Nordic nations work on Iceland bail-out

Officials from four Nordic central banks and finance ministries held a private meeting in Stockholm on Wednesday to discuss their contributions to a $6bn rescue package for Iceland.

The gathering at the Ministry of Finance was a strong sign that Denmark, Sweden and Finland are drawing closer to announcing a multibillion euro package of loans after Norway agreed a €500m ($648m, £405m) advance last week.

Iceland hopes to be told on Thursday or Friday that its application to the International Monetary Fund for a $2bn (€1.54bn, £1.25bn) loan to support its economic revival has been approved.

Once official approval of the IMF loan has been secured, the way is clear for the Nordic countries to start considering how much they are prepared to offer, central banking officials said.

Iceland is seeking a total of about $6bn, which it will use to bolster its foreign exchange reserves to try to restore the credibility of its currency after its banking system collapsed last month.

The island’s government has also sent an application for funds to the US Federal Reserve and the European Central Bank and has been in contact with the Bank of Japan through its embassy in Tokyo, it said.

The four Nordic nations have said they are willing to support Iceland but only after it agreed to design and implement an economic stabilisation plan in association with the IMF. That plan was agreed in late October and comprises stabilising the Icelandic krona, restoring fiscal sustainability and re-establishing a viable banking system. It should also be approved by the IMF on Thursday or Friday.

The meeting at the finance ministry was attended by Ingimundur Fridriksson, one of three governors of Iceland’s central bank; Audun Gronn, the head of the international department at Norway’s central bank; Barbro Wickman-Parak, deputy governor of Sweden’s Riksbank; and similar level representatives from the central bank and finance ministries of Finland and Denmark.

Any commitment by the Nordic nations to support Iceland alongside the IMF would be an important development as the island strives to stabilise its economy. But securing approval for the loans does not mean that Iceland will have immediate access to the funds. Norway’s loan requires approval from parliament, as would others.

Following the collapse of Iceland’s banking system, its economy is expected to contract up to 10 per cent, unemployment is forecast to spike to about 8 per cent and inflation is set to reach 20 per cent or more, according to economists.

Iceland raised interest rates last week from 12 per cent to a record 18 per cent.