Iceland to announce $6bn IMF-led rescue

Iceland is poised to announce a $6bn International Monetary Fund-led rescue package, backed with co-ordinated action from other central banks, to help stabilise its economy after its banking system collapsed this month.

People with knowledge of the talks between Iceland and the IMF said the fund was expected to contribute just in excess of $1bn (€750m), with central banks from the Nordic region and Japan contributing the rest of the money.

The proposed package represents a breakthrough for Iceland in its bid to stabilise its economy as it had been struggling to find significant international backing. People close to the talks said the IMF had not attached punitive conditions. The agreement could be announced on Tuesday once Iceland has sent the IMF an official invitation for assistance. The prime minister’s office in Reykjavik declined to comment.

It is doubtful whether Russia will participate in rescue after talks between the two countries over a possible $4bn loan last week ended without agreement.

An IMF agreement to provide support has been a condition for the Bank of Japan and other Nordic central banks to help, people close to the talks said. ­

The IMF sought assurances on the restructuring of the banking sector and has demanded a review of Iceland’s banking legislation to ensure it conforms with international best practice.

Crucially, the IMF is not insisting on the privatisation of Iceland’s huge Housing Financing Fund, a state-backed mortgage lender. The IMF will ask the government to compile a credible plan for fiscal tightening in response to government debt levels, which are expected to rise to well over 100 per cent of gross domestic product. The Icelandic krona will be floated again as soon as practical.