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Iceland reaches deal for $2 billion loan from IMF

(Agencies)
Updated: 2008-10-25 11:53

Iceland reached a tentative agreement Friday with the International Monetary Fund for a $2 billion loan over two years, after the country's banking system collapsed amid the global credit crunch.

The government said the deal, which still must be approved by the IMF's board in Washington, would also give Iceland immediate access to $830 million to head off the financial threat to the entire economy.

The country's currency, the krona, has lost half of its value since January and banking transactions to and from the island nation of 320,000 people have seized up.

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"This program will enable us to secure funding and gain access to the necessary technical expertise required to stabilize the Icelandic krona and to provide support for the development of a healthier financial system," Prime Minister Geir Haarde said in a statement.

"As a result, Iceland will commit to a sustainable long-term economic policy, and a plan for the recovery of the Icelandic economy," he added.

Strauss-Kahn said those strong policies justified the high level of access to IMF resources and deserved the support of the international community.

"The authorities' program is focused on the essential upfront measures needed to restore confidence and economic and financial stability," he said. "The overarching goal is to support Iceland's efforts to adjust to the economic crisis in a more orderly and less painful way."

Iceland said it would use the funds to reintroduce a flexible interest rate regime and revise its financial regulation, particularly insolvency laws.

Haarde said Iceland expected the IMF deal to encourage lending from other sources.

Iceland turned to the international agency after talks with Russia over a €4 billion loan failed.

It has also been holding talks for two days with a delegation from the Norwegian government over possible financial assistance and has suggested that Japan or other Nordic nations could offer more support.

Iceland's central bank, Sedlabanki, is facing a considerable loss after the collapse of the banking system. After the three main banks - Glitnir, Landsbanki and Kaupthing - went into insolvency, Sedlabanki created new banks to handle domestic commercial banking activities.