The credit crunch claimed its first sovereign scalp last night as Iceland readied itself to accept an International Monetary Fund (IMF) bailout. The North Atlantic nation is believed to have negotiated a $6 billion (£3.49 billion) IMF-led rescue package backed by the central banks of its Nordic cousins, although the IMF has yet to make a formal announcement.

The last Western country to turn to the IMF was Britain, which called the international lender of last resort in 1976 when the banking system was facing collapse and foreign currency reserves had run dry.

The IMF may provide about $1 billion in emergency cash for Iceland with the balance lent by Norway, Sweden and Denmark and additional money possibly coming from Russia and Japan. Iceland, which has the same population as Coventry, had hoped that a bigger loan from Russia would save it from the humiliation and financial strictures of an IMF bailout.

Bjorgvin Sigurdsson, the Icelandic Banking and Commerce Minister, told The Times last night: “The talks with the IMF have progressed so that we are now at a stage where conditions, pros and cons are being looked over.”

Economists gave warning that $6 billion would not be sufficient to refloat Iceland’s devastated banking system because the Government needs so much foreign currency to buy basic supplies for Icelanders.

“The central bank will prioritise payments for essential imports, but it will delay payments to British savers. They will be in the queue somewhere along with British companies who bank with Iceland’s nationalised banks,” Jan Randolph, head of sovereign risk at Global Insight, said.

The IMF is likely to attach stringent conditions to the loan, including the stipulation that Iceland quickly deleverage its three nationalised banks Kaupthing, Landsbanki and Glitner. At one stage the gross liabilities of the country’s banking system were ten times the foreign exchange Iceland had available to cover them.

The nationalisation of Iceland’s banking system threatens to wreak havoc on the British high street, with 55,000 retail jobs in jeopardy. Baugur, which owns stakes in Debenhams, House of Fraser, the supermarket chain Iceland and fashion retailers such as Karen Millen, is financed by Icelandic money.

The fallout from Iceland’s crisis continued to hit the UK yesterday as Britain’s bank deposit guarantee fund paid £3 billion to ING Group, which has taken on savers previously with the UK units of Kaupthing and Landsbanki.

The move will not affect Landsbanki’s Icesave, which has 300,000 British depositors but whose assets are now controlled by the Icelandic Government. The Treasury has promised to guarantee the deposits and to try to recoup the money from Iceland.

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