Europe Economy

Iceland Plea for Aid Meets with Cold Response

Icelandic pleas for further aid met with a cool response on Thursday as the IMF suggested its hands may be tied by an Anglo-Dutch debt impasse and Sweden signaled no immediate funds were on the way.

Dominique Strauss-Kahn, head of the International Monetary Fund (IMF), said a solution for the so-called Icesave issue was not a condition for aid but the Fund still had to listen if members raised issues.

"If a lot of members think we have to hold on, we have to hold on," Strauss-Kahn told journalists in Washington.

Britain and the Netherlands are both important members of the fund. The IMF is due to carry out a review of its aid program this month.

Icelandic officials have said money could be held up until it agrees a deal to pay back more than $5 billion to Britain and the Netherlands for money lost in the 2008 financial meltdown.

That could take time after the Icelandic president's rejection last week of an Icesave bill. The country now must hold a referendum, due by March 6.

Icelandic Prime Minister Johanna Sigurdardottir urged the IMF not to leave the country starved of cash.

"The review of the Economic Program is of fundamental importance for the recovery of the Icelandic economy," Sigurdardottir wrote to Strauss-Kahn, saying it was "very important" the review take place as soon as possible.

The Icelandic government released a copy of the letter. But Strauss-Kahn, speaking later in a French television interview, suggested Iceland might want to try sort out Icesave first before seeking the next aid installment.

The IMF chief said he hoped IMF shareholders did not want to block aid so that it could move ahead swiftly.

"That will depend a lot on the government itself, which may want to sort out its banking problem first with the referendum etc and restart with the IMF after and not mix the two up." Time, however, is in short supply if Iceland hopes to avoid an economic relapse.

The country needs funds so it can safely reduce high interest rates and remove capital controls. The Icelandic finance minister has visited Nordic capitals in recent days to drum up backing.

Yet Sweden said on Thursday no Swedish funds would move until the IMF gave a green light on its own aid program.

"We want Iceland to stick to these international ... obligations and then we will follow through with our own commitments," Prime Minister Fredrik Reinfeldt told journalists in Stockholm.

Nordic Help

Reinfeldt said he spoke with Sigurdardottir, but insisted the next tranche of a 1.8 billion euro ($2.62 billion) package of Nordic aid must wait at least until the IMF held a review.

British and Dutch depositors in high-interest Icesave accounts lost their money when Iceland's banks collapsed in 2008 after years of aggressive expansion fuelled by debt. The two countries compensated savers in full and want their money back.

Reinfeldt's comments weighed on market sentiment.

"This might be seen as increasing the chances that the IMF program will be delayed," said Jon Bentsson, economist at Islandsbanki in Reykjavik. "Conceivably, the program might be delayed by a month and a half."

The cost of insuring Iceland's debt against restructuring or default rose to six-month highs. Five-year credit default swaps widened more than 36 basis points to 544 bps, data showed.

The government is trying to avoid a vote, which polls suggest could see Icelanders reject the bill, and has sought to keep lines open with London and Amsterdam in the hope of starting new negotiations.

There has also been speculation Iceland may seek a third party as a mediator with Britain and the Netherlands, though the Icelandic foreign ministry said on Thursday the government had not approached the EU or any other parties.

"The authorities are seeking to solve this internally. They are engaged in discussion with other political parties," foreign ministry spokeswoman Urdur Gunnarsdottir told Reuters.