Nov. 17 (Bloomberg) -- Iceland may sign a $6 billion International Monetary Fund-led loan deal by Nov. 19 after it reached an agreement on how to repay depositors at the overseas unit of one of its failed banks, Prime Minister Geir Haarde said.

``This means the IMF can conclude its discussion of Iceland's request for financial assistance,'' Haarde said in an interview in Reykjavik yesterday. The comments confirm an announcement by IMF Managing Director Dominque Strauss-Kahn on Nov. 15 that the fund would approve a loan within four days.

The island, which had the fifth-highest per capita income in the world last year, needs the financing for imports and to create enough foreign reserves to support a free-floating currency. The central bank has predicted the economy may contract 8.3 percent next year after the currency plummeted following the collapse of the country's three largest banks .

Iceland yesterday reached a European Union-backed accord with the U.K. and the Netherlands on repaying depositors at Icesave, the online banking unit of Landsbanki Islands hf, clearing the way for a loan deal.

``We accept the EU directive on deposit guarantees and will undertake the obligation to pay what Landsbanki assets will not cover,'' Haarde told reporters yesterday. ``Over what period the payments will be made and the annual payment obligation is still to be negotiated.''

Loan Pledges

Under a preliminary agreement reached on Oct. 24, the IMF will provide a $2.1 billion loan, with the rest of it coming from a group of countries.

The government will be able to draw $830 million when the IMF- led loan is completed, Haarde said. Nordic countries would ``play the biggest part'' in the package, he added. Norway has pledged 500 million euros ($635 million), the Faroe Islands 300 million kroner ($50 million) and Poland $200 million, so far.

Denmark's central bank is ``considering'' extending a 500- mllion euro swap facility, of which 300 million euros have yet to be drawn, spokesman Karsten Biltoft said today.

The full $6 billion loan ``is a prerequisite for our economy, currency market and businesses to function,'' Foreign Minister Ingibjorg Solrun Gisladotttir said yesterday.

``Of course it's positive,'' said Thomas Haugaard, a Copenhagen-based economist at Svenska Handelsbanken AB. ``But Iceland will always be a small economy with a small currency that can become the target of speculation again. It's well known that the krona has been a sort of lottery ticket in portfolios around the world.''

Icesave Dispute

The krona collapsed last month, losing more than two thirds of its value since the start of the year, following the failure of the three biggest banks. The central bank tried pegging the krona to a basket of currencies on Oct. 7 and abandoned the effort the following day. Policy makers are now striving to resurrect the currency through daily auctions with local banks.

Iceland had been told in ``no uncertain terms that nobody will take part in lending'' to the country until the Icesave dispute was finished, Haarde told reporters yesterday.

``We were not just holding talks with the U.K. and the Netherlands, but the whole of the European Union and then some, because other nations that were connected with this issue later also set the condition that Icesave would be resolved,'' Haarde said.

Deposits at Icesave may amount to as much as 5.5 billion pounds ($8.2 billion), the size of Iceland's economy, according to a report by Jon Danielsson, an economist at the London School of Economics. Finance Minister Ingibjorg Solrun Gisladottir put the figures at 640 billion kronur ($3.7 billion) on Nov. 14.

``We obviously welcome the announcement by Iceland'' that it ``will apply the EU rules on protection'' for deposits, said Amelia Torres, a spokeswoman for European Union Economic and Monetary Affairs Commissioner Joaquin Almunia. ``This should open the way for the financial assistance that has been requested by the country.''

To contact the reporter on this story: Helga Kristin Einarsdottir in Iceland at einarsdottir@bloomberg.net.

Last Updated: November 17, 2008 07:31 EST