secretary Martti Hetemaki told Reuters.

Iceland said it would receive $3 billion from Denmark, Finland, Norway, Sweden, Russia and Poland. The Faroe Islands, a tiny Danish territory, will chip in $50 million.

Britain, the Netherlands and Germany issued a statement saying they would provide “pre-financing” to help Iceland meet foreign deposit obligations. The IMF, in a conference call on Thursday, estimated those obligations at $5-6 billion.

The first priority is to make the Icelandic crown a functional currency again so that the island can begin to trade more normally.

Paul Thomsen, head of the IMF’s Iceland mission, told the conference call: “As far as the value of the krona is concerned, I am confident that the krona is going to stabilise ... and soon start appreciating.”

LOAN DELAY

The IMF loan had been held up due to an acrimonious dispute between Iceland and Britain and the Netherlands over how to repay savers with deposits in frozen Icelandic accounts. German savers also had money locked up.

Iceland announced a breakthrough in the conflict on Sunday, saying it would cover insured deposits in accordance with European law.

Britain will lend Iceland 2.2 billion pounds ($3.26 billion), a British finance ministry source told Reuters.

The Netherlands was working on assistance to help cover 1.2 billion to 1.3 billion euros ($1.5 billion to $1.6 billion) in Dutch deposits held in Icelandic accounts, a Dutch finance ministry spokesman said.

Icelandic Prime Minister Geir Haarde expected rapid parliamentary support for the IMF deal. “I expect that this will be approved by the end of the day,” he told state radio.

But Icelanders are braced for a sharp economic contraction and thousands of the country’s 320,000 people face the prospect of losing their homes and savings.

Protests against the government have become a regular fixture in Reykjavik since the crisis erupted last month.

“The collapse of the banking system has inflicted severe dislocation on the economy and the conduct of international trade,” Fitch Ratings senior director Paul Rawkins said.

“It is imperative that the authorities move quickly to stabilise the currency and lay the foundations for economic recovery and a normalisation of financial flows.”

A spokesman for Swedish Finance Minister Anders Borg said a Nordic $2.5 billion loan to Iceland would be split roughly equally between Sweden, Finland, Norway and Denmark Finland’s Hetemaki said the Nordic countries had not yet finalised details, including the share of each Nordic country.

According to Thomson Reuters data, Iceland’s banks owed more than $60 billion in foreign debts when the crisis hit.

Haarde said this week Iceland may need as much as $24 billion but estimated the most immediate needs at $5 billion.

Germany, Britain and the Netherlands said they welcomed Iceland’s commitment to meet its obligations and would work with the country on agreements to help it meet its obligations towards depositors.

There was no immediate sign that the financial aid was helping the Icelandic crown, which is now barely trading on international markets and is worth less than 40 percent of its value at the start of the year. (Reporting by Tarmo Virki, Sakari Suoninen in Helsinki, Niklas Pollard in Stockholm and Noah Barkin in Berlin, editing by Stephen Nisbet)

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