Added Loans to Iceland Will Help Pay Depositors
11/26/2008
STOCKHOLM -- The international aid package for Iceland is set to double to more than $10 billion, with the U.K., Germany and the Netherlands adding roughly $5 billion to a $5.1 billion package Iceland said it has secured. The total aid package will reach an estimated $10.2 billion, said Martti Hetemäki, undersecretary at Finland's finance ministry.
Iceland officials weren't available to confirm details of the aid package Thursday.
While loans from the International Monetary Fund and the Nordic countries are aimed at supporting Iceland's tottering economy, the British, Dutch and German loans likely will be intended to free up cash so Iceland can repay the money owed to foreign depositors in Icelandic banks that have collapsed.
Poul Thomsen, deputy director in the IMF's European department and the mission chief for Iceland, said a key objective of the IMF's $2.1 billion financing for Iceland's economy would be to stabilize its currency, the krona.
Unless that happens, the country could suffer a "wave of defaults" because a large share of Icelandic debt is linked to the exchange rate or indexed to inflation, Mr. Thomsen said.
Iceland will adopt a combination of a tight monetary policy and restrictions on capital outflows, he said, while allowing movement of current-account-related flows. The fund's executive board approved the loan Wednesday.
Germany, the Netherlands and the U.K. said in a statement that they welcomed the IMF's aid package and Iceland's commitment to meet its obligations to customers in their countries.
A representative for the Dutch Ministry of Finance said it will lend Iceland about €1.3 billion ($1.63 billion), which should be used to repay Dutch customers of Iceland-based online bank Icesave.
A U.K. government official indicated that the total amount that the local branch of Icesave owed to U.K. depositors was about £2.2 billion ($3.3 billion), and said any "pre-financing" loan to Iceland would be the "first step" in recovering that money.
The U.K. treasury is already repaying savers who have been locked out of their Icesave accounts. The loan from the U.K. will enable Iceland to repay the £2.2 billion to the U.K. treasury.
"The details for Germany's financial support for Iceland have to be finalized in the coming days," German Finance Ministry spokeswoman Jeanette Schwamberger said.
Separately, the central banks of Sweden, Norway and Denmark said they were extending their €500 million swap facilities with Iceland, now that the country has been granted IMF funds. The agreements allow Iceland's central bank to draw euros in exchange for Icelandic kronur.
Source: http://online.wsj.com/article/SB122718166821744225.html
