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International Monetary Fund approves $2.1 billion loan for hard-hit Iceland

International Monetary Fund approves $2.1 billion loan for hard-hit Iceland

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The International Monetary Fund (IMF) has approved a $2.1 billion loan to Iceland to help the Nordic nation stabilize its currency, restore confidence in its banking system and limit the harshest effects of the global financial crisis.

About $827 million will be made available immediately to Iceland – one of the countries whose economies have been hit hardest by the crisis – under the two-year standby arrangements, according to a press release issued by the IMF, whose Executive Board approved the deal yesterday.

The IMF said the assistance package should fill about 42 per cent of Iceland’s financing gap between this year and 2010, with the remainder to be met by bilateral creditors.

John Lipsky, IMF Acting Chairman, said the package had been approved because Iceland was currently enduring “a banking crisis of extraordinary proportions.

“The three main banks, accounting for about 85 per cent of the banking system, collapsed within a time span of less than one week,” he said. “The krona [the Icelandic currency] fell sharply, the equity market plummeted, and severe disruptions in the external payments followed.

“As a result, Iceland is facing a severe recession, given the high debt level in the economy and significant dependence of the private sector on foreign currency and inflation-indexed debt.”

Mr. Lipsky said the Icelandic authorities had devised a recovery programme with three key objectives: stabilizing the exchange rate, comprehensive bank restructuring, and ensuring medium-term fiscal sustainability.

“The road ahead is difficult. The programme 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.

“At the same time, 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.”

The IMF also announced that it has approved nearly $38 million in emergency post-conflict assistance to Lebanon to support the Middle Eastern country’s economic programme for 2008-09. The Fund has already unveiled assistance packages to a number of countries, including Hungary, Ukraine and Pakistan, to help them weather the global financial crisis.