Russia has denied Iceland’s request for a loan because it needs to keep a lid on government spending in the face of budget deficits, the Finance Ministry said Wednesday.

Iceland, reeling from a collapse of its heavily exposed banking sector, asked for a loan from Russia last October.

“Based on the results of considering the Icelandic government’s request for financial aid … of up to $500 million, the Russian government took the decision to refrain from giving the requested funds,” the ministry said in a statement. “The decision was dictated by the necessity to restrain the growth of state spending in the conditions of a budget deficit.”

Icelandic Finance Minister Steingrimur Sigfusson said Russia’s refusal to lend money would not affect the island’s IMF-supervised economic program.

“We have been re-evaluating Iceland’s need for loans, and it is very unlikely that Russia’s refusal will have any impact on our economic program,” Sigfusson said.

Iceland began loan talks with Russia after the collapse of its main banks and currency last year as it sought to round up funds to bolster its currency reserves enough to allow the loosening of strict currency controls adopted because of the crisis. Since then, it has struck a deal for a $10 billion bailout led by the International Monetary Fund and its European neighbors.

(Reuters, Bloomberg)