2008-11-20 15 h 10 :: nasdaq.com :: Le FMI met en garde : vague de défauts de paiement si la couronne islandaise n'est pas stabilisée

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IMF Warns Of Wave Of Defaults If Iceland Krona Not Stabilized

Le FMI met en garde : vague de défauts de paiement si la couronne islandaise n'est pas stabilisée

By Tom Barkley, Of DOW JONES NEWSWIRES Nasdaq - Global Markets 15:10

WASHINGTON -(Dow Jones)- Iceland could suffer from a "wave of defaults" if the country's currency isn't stabilized, an International Monetary Fund official said Thursday.

Since a large share of Icelandic debt is linked to the exchange rate or indexed to inflation, a currency depreciation "is bound to have severe balance sheet effects and possibly triggering a wave of defaults in the corporate and household sector unless we manage to stabilize the krona," said Poul Thomsen, Deputy Director in the IMF's European Department and mission chief for Iceland, on a conference call.

Thus, the immediate priority is stabilizing the krona, he said, through a combination of a tight monetary policy and maintaining restrictions on capital outflows while allowing movement of current account-related flows.

Thomsen said he is "confident the krona is going to stabilize" around current levels, "and soon start appreciating."

Other goals of the IMF's $2.1 billion loan, which the executive board approved Wednesday, are restoring investor confidence, shoring up the banking system, and ensuring medium-term fiscal stability, he said.

The IMF loan is part of a broader international rescue package of over $5 billion, which could eventually top $10 billion.

The rescue package had been delayed for weeks by Iceland's dispute with the U.K. and Netherlands over frozen deposits in a collapsed Icelandic bank, but the country's pledge over the weekend to guarantee the deposits cleared the way for the deal.

In addition to about $3 billion in extra financing from Nordic countries, Poland and Russia lined up Wednesday, the U.K., Germany and the Netherlands were expected to contribute an additional $5 billion, according to Martti Hetemaki, Finland's finance ministry undersecretary. While a spokesperson for the Dutch Finance Ministry confirmed plans for a EUR1.3 billion ($1.63 billion) loan, German and U.K. officials wouldn't comment on the size of the deal.

The IMF warned Wednesday that Iceland is headed for a "serious recession" over the next two years, with gross domestic product expected to contract 9.6% in 2009.

The IMF estimates that its loan would meet about 42% of the country's financing gap through 2008, with bilateral creditors expected to make up the rest of the gap.

Still, there is concern that the country's problems will continue to mount, given its reliance on foreign inflows.

One risk is that foreign investors could dump Icelandic bonds and other assets, which could significantly weaken the currency once it is allowed to trade freely. Prime Minister Geir Haarde has said he expects a refloat of the krona by year-end, once the reserves are replenished.

-By Tom Barkley, Dow Jones Newswires; 202-862-9275; tom.barkley@dowjones.com

(Joel Sherwood in Stockholm, Laurence Norman in London, Andrea Thomas in Berlin, and Ykje Vriesinga in Amsterdam contributed to this story)

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(END) Dow Jones Newswires
11-20-08 1006ET
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