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Iceland can’t afford to wait any longer for its International Monetary Fund review and the transfer of the second tranche of its IMF-led bailout loan, Prime Minister Johanna Sigurdardottir said.

“The review of Iceland’s program has been delayed for way too long,” Sigurdardottir said in an interview in the township of Gardabaer in Iceland on Sept. 26.

The IMF is withholding the payments until a dispute with the U.K. and the Netherlands over depositor claims is resolved. Last year’s failure of Landsbanki Islands hf, which provided Internet accounts known as Icesave, left thousands of British and Dutch depositors in the dark about how to recoup their life savings and prompted the U.K. to deploy anti-terror laws to freeze Icelandic assets until the country agreed to cover the claims.

“We are still hoping that the program will be reviewed in October,” Sigurdardottir said. “However, it’s clear that the IMF wants to see a solution in the Icesave matter, prior to Iceland’s review with the fund.”

The coalition government on June 6 agreed to take a 2.35 billion-pound ($3.74 billion) loan from the U.K. and 1.2 billion euros ($1.76 billion) from the Netherlands to cover the deposit guarantees. That agreement was shelved after the Atlantic island’s lawmakers demanded changes, including linking debt payments to Iceland’s economic growth rate and a clause enabling renegotiation if the loan isn’t repaid by 2024.

‘More Elusive’

The Atlantic island is relying on a $5.1 billion international loan, including $2.5 billion from the Nordic states of Sweden, Finland, Norway and Denmark, and $2.1 billion from the IMF. Without these funds, Iceland risks a second collapse, Finance Minister Steingrimur J. Sigfusson has said. To date, Iceland has received $827 million in IMF funds.

“Solving the Icesave matter under the conditions placed by parliament has proven to take longer, be more difficult and more elusive, than we anticipated,” the premier said. “We assume a formal answer from the Netherlands and the U.K. to the conditions and how we can uniformly move forward will arrive shortly.”

If the IMF review, originally scheduled for February, doesn’t take place at the fund’s next board meeting, it will jeopardize “the restructuring of Iceland’s banks, bringing down interest rates and other economic measures underway meant to get Iceland back on track,” Sigurdardottir said.

‘Hardship’

“As all these things are interrelated, it’s imperative that we reach a solution which satisfies all parties, the U.K. and the Netherlands, as well as Iceland,” said Sigurdardottir. “A solution that forces hardship on Iceland and Icelanders isn’t a solution I can agree to.”

Most Icelanders are opposed to the government’s agreement to cover foreign deposits. An Aug. 5 poll showed 68 percent of voters don’t back the accord. Sigfusson, who heads the junior coalition Left Green party, has called the agreement “unfair.”

“It’s extremely important that both the U.K. and the Netherlands understand that Iceland is eager to honor its obligations,” Sigurdardottir said. “However, taking on more than we can handle isn’t going to benefit anyone. This perceived link between the solution to the Icesave issue and the IMF program is, in my mind, unfortunate to say the least.”

Failing a U.K. and Dutch agreement of the conditions placed by Iceland’s parliament, the country’s government will have to ask lawmakers to re-open the debate in the Althingi.

‘Imperative’

“I would be concerned if parliament has to debate the Icesave matter again,” Sigurdardottir said. “Obviously, that would call for a majority with the coalition parties, as we can’t rely on the opposition.”

Sigurdardottir said she was appealing to the IMF and Nordic countries to allow disbursement of the bailout as soon as Iceland reaches an understanding with the U.K. and the Netherlands, to pre-empt any lawmaker demands to re-open the Icesave debate.

“It’s imperative that the IMF and the Nordic countries agree that an agreement between the coalition parties on passing the bill is enough for the disbursement of the second part of the IMF loan,” she said.

The failure of Iceland’s biggest banks last year forced the government to impose capital restrictions to prevent a sell-off of the krona after the currency lost as much as 80 percent of its value against the euro on the offshore market. The controls have failed to prevent a 7.7 percent decline in the krona against the euro this year, making it the second-worst performer of the 26 emerging market currencies tracked by Bloomberg.

The central bank, which shares Europe’s highest benchmark interest rate with Serbia, on Sept. 24 left the rate at 12 percent. Sigurdardottir’s government has said the success of its economic reforms will be measured by the ability of the bank to lower the key rate below 10 percent.

“The next interest rate decision will be taken by the central bank on Nov. 5, and one can only hope for conditions to improve sooner, allowing for an opportunity for an earlier easing of monetary policy,” Sigurdardottir said. “Maintaining stability in the labor market will become difficult if the interest rates cannot be brought down.”

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