Icelanders Protest Government Failure to Clinch Loan

By Tasneem Brogger and Helga Kristin Einarsdottir

Nov. 14 (Bloomberg) -- Icelanders will take to the streets in their thousands tomorrow to protest the government's failure to clinch a $6 billion International Monetary Fund-led loan while countries in less dire economic straits jump the IMF queue.

Weekly protests in downtown Reykjavik may swell to 20,000 soon, or 6 percent of the population, said Andres Magnusson, chief executive of the Icelandic Federation of Trade and Services. The islanders are venting their anger on politicians as prices soar, the krona collapses and the economy goes into reverse.

``Enormous mistakes were made, but those who made them are still in the same place,'' said Hildigunnur Runarsdottir, a music composer who has attended five protests since the country's banking system collapsed last month. ``They don't seem to be doing anything at all about the situation.''

The Atlantic island, which had the fifth-highest per capita income in the world last year, needs the money to finance imports and revive the banking system. Central bank forecasts that the economy will contract 8.3 percent next year may prove optimistic if the loan isn't approved soon, said Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen.

This ``isn't sustainable,'' Christensen said. ``You can't starve the economy, and that's what the government's doing at the moment. Every day that passes makes the economic outlook worse.''

`Depressed'

Many retailers are relying on credit from their suppliers to keep their shops stocked.

``I have a long-standing relationship with suppliers, who have given me 30-60 days credit,'' said Gudrun Steingrimsdottir, who runs a lingerie store in central Reykjavik. ``If the situation persists another month, I don't know what is going to happen.''

Trouble is, neither does anyone else.

``The main thing that is creating unrest is that the government doesn't come forward and inform the public what is on the agenda,'' Magnusson said. ``Nobody can get any information.''

As the currency fell and imports shrank, the inflation rate reached an 18-year high of 15.9 percent in October. Delays in sealing a loan package mean the central bank can't return the currency to free float. The bank now holds daily krona auctions, with the currency trading for 178 against the euro on Nov. 12, compared with about 90 kronur per euro at the start of the year. The traded volume at that auction was 13.8 million euros.

``What I notice is how depressed people have become,'' said Steingrimsdottir. ``We know nothing. People seem to have lost all hope.''

IMF Rescue

The IMF is withholding approval of its $2.1 billion loan until other lenders agree to fulfill their commitments to a wider bailout, Fund spokesman Bill Murray said on Nov. 11.

Norway has pledged 500 million euros ($635 million), the Faroe Islands 300 million kroner ($50 million) and Poland $200 million. That leaves Iceland well short of the $6 billion it says it needs.

Complicating talks are U.K. and Dutch demands that the government repay depositors at the Internet unit of Iceland's collapsed Landsbanki Island hf. Those debts 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.

``By comparison, the total amount of reparations payments demanded of Germany following World War I was around 85 percent of GDP,'' Danielsson said.

``We're discussing a number of issues raised by potential creditors, including the process for determining Iceland's obligations with regard to foreign deposits taken by three intervened banks,'' said David Hawley, a senior adviser at the IMF's external relations department, according to a transcript of a press briefing published on the IMF's Web site yesterday.

Envy

Iceland's government has accepted it will have to reach a negotiated solution to the dispute with the U.K. and the Netherlands to get the IMF loan, the newspaper Morgunbladid said yesterday, without saying where it got the information.

Icelanders are shooting envious glances at Eastern Europe where Hungary and Ukraine received loans from the IMF within two weeks of asking. Iceland has little to show for its efforts, six weeks after its banking system started to collapse.

``It's worrying enough that they're not getting the $6 billion they're talking about, but the fact they're not even getting the $2 billion is very worrying,'' Christensen said. ``It's amazing that Ukraine is able to get a $16 billion loan, one of the most corrupt countries in the world, and Iceland is not able to pull it off.''

Ukraine had its $16.4 billion loan from the IMF approved on Nov. 6. Hungary said on Nov. 11 it's already drawn on the first 4.9 billion euro ($6.16 billion) tranche of its IMF-led 20 billion-euro loan.

While the IMF loans to Hungary and Ukraine make up less than 20 percent of those countries' gross domestic products, Iceland needs loans worth more than its entire GDP to repay debts built up through five years of economic boom.

``We should have turned the music down when the party got out of hand,'' Runarsdottir said.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;