Iceland will use the $2.1billion (£1.4billion) loan to “restore confidence and stabilise the economy” the IMF said in a statement. It is the first time a European country has received a loan from the IMF since 1976.

Now that the IMF has approved the loan, it has also said that it will assist Iceland in accessing additional help from other countries.

Since the announcement was made, Iceland has been able to secure a further $2.5billion from Finland, Sweden, Norway and Denmark. It hopes to raise a total of $6billion to restore its banking system.

The IMF did not approve the loan until after the Icelandic Government agreed to honour its responsibilities to foreign customers whose money became frozen in Icelandic banks such as Icesave, the UK online savings account arm of Landsbanki, the country’s biggest bank.

It has now agreed to repay up to £17,844 of each Icesave customer’s deposits, to fall in line with EU regulations.

Following the executive board’s discussion on Iceland, John Lipsky, deputy managing director and acting chairman of the IMF, said that “Iceland is in the midst of a banking crisis of extraordinary proportions. The three main banks, accounting for about 85 percent of the banking system, collapsed within a time span of less than one week. The krona fell sharply, the equity market plummeted, and severe disruptions in the external payments followed.

“As a result, Iceland is facing a severe recession, given the high debt level in the economy and significant dependence of the private sector on foreign currency and inflation-indexed debt.”

© Fair Investment Company Ltd