(CNN) -- Nordic countries agreed to lend struggling Iceland $2.5 billion to help it recover from a series of crippling bank failures, bolstering a $2.1 billion aid package from the International Monetary Fund, their governments announced Thursday.
Prime Minister Geir Haarde has been trying to drum up support for Iceland's bailout.
"This is a first step to get Iceland out of its current serious financial and economic situation," the governments of Finland, Norway, Denmark and Sweden announced in a joint statement. "The banking crisis in Iceland is of unprecedented proportions and has serious implications for the country's economy."
The statement follows the IMF's decision on Wednesday to pump about $827 million into the Icelandic economy immediately, with another $1.3 billion coming in eight installments. Both moves are aimed at stabilizing Iceland's finances and shoring up its currency, which plummeted after a series of bank failures in October.
Iceland sought IMF help after its government was forced to nationalize three banks to head off a complete collapse of its financial system. Trading on the country's stock market was suspended for nearly a week, economic growth nearly flatlined and inflation jumped to more than 12 percent.
"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," John Lipsky, the IMF's acting chairman, said in a statement announcing the decision.
The IMF move marks the first time the international lender has had to funnel money to a Western European country in 25 years. Lipsky said Iceland's highly-educated workers and resource base gives it "favorable" prospects for long-term growth, but he cautioned, "The road ahead is difficult."
"The program is subject to exceptionally large uncertainty and significant risks, reflecting the unprecedented magnitude of the banking sector collapse," he said.
The package requires Iceland to restructure its banking industry, which had grown rapidly since the 1990s, and cut its government debt.
"The work with implementing the IMF program will not be easy, but given appropriate measures, we believe that there is a good basis for rebalancing the economy," the Nordic countries' statement read. "We stand ready to assist Iceland in the spirit of continuous Nordic cooperation."