REYKJAVIK/HELSINKI (Reuters) - Iceland is set to receive financial aid of more than $10 billion (6 billion pounds) from an IMF-led package to rebuild its shattered financial system, with European countries pledging on Thursday to work closely with the island.
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.
“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.
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.
Iceland fell prey to the global financial crisis as its currency plunged and its financial system crashed under the weight of tens of billions of dollars of foreign debts incurred by its banks, three of which failed.
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, paving the way for aid to start flowing.
Britain, the Netherlands and Germany said in a joint statement on Thursday they would work with Iceland on “pre-financing” to help it meet its obligations.
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.
“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.”
Iceland said in a statement late on Wednesday that on top of $2.1 billion from the IMF, 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.
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 the details, including the length of the loans and the share of each Nordic country.
A spokesman for the Dutch finance ministry said the deal the Netherlands was working on was for 1.2 billion to 1.3 billion euros (1 billion pounds) to $1.6 billion in Dutch savings.
“Iceland is in the midst of a banking crisis of extraordinary proportions,” IMF First Deputy Managing Director John Lipsky said in the Washington lender’s statement.
According to Thomson Reuters data, Iceland’s banks owed more than $60 billion in foreign currency debts when the crisis hit in early October.
Haarde said this week Iceland may need as much as $24 billion in total but estimated the most immediate needs at $5 billion.
Germany, Britain and the Netherlands said they welcomed Iceland’s commitment to meet its obligations.
“As part of the international support for Iceland the UK, Netherlands and Germany will work constructively in the continuing discussions with Iceland to conclude agreements on pre-financing that enables Iceland to meet its obligations towards depositors shortly,” the countries said.
There was no immediate sign that the financial aid was helping the Icelandic crown, which is now barely trading on international markets. It was last quoted on Wednesday at 240 per euro. A year ago the crown was worth around 90 per euro.
Reporting by Tarmo Virki, Sakari Suoninen in Helsinki, Niklas Pollard in Stockholm and Noah Barkin in Berlin, editing by Mike Peacock