The International Monetary Fund said on Wednesday its board approved a $2.1 billion loan for Iceland to try to stabilize what the fund called a “banking crisis of extraordinary proportions.”
The two-year, stand-by arrangement is structured so that Iceland can immediately draw about $827 million, with the rest in eight installments of about $155 million, subject to quarterly reviews. “Iceland is in the midst of a banking crisis of extraordinary proportions,” John Lipsky, the IMF’s first deputy managing director, said in a statement. Iceland has been anxiously awaiting emergency funding after the global financial crisis sparked the collapse of three of its major banks and rapid depreciation of the krone (ISK).
The IMF forecast that Iceland’s economy would be badly damaged, with real gross domestic product falling 9.6% next year after an expected 1.6% advance in 2008. It estimated that the unemployment rate would quadruple to 5.7% next year. Iceland will remain in a “serious recession” through 2010, the fund said, but once confidence is restored and balance sheets readjust, domestic demand should rebound strongly in 2011. “Long-term growth prospects are favorable, in line with Iceland’s very strong fundamentals, not least its highly educated labor force, favorable investment climate and rich natural resource endowment," the IMF said.
In a separate statement, Iceland’s Prime Minister Geir Haarde called the IMF loan program an important step towards rebuilding the economy. “Our task now is to overcome the difficulties we face and to regain the trust and the standing among other nations which we enjoyed before the impact of the global financial crisis struck Iceland,” he said.
TIGHT MONETARY POLICY
The IMF said its loan would fill about 42% of the country’s 2008-2010 financing gap. The rest would be met by official bilateral creditors. Finland, Sweden, Norway and Denmark plan to lend Iceland a total of $2.5 billion, a Finnish official said earlier on Wednesday.
As part of the IMF’s loan program, Iceland will maintain an “appropriately tight monetary policy”. Restrictions on capital outflows will remain in the near term. The fund said last month that its staff had hammered out a loan agreement, which would be presented to the board in early November. But consideration was delayed because of disputes with European creditors, including the Netherlands and Britain, over their citizens’ deposits in Icelandic banks abroad.
In the statement, the IMF said Iceland must develop a comprehensive strategy for bank restructuring that ensures “the fair and equitable treatment of depositors and creditors of the intervened banks.” Lipsky said exchange rate stabilization was an immediate priority to contain the impact on output and employment. Iceland said in its statement that the funds made available through the IMF would be used to support the currency, which would be floated as soon as possible.
“The road ahead is difficult,” Lipsky said. “The program is subject to exceptionally large uncertainty and significant risks, reflecting the unprecedented magnitude of the banking sector collapse. With this in mind, the authorities remain committed to maintaining a resolute policy implementation, and stand ready to adjust policies as circumstances change, working closely with the fund.” (Reuters)