Waiting for Aid in Iceland

The IMF and EU have promised assistance to the economically devastated nation, but so far no money has showed up

About the only thing Iceland hasn't tried in its efforts to quickly raise billions in much needed cash is to hold a bake sale. Every other strategy, it has become apparent in recent days, has either been tried or is under consideration. Nevertheless, even as both the International Monetary Fund and the European Union have expressed willingness to loan money to the island nation, precious little has actually materialized.

On Monday, the IMF again delayed a final decision on a $2.1 billion (€1.63 billion) emergency loan package for Iceland—for the third time. The loan package got the initial go-ahead on Oct. 24, but according to the Icelandic daily Morgunbladid, citing Iceland Prime Minister Geir Haarde, the IMF wants more information on how much cash Iceland will be able to raise elsewhere. In addition, an official from the Finnish Finance Ministry, Ilkka Kajaste, likewise said on Tuesday that more information was necessary before the Nordic countries could sign on to the package, according to a report in the Wall Street Journal.

When asked about the delay by the Morgunbladid, Haarde said "we will manage for a while longer, but this is naturally not a good position." Of the IMF approval, he said "I hope it will take place as soon as possible."

But Haarde's isn't the only explanation for the delay in circulation, as he himself hinted at in his Monday comments. "I trust that nothing else is involved (in the delay)," he said according to a report in the English-language publication Iceland Review. "Not pressure from European Union member countries because of Icesave."

Uncertain Future for Depositors

The comment was a clear reference to reports, including one on Nov. 7 in the Dutch daily NRC Handelsblad that Dutch Finance Minister Wouter Bos and his British counterpart Alistair Darling were blocking the IMF aid package pending an agreement by Iceland to pay back money citizens of those two countries deposited with Icesave, a subsidiary of Landsbanki. According to the report, Dutch citizens deposited some €1.6 billion ($2.05 billion) with Icesave while Britons have some €1 billion in the bank. The bank's collapse last month makes the future of those deposits uncertain. Some 30,000 Germans also have deposits with Icesave.

With the IMF loan held up, the European Union may jump into the gap. European Commission Spokesman Johannes Laitenberger told reporters on Monday that the EU may provide Iceland with a "small loan." "This should be seen more as a political gesture as a complement" to the IMF package, he said.

No amount was mentioned—nor was a timeline for such an EU loan. Ominously for Iceland, however, Laitenberger said that any EU loan can only be made "after several member states and Iceland reach an agreement on bilateral issues related to deposit guarantee schemes and the protection of foreign depositors." In other words, Britain and the Netherlands could presumably block the EU loan as well should they choose to do so.

Even if the European Union loan materializes, it likely won't be much more than a drop in the ocean for Iceland. In addition to the €2.1 billion on its way from the IMF, Reykjavik is trying to find an additional €4 billion. So far though, Iceland has had only limited success. Norway has loaned Iceland €500 million, Poland has offered up €155 million and the Faroe Islands have loaned $51 million. Iceland has also been in touch with Russia and China about possible loans, but nothing has materialized.

Sweden too has set up a €500 million euro swap facility—which gives Iceland access to much-needed cash. But Reykjavik has not yet been able to draw on the fund. Before freeing up the money, Sweden is waiting to see how the IMF proceeds.

After years of investing massively overseas, Iceland's leading banks have been hit hard by the global financial crisis. In early October, the government passed emergency legislation allowing it to intervene directly into the country's banking system and begin selling off foreign assets. The collapse of many foreign subsidiaries has led to depositors overseas wondering if they will ever regain access to their savings. The country's currency, the kronur, is currently valued at 165 to the euro—compared to 90 to the euro at the beginning of the year.

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