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Financial Crisis

DW staff (dc)October 15, 2008

With Iceland's economy frozen by the global financial crisis, the tiny Nordic country continues to explore options for recovery, turning to the IMF, Russia and the EU for help.

Iceland is struggling to keep its economy afloatImage: BilderBox

Under a currency swap agreement, Iceland on Tuesday, Oct. 14, secured 200 million euros ($270 million) from each of the central banks in neighboring Norway and Denmark, but talks to secure a much larger loan from Russia continued. Icelandic officials arrived in Moscow on Tuesday for talks, though Geir Haarde, Iceland's prime minister said the size of any loan from Russia had not been decided.

"We look at this as a non-political deal, if there is to be a deal," he said. "I don't know of any particular political strings that the Russians would want to attach to this."

On a third front, Iceland is also in discussions with the International Monetary Fund (IMF), though Haarde said the country has not formally requested a loan. If it does, it would become the first western European country to turn to the IMF since 1976.

Iceland's Prime Minister Geir Haarde
Iceland's Prime Minister Geir HaardeImage: AP

"We're entitled to their services like everybody else but there is no decision on behalf of the government as to whether or not to apply for a loan," Haarde said. "And there is no decision on behalf of the IMF as to what kind of conditionality would be involved."

The IMF has sent a delegation to evaluate the situation in Iceland, in a process which Haarde has described as "friendly."

"It's not like the IMF is here to take over the country," he said.

Rescuing a stricken economy

Iceland has been badly affected by the financial turmoil, which has resulted in its main commercial banks being nationalized by the state. Its currency has been severely weakened, and the local stock exchange was shut down for three days.

Trading resumed on Tuesday, but the day ended badly, with the OMX Iceland 15 Index falling by 77 percent. The Icelandic index has lost 89 percent of its value this year, making it the worst performing stock exchange globally.

Despite the grim economic realities, Iceland's president said Tuesday that the tiny country is well positioned to recover, and can serve as a model on how to tackle the energy and climate change challenges.

"In the current global financial hurricane, Iceland and others have been reminded, to use an analogy, that when a hurricane passes over the ocean toward the powerful mainland it usually crosses small islands where the destruction can be substantial," Olafur Ragnar Grimsson said in a video address to a United Nations seminar on small states.

He said that experience has shown that "small states, due to their flexibility and the closely knit networks of cooperation which characterize their societies, can recover surprisingly quickly."

Iceland is currently campaigning for a two-year seat on the UN Security Council, competing with Austria and Turkey for the two seats reserved for European states. On Friday, the UN General Assembly will elect five new members to replace the nations whose terms expire at the end of this year.

Though Iceland is considered a European country, it is not a member of the European Union. In the wake of the country's near financial collapse, however, some politicians are raising the idea of joining the EU in order to safeguard the economy.