Iceland will get $2 billion IMF loan

The Icelandic government said Friday that it reached tentative agreement with the International Monetary Fund for a $2 billion loan over two years as part of an aid package to assist the stricken country.

The government said the deal, which must be approved by the agency's board in Washington after negotiations in Reykjavik with IMF representatives, will also give Iceland immediate access to $830 million.

Iceland had sought help from the IMF after its banking system collapsed this month under the weight of the global credit crunch — threatening the entire economy.

The country's currency, the krona, has lost half its value since January and banking transactions to and from the island nation in the middle of the North Atlantic have seized up, leaving its population of 320,000 virtually stranded.

"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.

"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.

Haarde said he expects the agreement with the IMF — the first loan by the body to a Western nation since 1976 — would encourage lending from other sources.

Iceland turned to the IMF after talks with Russia over a euro4 billion ($3.2 billion) loan failed.

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

Iceland already called on a swap facility drawing euro200 million ($256.6 million) each from the Norwegian and Danish central banks — it can take up to a total of euro500 million ($636.2 million) from each. A similar deal with Sweden's central bank has not yet been used.

Iceland's central bank, Sedlabanki, is facing a considerable loss following the collapse of the banking system.

After the three main banks — Glitnir, Landsbanki and Kaupthing — became insolvent, Sedlabanki created new banks to handle domestic commercial banking activities.

It said it considered transferring liabilities for securities pledged to the central bank to those new institutions, but regulators determined that all debt instruments issued by the old banks must remain with those banks to guarantee transparency.

The banks' foreign debts amount to over $60 billion, dwarfing the country's gross domestic of $14 billion.