AP
Iceland announces Russian loan, nationalizes bank
Tuesday October 7, 9:16 am ET
By Jane Wardell-, AP Business Writer
Iceland nationalizes major bank under emergency law, announces $5.4 billion loan from Russia

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

The central bank also loaned 500 million euros ($680 million) to Kaupthing, the country's biggest bank, to tide it through the crisis.

As the government scrambled to gain control, the central bank first announced that it had secured the Russian loan, then backtracked and said the countries had agreed to open talks on "financial issues" soon.

Russian Finance Minister Alexei Kudrin said Russia was favorably inclined toward Iceland's request for credit, the Interfax news agency reported.

Prime Minister Geir H. Haarde told reporters that Iceland had sought help from other countries, but only its Nordic neighbors had given support. "In a situation like that, one has to look for new friends," said Haarde, refusing to identify any countries that had rebuffed Iceland's appeals.

The takeover of Landsbanki came a day after trading in shares of major banks was suspended, the Icelandic krona lost a quarter of its value against the euro and the government rushed through emergency legislation giving it sweeping powers to deal with the financial meltdown.

"As declared by the government, all domestic deposits are fully guaranteed," the Financial Supervisory Authority said. "Landsbanki's domestic branches, call centers, cash machines (ATMs) and Internet operations will be open for business as usual."

Icesave, Landsbanki's Internet service, stopped processing deposits and withdrawals, according to a brief announcement on the Web site.

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 central bank said in a statement that it had been informed by the Russian ambassador, Victor I. Tatarintsev, that Iceland would be given a loan of 4 billion euros ($5.4 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 there had been no formal approach from Iceland and no decision had been made. Iceland's central bank followed with an amended statement: "It should be emphasized that the countries have decided to start in the next few days negotiations on financial issues."

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 the third-largest bank, Glitnir, only last week.

Haarde warned late Monday that the heavy exposure of the tiny country's banking sector to the global financial turmoil raised the specter of "national bankruptcy."

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 euros ($19 billion).

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.

"In the perilous situation which exists now on the world's financial markets, providing the banks with a secure life line poses a great risk for the Icelandic nation," Haarde said in a televised address to the nation. "There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy."

Just hours earlier, Haarde had said that no special measures were necessary -- but credit lines to banks then seized up amid speculation about the solvency of the country's major banks.

The new laws gave the Central Bank of Iceland and the Icelandic Financial Supervisory Authority detailed and vast authority to intervene in the control and operation of Icelandic financial institutions, including the ability to take over or create new institutions, call shareholder meetings and limit the authority of boards.

Earlier Monday, the Icelandic Financial Supervisory Authority suspended trading in financial instruments issued by Kaupthing, Landsbanki, Glitnir, Straumur-Burdaras, Exista and Spron.

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

A collapse of the Icelandic financial system could reverberate across Europe, given the heavy investment by Icelandic banks and companies across the continent.

One of the country's biggest companies, retailing investment group Baugur, owns or has stakes in dozens of major European retailers -- including enough to make it the largest private company in Britain, where it owns a handful of well-known stores such as the famous toy store Hamley's.



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