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Banking meltdown drags Iceland into recession

REYKJAVIK (AFP) - - Iceland's banking catastrophe dragged it into recession in late 2008, official data showed Friday, reflecting the impact of a crisis that brought down the government and destroyed jobs and savings.

The economy shrank by 0.9 percent in the last three months of 2008 -- a much less sharp fall than the 3.4 percent of the previous quarter, but enough to signal a recession, commonly defined as two quarters of contraction in a row.

The figures, published by the statistics office, make it likely that Iceland will move towards membership of the European Union, said analyst Howard Wheeldon of BGC Brokers in London.

For the whole of 2008 however, gross domestic product rose by 0.3 percent from the level in 2007, buoyed by rising exports, particularly aluminium, and a fall in imports, the statistics office said.

"Exports of aluminium were the biggest part of the total of exports, around 90 per cent," due to big investments in the past two years, a spokesman for the statistics office, Stefan Thor Jansen, told AFP.

Growth had been much higher in 2007 at 5.5 percent, according to revised figures.

Iceland was hit full force by the credit crisis that spread worldwide last year.

Its financial sector, formerly worth several times its GDP, crumbled and the government was forced to take over the three country's biggest banks as Iceland's currency lost half its value.

Thousands of Icelanders lost their savings and jobs and the government later resigned amid popular anger. Angry protests also led to former central bank chief David Oddsson being replaced.

The catastrophe drove Iceland to seek help from the International Monetary Fund (IMF), the lender of last resort for countries unable to pull themselves out of financial difficulty. It was the first western European country to do so since Britain in 1976.

The IMF granted it an emergency loan of 2.1 billion dollars and an IMF mission was still in the country on Friday to monitor developments in the wake of the crisis.

Iceland also received a 2.5-billion-dollar loan from Nordic neighbours Denmark, Finland, Norway and Sweden.

Before the crisis Iceland, a nation of just 320,000 people, was one of the richest countries in the world, with average yearly growth of four percent that peaked at 7.7 percent in 2004.

In January the central bank forecast a brutal contraction of 9.9 percent of GDP for 2009. Sedlabanki bank forecast it would fall by a further 0.8 percent in 2010 before returning to growth the following year.

Howard Wheeldon, a senior strategist at BGC Brokers, put the 2009 figure higher, forecasting a fall of between 10 and 12 percent of GDP.

"The Icelandic dream is a busted flush never to return," he told AFP, using a poker-playing metaphor to describe the country's financial boom and bust.

"Like it or not, EU membership beckons, followed of course, by joining the euro too."

Many Icelanders are sceptical about joining the EU, fearing that Brussels will limit Icelandic sovereignty and curb its authority over fishing rights. But support for joining the 27-nation bloc has soared since the crisis.

The Civil Movement, a political party made up of protest groups that emerged in the aftermath of the economic collapse, has said it will call for a referendum on whether Iceland should join the European Union.

"The government remains in turmoil," Wheeldon said. "What remains is a busted hedge fund that has no place to go but into the protective hands of the EU."