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IMF, Nordic Neighbors Agree Billion-Euro Loans for Iceland

Iceland's Nordic neighbors and the International Monetary Fund (IMF) have agreed loans of over two billion euros to keep the North Atlantic island nation afloat after the credit crunch laid waste to its banking sector.

Logo of the International Monetary Fund (IMF)

The IMF hopes to restore confidence and stabilize the Icelandic economy with its loan

The executive board of the IMF approved a two-year $2.1 billion (1.6 billion-euro) loan to Iceland to "restore confidence and stabilize the economy," the IMF announced on Wednesday, Nov. 19.

The fund said it approved the stand-by arrangement -- structured so that Iceland can immediately draw about $827 million, with the rest in eight installments of about $155 million -- 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 crown and 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 centnext year after an expected 1.6 percent advance in 2008. It estimated that the unemployment rate would quadruple to 5.7 percent 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 favorable, buttressed by its very strong fundamentals of a highly educated labor force, a favorable investment climate, and a rich natural resource endowment," said John Lipsky, the IMF's first deputy managing director, in a statement.

Nordic nations do the neighborly thing

The announcement was followed on Thursday, Nov. 20 by news that cash-strapped Iceland's Nordic neighbors had approved a $2.5-billion loan, supplementing the IMF loan.

Prime Minister of Iceland Geir Haarde

Iceland's PM Geir Haarde has generous neighbors

"Within the framework of the IMF-supported program, the Nordic countries -- Denmark, Finland, Norway and Sweden -- have worked closely together and jointly decided to supplement the IMF financing of 2.1 billion dollars with additional loans of 2.5 billion dollars," the joint ministerial statement said.

"We stress that, as outlined in the IMF program, an ambitious multi-year fiscal consolidation program will help Iceland stabilize the economy, including the exchange rate, and reduce public debt over the medium-term," the statement added.

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

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 IMF said in a statement.

Latvia ready for talks with EU, IMF over aid

Latvian President Valdis Zatlers

President Valdis Zatlers wants IMF aid for Latvia

After Iceland received the green light from the IMF, Latvia said that it was to launch formal talks with the EU and IMF on financial aid to cushion the Baltic nation from its deepening economic crisis

Prime Minister Ivars Godmanis said the goal of talking to the European Commission and the International Monetary Fund would be to "stabilize the financial system" but declined to say when official negotiations could kick off.

He added that "processes connected with a certain bank" would be included in the negotiations but did not elaborate.

Latvia, which broke free from the crumbling Soviet Union in 1991, has enjoyed a reputation as an economic "tiger," notably since joining the EU.

But after several years of double-digit growth, the country of 2.3 million people is now grappling with a recession as its once-robust domestic demand slumps in the face of high inflation, tighter domestic credit rules and the global economic crisis.

The Latvian economy shrank by 4.3 percent in the third quarter compared with the same period in 2007, and official data show the country is suffering the sharpest recession in the EU.

For the full year, the Latvian central bank expects the economy to shrink by 1.5-1.7 percent and by 3.5-3.9 percent in 2009.

Iceland 's PM promises recovery, compensation

Iceland's Prime Minister Geir Haarde said on Tuesday that, despite his country being battered by the international financial crisis, Iceland will be back on its feet in 2010.

A man walks past a branch of the Kaupthing bank in Reykjavik

Kaupthing's German clients will be compensated

"With help from the International Monetary Fund, we will be able to quickly put this difficult period behind us," Haarde told the German business daily Handelsblatt. "We will be back in 2010."

Haarde also used the interview to reassure 30,000 German clients of the Kaupthing bank, where accounts were frozen on Oct. 9. "They should worry less than a few weeks ago," he said.

A German finance ministry spokesman said German account holders should recuperate up to 20,900 euros each. Kaupthing, one of Iceland's three main banking groups, recently collapsed over the global credit crunch.

Iceland also said it had agreed to reimburse British and Dutch depositors of failed Internet bank Icesave, operated by the collapsed Landsbanki bank.

The compensation agreed for the British and Dutch depositors was 20,000 euros.

Haarde has said Iceland needs some $6 billion, and recently warned the economy would contract some 10 percent next year.

The Icelandic economy, which is highly dependent on the country's financial system, was knocked flat by the international crisis. The three biggest banks were nationalized in early October, and the debacle could cost up to an estimated 85 percent of gross domestic product (GDP).

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