By Omar Valdimarsson
REYKJAVIK, April 30 (Reuters) - Iceland faces sharp spending cuts and revenue rises over the next two to three years, but the prime minister told Reuters she was confident the crisis-hit nation would overcome its problems.
Iceland last year had to take a $10 billion rescue package led by the International Monetary Fund (IMF) after its banks collapsed under a weight of debt.
Prime Minister Johanna Sigardardottir, who led a caretaker government, won an election on Saturday for the Social Democratic Alliance and is negotiating a new coalition with the Left-Green party.
"Over the next two to three years we will have to cut the budget, which is around 450 billion Icelandic crowns ($3.47 billion), by around one third, or 150 billion crowns to 170 billion crowns," she said.
The cuts have to be made in order to reduce the budget deficit, which is set to surge during a gross domestic product (GDP) drop forecast to reach 10 percent this year.
The central bank has said that a fiscal reduction of about 12 percent of gross domestic product (GDP) will be needed. GDP came to about 1.5 trillion crowns in 2008.
All in all, she said the cost to Iceland of the failure of its top three banks would be 1.1 trillion crowns ($8.48 billion). "This figure could of course change. But we don't think this is insurmountable," she added.
She said the country would be able to manage if it reached fair agreements on refunding depositor holders in Britain, and on repaying its debts to creditors and to the International Monetary Fund (IMF).
"The revaluation of the banks is about to be published, which will allow us to put a firm number on our commitments to foreign creditors, and only then will we know exactly."
"But what is certain is that we are going to have to extend ourselves greatly, all of us," she added.
She said that in the future the banks would be privatised so they had wider ownership.
She also wanted to see partial foreign ownership.
Sigurdardottir wants to take Iceland into the European Union and the euro zone, and has said the latter could be introduced within four years.
"If we stick to our plans we will be full EU members in five years time," she added.
"We will have fully restored our banking system, facilitated normal competitiveness in our economy and got the state out of businesses it has had to take over temporarily," she said. (Writing by Patrick Lannin; Editing by Andy Bruce)