Iceland Rescued?

A follow up to the post I put up about Iceland’s woes: Icelandic Freeze

Iceland and the International Monetary Fund will probably announce an agreement today that may include a loan of about $1 billion and a plan to restructure the economy, said Einar Karl Haraldsson, adviser to Industry Minister, Oessur Skarphedinsson.

“The government knows roughly what the IMF is proposing and there is no disagreement with that,” Haraldsson said in a telephone interview from Reykjavik today. “I guess there will be a decision meeting some time today.”

Iceland has special drawing rights at the Washington-based fund equivalent to about $1 billion, according to Standard and Poor’s. The island nation faces a prolonged period of contraction, possible hyperinflation and rising joblessness. Iceland is the first western country to seek IMF support since the U.K. in 1976.

Iceland needs aid after the collapse of its banking system froze the foreign-exchange market, making it hard for importers to finance purchases. Glitnir Bank hf, Landsbanki Islands hf and Kaupthing Bank hf imploded with debts of $61 billion, or as much as 12 times the size of the economy.

Norway, Sweden and Denmark would probably follow any accord with the IMF, with Japan also a candidate to provide the Atlantic island with aid, Skarphedinsson said on Oct. 20.

The central banks of Denmark, Norway and Sweden in May provided Iceland with a euro swap facility worth a total of 1.5 billion euros ($2 billion). The central bank of Iceland has so far drawn on 400 million euros of that.

Iceland is also in talks with Russia to secure a loan worth as much as 4 billion euros ($5.2 billion).

The U.K. may lend Iceland 3 billion pounds ($5 billion), the Financial Times reported today, without saying where it got the information. Haraldsson said he had no knowledge of any such agreement.