EU countries said to put British condition on Icelandic aid

(REYKJAVIK) - Some European countries say they will support an IMF loan and emergency EU aid to Iceland only if Reykjavik settles a dispute over frozen British assets, an Icelandic member of parliament said on Thursday.

Support for aid to Iceland from some EU countries would depend on a settlement of Reykjavik's dispute with London, a delegation was told in Brussels on Tuesday, delegation head Katrin Juliusdottir told AFP.

However, she said: "I doubt though that this will be the case, because it is very irrational, both for the British and others we do business with."

Juliusdottir heads the delegation to the European Free Trade Association (EFTA) and the European Environmental Agency (EEA) parliamentary committee

Iceland's once booming financial sector has collapsed under the weight of the worldwide credit crunch, forcing the government last month to take control of the major banks as its currency has nosedived.

Britain, rushing to protect Britons' savings in the Icesave branch of the nationalised Icelandic bank Landsbanki, used anti-terrorist laws to freeze the banks' assets, sparking protests by Icelanders as both sides threatened legal action.

Reykjavik and London have yet to agree on how much of the British savings Iceland is liable for, with Icelandic Prime Minister Geir Haarde saying last week his country would be crippled if forced to repay the full amount.

Britain meanwhile announced on Thursday that it would advance 800 million pounds (1.27 billion dollars, 993 million euros) to compensate British Icesave customers with deposits greater than 50,000 pounds, the limit for compensation from the British Financial Services Compensation Scheme.

London stressed however that its discussions with the Icelandic government over reimbursing Britain and its savers were still "ongoing."

Iceland has already agreed with the International Monetary Fund on a loan of 2.1 billion dollars (1.6 billion euros), but IMF's confirmation of the deal, which had been scheduled for Wednesday, was delayed without explanation.

Prime Minister Geir Haarde said in an address to parliament on Thursday that the announcement probably would not come until November 10, indicating that the decision had been delayed because Iceland had yet to secure loans for the additional four billion dollars it needs to climb out of the crisis.

Reykjavik has sought assistance from a range of sources, including the European Central Bank and the Federal Reserve in Washington, but has focused most of its efforts on securing loans from its Nordic neighbours.

"It is of the utmost importance that the foreign exchange market is revived here in Iceland, and to do that we need IMF support," Juliusdottir stressed Thursday, adding that she was optimistic the aid would come through.

"I believe that the world is still civilised despite the economic crisis," she said.