Iceland Struggles to Shore Up its Currency

REYKJAVIK, Iceland -- Iceland nationalized its second-largest bank on Tuesday and said it was negotiating a €4 billion ($5.4 billion) loan from Russia to shore up the nation's finances amid a full-blown financial crisis.

In an effort to stabilize the nation's freefalling currency, which lost a quarter of its value against the euro Monday, Iceland's central bank also on Tuesday intervened in to support the krona at a level of 131 to the euro.

Reuters

A branch of Landsbanki Bank in Reykjavik.

Just a day after Iceland's government rushed through emergency legislation giving it sweeping powers to deal with the financial meltdown, the island nation's Financial Supervisory Authority took control of Landsbanki Island hf and put it into receivership to protect it from creditors.

Within hours of the government move, the Samson holding company, which held a 41 percent stake in Landsbanki, went to the district court seeking temporary protection from its creditors.

Iceland's largest bank, Kaupthing Bank hf, said it hadn't been approached by the FSA, but that the central bank had loaned it €500 million to facilitate operations. The FSA also banned short selling of stocks in shares of Landsbanki, Kaupthing, and the third largest bank, Glitnir Bank hf, as well as investment companies Straumur-Burdaras Fjarfestingarbanki hf. and Exista hf, and savings bank Spron hf.

Iceland's central bank said in a statement it had been informed by the Russian ambassador, Victor I. Tatarintsev, that Iceland would be given a loan of €4 billion, and that this had been confirmed by Prime Minister Vladimir Putin.

However, the Russian state news agency RIA-Novosti quoted Deputy Finance Minister Dmitry Pankin as saying no decision had been made. Prime Minister Haarde said his country has been talking about a currency loan with Russia, which has "taken a friendly position on this." He said discussions would take place in Moscow Wednesday or Thursday and the loan would be used to add to foreign currency reserves.

A loan would support the government's efforts to gain control of an increasingly dire financial situation, which saw the government coming to rescue of Glitnir only last week. On Tuesday, Stand & Poors lowered Glitnir's long term counterparty credit rating to CCC, from BBB.

Iceland is paying the price for an economic boom of recent years that saw its newly affluent companies go on an acquisition spree across Europe and its banking sector grow to dwarf the rest of the economy. Bank assets are nine times annual gross domestic product of €14 billion.

In a speech Monday night, Mr. Haarde warned that the heavy exposure of the tiny country's banking sector to the global financial turmoil raised the spectre of "national bankruptcy." (See related article.)

Investors are now punishing the whole country for the banking sector's heavy exposure to the global credit squeeze -- its currency has gone through the floor, imports have fallen and inflation is soaring.

The government also on Monday put 100% guarantees on savers' deposits, following in the footsteps of Ireland, Germany, Austria, Greece and Denmark.