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Iceland Poised to Get $6 Billion Rescue Package
WASHINGTON — The International Monetary Fund, along with several Nordic countries and Russia, is poised to announce a $6 billion rescue plan for Iceland, whose once-booming financial system collapsed early this month.
Iceland would receive about $1 billion in emergency cash from the monetary fund, and the balance from Norway, Sweden, Denmark and Russia, according to an official of the fund who asked not to be identified because the formal announcement had yet to be made.
The plan for Iceland was the latest extraordinary rescue effort led by governments, central banks and multilateral institutions to address the global credit crisis and its fallout.
Detailed terms of the plan were not immediately known.
Typically, such a rescue organized by the monetary fund would depend on the recipient government taking stringent measures to restore fiscal and monetary stability. In the case of the fund's deal with South Korea in 1997, during the Asian financial crisis, the government in Seoul complained bitterly that the harsh medicine made matters worse before they got better.
A person briefed on the situation said that Iceland's cabinet, led by Prime Minister Geir H. Haarde, planned to discuss the rescue package at a meeting on Tuesday. Mr. Haarde said last week that a decision on whether to accept the fund's help, and its conditions, would be made by Thursday.
The country's industry minister, Oessur Skarphedinsson, told Bloomberg News that a deal was close, and that Japan might also take part in it.
"It's clear from our diplomatic contacts that if and when an agreement is made between the I.M.F. and Iceland, then our neighbors would be quite willing to sail in their wake," Mr. Skarphedinsson told the news agency from Reykjavik. "We, in fact, have confirmation of what I would label quite generous lending facilities."
Iceland has been in dire need of financial help since the government found itself having to take control of the last of the country's three major banks, Kaupthing. Along with the other two banks, Landsbanki and Glitnir, Kaupthing was brought down by the weight of debts, denominated mainly in foreign currency, that it was unable to refinance.
Analysts have said that a rescue coordinated by the monetary fund had become the only practical path out of the crisis for Iceland, which already faces the prospect of a deep recession. But Iceland's leaders, worried about the stigma that attaches to countries that have to be rescued by the fund, had sought to exhaust all other options first.
Even so, the fund sent a team to Iceland early this month and the decision by the fund to approve a rescue plan for Iceland appeared to be the breakthrough that allowed other central banks to join in supporting the country.
The crisis struck Iceland quickly and hard, leaving the country and its financial system essentially bankrupt. After the government took over the banks and shuttered the stock exchange, trading in the krona, the Icelandic currency, ceased, and without a viable, exchangeable currency, Iceland had no mechanism to affect inflation or interest rates, both of which had risen to double-digit rates before the crisis.
The monetary fund-led rescue deal for Iceland was first reported on Monday by the Web site of The Financial Times.
The recent events represented a sharp reversal in Iceland's fortunes. The country's banks had expanded aggressively in the last decade, and though they largely stayed away from troubled mortgage securities, the global tightening of credit this year left them unable to finance their debts, which are largely denominated in foreign currencies.
Some Icelandic authorities have suggested that once matters stabilize, the country should give up having an independent currency, and instead either adopt the euro outright or peg the value of the krona firmly to that of the euro.
Another possibility, rejected in the past, is to join the European Union as a member nation, a proposal that Icelandic conservatives have opposed. Still, Olli Rehn, the union's commissioner for enlargement, told Agence France-Presse on Monday that Iceland would not find it difficult to be admitted to the union.
"Iceland is clearly a democratic European country," which has "already negotiated perhaps two-thirds" of the criteria needed to join the 27 current members, Mr. Rehn told the agency. "This means that, were Iceland to pose its candidature, we could quickly complete the negotiations."
Ukraine and Pakistan are also among countries discussing rescue plans with the monetary fund.
