Page last updated at 17:02 GMT, Friday, 24 October 2008 18:02 UK

Iceland set for $2.1bn IMF help

Flateyri scene
Iceland's financial system has run aground

The International Monetary Fund (IMF) has reached a "tentative" agreement to give aid to Iceland worth about $2.1bn (1.3bn; 1.58bn euros).

It is the first Western country to have approached the IMF for aid since 1976.

Iceland said it should have immediate access to $833m if the "comprehensive stabilisation programme" is approved.

Its financial system is close to collapse after the country was forced to take over three of its biggest, debt-laden banks this month.

The Nordic nation's troubles have had severe repercussions elsewhere in Europe. In the UK, individual savers and local councils have been unable to access funds deposited in Icelandic banks.

The overarching goal is to support Iceland's efforts to adjust to the economic crisis in a more orderly and less painful way
Dominique Strauss-Kahn
IMF managing director

Iceland's currency, the krona, has almost halved in value this year and banking transactions with other countries have almost completely frozen.

Less pain

The IMF said the tentative agreement aimed to "restore confidence" in the nation's banking system, but warned that the country's economy could contract by as much as 10% next year.

IMF managing director Dominique Strauss-Kahn said that Iceland had put together "an ambitious economic programme" to restore confidence in its banking system, stabilise its currency.

This meant it deserved IMF funding as well as the support of the international community.

"The overarching goal is to support Iceland's efforts to adjust to the economic crisis in a more orderly and less painful way," Mr Strauss-Kahn said.

Sustainable plan

Iceland said the IMF funds would be used to stabilise its currency, reintroduce a flexible interest rate regime and to overhaul its financial regulation system, especially insolvency laws.

Iceland's Prime Minister Geir Haarde said he did not think the IMF had laid out any unacceptable conditions.

"This program will enable us to secure funding and gain access to the necessary technical expertise required to stabilise the Icelandic krona and to provide support for the development of a healthier financial system," Mr 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.

Mr Haarde said that it was vital that the Icelandic public did not get lumbered with the debts which banks had built up when they were privately owned.

Before going to the IMF, it had been in talks with Russia for a $4bn loan, but discussions broke down.

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