Nordics to give Iceland a 2.5-billion-dollar loan

Nov 20, 2008, 6:39 GMT

Stockholm/Helsinki - Nordic neighbours of cash-strapped Iceland said Thursday they have approved a 2.5-billion-dollar loan, supplementing a similar loan from the International Monetary Fund (IMF).

The announcement came the day after the executive board of the IMF approved a two-year 2.1-billion-dollar loan.

'We stress that, as outlined in the IMF programme, an ambitious multi-year fiscal consolidation programme will help Iceland stabilize the economy, including the exchange rate, and reduce public debt over the medium-term,' the finance ministers of Denmark, Finland, Norway and Sweden said in a joint statement.

The finance ministers said 'implementing the IMF programme will not be easy,' but they believed it could help rebalance Iceland's economy.

In Washington, the IMF said Wednesday the standby arrangement was structured so that Iceland could immediately draw about 827 million dollars, with the rest in eight installments of about 155 million dollars - to stabilize a 'banking crisis of extraordinary proportions.'

The global financial crisis sparked the collapse of three of Iceland's major banks and a rapid depreciation of the krona.

The nation is facing a severe recession through 2010, the fund said in a statement.

The IMF forecast that Iceland's economy would be badly damaged, with real gross domestic product falling 9.6 per cent next year after an expected 1.6-per-cent advance in 2008.

It estimated that the unemployment rate would quadruple to 5.7 per cent next year.

However, once confidence is restored and balance sheets readjusted, the IMF predicts domestic demand to rebound strongly in 2011.

'Iceland's long-term growth prospects remain favourable, buttressed by its very strong fundamentals of a highly educated labour force, a favourable investment climate, and a rich natural resource endowment,' said John Lipsky, the IMF's first deputy managing director, in a statement.