Iceland requests $2 billion from IMF to save banks

Crisis-hit Iceland agreed to begin formal negotiations with the International Monetary Fund (IMF) to request $2 billion in aid, Prime Minister Geir Haarde said on Friday.

Iceland's financial system has all but collapsed and its economy is suffering badly after the country was forced to take over three of its biggest, debt-laden banks this month.

Haarde, in a press briefing broadcast on Icelandic television, said the cabinet had agreed on the request and he expected it would take about 10 days for the IMF board to approve the deal.

"The goal is to restore faith in the Icelandic economy and stabilise the currency and restructure the banking system," he said.

The IMF has been accused in the past of being too dogmatic in demanding reforms, with critics charging it has sometimes increased the pain of countries already experiencing economic trauma.

"We don't think the fund has put down any unnacceptable conditions," Haarde said.

A statement from the lender released soon after his comments said the stand-by arrangement would total about $2.1 billion.

"Iceland has put together an ambitious economic program, which aims to restore confidence to the banking system, to stabilise the krona through strong macroeconomic policies, and to help the country achieve medium-term fiscal consolidation following the collapse of its banking system," the IMF said.

The head of an IMF mission in Reykjavik said the country's economy could contract by as much as 10 percent next year.

Paul Thomsen of the IMF said stabilising the Icelandic crown was an urgent priority for the government.

Thomsen said there was "no doubt" that Icelandic monetary policy would need to be relatively tight for a while.