By David Ibison in Stockholm
November 12 2008
An international bail-out of crisis-hit Iceland appeared to be unravelling last night as the International Monetary Fund withheld official backing for the $6bn plan. Iceland has also been left with a $500m shortfall in the funds for the plan that it had hoped to raise from other international donors.
Iceland agreed a $2.1bn (€1.7bn, £1.4bn) loan with the IMF on October 24 that was due to be approved by its board last Tuesday but which was delayed until the following Friday, postponed again to Monday and has now been put back to an unknown date.
IMF approval is crucial as Sweden, Denmark and Norway have said they will only offer loans to Iceland once the IMF package and an associated economic stabilisation plan have been agreed by its board.
The delay at the IMF’s head office comes at the same time as Iceland has failed to raise the full sum it needs to stabilise its economy. A government official said: “There is a $500m gap.”
There are deep suspicions in Iceland that the UK government has put pressure on the IMF to delay the loan until a dispute over the compensation Iceland owes savers in Icesave, one of its collapsed banks, is resolved.
Össur Skarphédinsson, acting foreign minister and ministry for industry, told the Financial Times: “I spoke to representatives of the UK who said that before they could assist us they would have to have clarity on other outstanding issues. I was left in no doubt what they were talking about.”
No explanation for the delay has been provided by the IMF and Gordon Brown, prime minister, said yesterday that he supported the IMF loan.
A government spokesman said London had “in no way blocked the IMF’s loan to Iceland. In fact the UK government fully supports the IMF’s loan and looks forward to a swift resolution of this issue”.
However, Wouter Bos, Dutch finance minister, suggested there was a link between the IMF plan and compensation disputes with Iceland, which also involve the Netherlands. He told Dutch television that The Hague would oppose the IMF plan until their compensation dispute was resolved. “Luckily we have powerful allies as Britain and Germany have the same problem with Iceland,” he is reported to have said.
Iceland is seeking to make up the $500m shortfall with a loan from the US, Japan, Russia or China, but has not had a response to its appeal for help, the official said.
The IMF delay and the failure to raise the necessary funds has left Iceland unable to boost its foreign exchange reserves and unable to re-float its currency, undermining international confidence in its struggling economy after its banking system collapsed last month.
“Iceland is stuck in limbo. It clearly needs a new monetary and exchange rate framework, but it needs the IMF for that,” said Paul Rawkins, senior director at Fitch Ratings, the credit rating agency.
November 11 2008
The Swiss representative on the board of the International Monetary Fund (IMF) claims the board has not received any formal request of assistance from Iceland, known as a letter of intent. Iceland’s Prime Minister says such a letter was sent one week ago.
“To this date, no formal request [from Iceland] has been received by the fund’s board,” the Swiss representative on the IMF board, Thomas Moser, wrote to Fréttabladid in an email yesterday, adding that Switzerland is generally positive towards assisting Iceland.
Prime Minister Geir H. Haarde. Copyright: Icelandic Photo Agency.
Iceland’s Prime Minister Geir H. Haarde told Fréttabladid that a letter of intent, signed by Iceland’s Minister of Finance Árni M. Mathiesen and Central Bank governor and chairman Davíd Oddsson, was sent to the IMF on November 3.
“I don’t know how this could be. There must be some kind of an in-house system which controls what documents are sent with express delivery to the board,” Haarde said, adding that the IMF is a large and unwieldy institution.
Haarde said that since the letter of intent was sent, Icelandic authorities have been expecting their request to be discussed by the board.
Icelandic authorities suspect that their dispute with Britain and the Netherlands in regards to the Icesave deposits may be the cause of the delay, although they are not certain of the matter. Haarde requests an explanation from the IMF board as to why Iceland’s letter of intent has not been discussed yet.
IMF’s decision on Iceland’s application for an emergency stabilization program has been postponed thrice, as reported yesterday.
Acting Foreign Minister Össur Skarphédinsson told RÚV that he is certain that British authorities were causing the delay. British authorities however claim that they support Iceland’s application from a loan from the IMF wholeheartedly.
A spokesperson from the British Chancellery, who was not named, told ruv.is, that Iceland could on the other hand not expect special treatment from the IMF. The fund’s regulations are very clear and state that applicants must have reached an agreement with their loan granters.
Fréttabladid reports that the agreement between Iceland and an the IMF which was presented in late October has at least 30 items, the 19th of which was increasing the policy rate to 18 percent, according to an announcement from the Central Bank.