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Iceland gets $10 billion in aid

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

The cornerstone of the rescue package is a $2.1 billion loan from the International Monetary Fund, a deal agreed late on Wednesday after weeks of delays due to wrangling between Iceland and some European nations.

That will be complemented by more than $3 billion in loans from Nordic countries, Russia and Poland as well as special financing arrangements of close to $5 billion or more by Britain, the Netherlands and Germany.

Russia’s involvement, while not specified, was scaled down vastly after initial discussions about a multi-billion euro loan. The idea that Russia would extend its influence into NATO member Iceland had raised questions in diplomatic circles, while Moscow this week played down talk of how much it could lend.

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.

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.

Poul 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 stabilize ... 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 on Sunday, saying it would cover insured deposits in accordance with European law.

Britain will extend Iceland a funding arrangement for 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.

Many have voiced anger with the Icelandic central bank chief David Oddsson, a former prime minister. Oddsson came in for fresh criticism from Icelandic politicians during a debate on Thursday in parliament.

Meanwhile analysts say urgent action is needed.

“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 stabilize the currency and lay the foundations for economic recovery and a normalization of financial flows.”

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

Iceland said this week it may need as much as $24 billion to solve its problems.

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 Ron Askew

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