Wounded Iceland takes over top bank, seeks Russia loan

REYKJAVIK Tue Oct 7, 2008 1:22pm EDT

A branch of Iceland's Landsbanki Bank in Reykjavik October 6, 2008. REUTERS/Iceland Photo Agency

A branch of Iceland's Landsbanki Bank in Reykjavik October 6, 2008.

Credit: Reuters/Iceland Photo Agency

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REYKJAVIK (Reuters) - Iceland took over its second largest bank, propped up a battered currency and sought on Tuesday a 4 billion euro ($5.44 billion) loan from Russia to help tackle a crisis threatening to overwhelm the island nation.

Russian Finance Minister Alexei Kudrin said Moscow viewed positively the request from Iceland, whose premier said it had faced a risk of "national bankruptcy."

"The result will be announced after negotiations," Kudrin said.

Prime Minister Geir Haarde said Icelandic officials would travel to Moscow on Tuesday or Wednesday to discuss terms for the loan to bolster the country's foreign reserves.

"With this, like everything else, nothing is certain until it's certain," Haarde told a news conference.

He said Iceland would not default on its sovereign debt.

Home to just 300,000 people, Iceland used emergency powers rushed through on Monday to dismiss the board of directors of Landsbanki LAIS.IC and put the bank in receivership.

That tipped the country's crown currency into a 35 percent nosedive although it later recovered some ground.

So volatile was the currency that Iceland's central bank was forced to introduce a currency peg at a value of 131 per euro. It was last trading around 150.

An International Monetary Fund spokesman said an IMF staff team was in Iceland and Norway said it was ready to discuss help but had heard nothing from Reykjavik.

Its reluctance to ask for IMF help was also noted when G7 deputy finance ministers discussed its situation during a conference call on Monday evening, according to a government official from one of the Group of Seven industrial nations.

"Japan proposed using an IMF facility to help Iceland, but Iceland did not want to ask the IMF for money," the official, who was familiar with the content of the phone consultations, told Reuters, speaking on condition of anonymity.

"Iceland does not want to be singled out as a country that needs IMF help. Even last summer, Iceland preferred to ask the central banks of some Nordic countries for help rather than go to the IMF for money."

REPERCUSSIONS

Iceland's commerce and banking minister Bjorgvin Sigurdsson said Landsbanki would be open and run as normal while changes were taking place. Iceland's Financial Supervisory Authority (IFSA) had replaced the bank's board with its own people.

"Domestic deposits are fully guaranteed, as declared by the government. Landsbanki's domestic branches, call centers, cash machines and internet operations will be open for business as usual," the IFSA said in a statement.

Ratings agency Standard & Poor's sharply revised its banking industry country risk assessment, saying: "The recent developments likely mark the end of the Icelandic banking model as it had developed over recent years. The forthcoming unwinding of the banking sector is likely to have significant repercussions on the economy and on the banks themselves."

The central bank said a Russian loan would substantially strengthen Iceland's foreign reserves and support the crown, which Haarde predicted would should strengthen significantly when more normal trading conditions resumed.

"Four billion euros would be more or less what Iceland needs to cover the whole banking system assets with their reserves," said Elisabeth Gruie, currency strategist at BNP Paribas.

"It's also a surprising move for Russia that reflects its desire to reaffirm itself as a world power."

Political analysts pondered Moscow's strategy in the light of its increasingly robust dealings with the west.

"I think there will be a lot of eyebrows raised in NATO if Iceland does accept this loan. I think the Icelandic government will need to ask themselves and the Russians a lot of questions before they accept," said Carlo Gallo, senior Russia analyst at Control Risks.

RUSSIA LOOMS LARGE

Iceland adopted sweeping powers over banks late on Monday as its financial system tottered and its currency plunged.

The ruling alliance and opposition parties united to pass a bill that gave the state the ability to dictate banking operations, including provisions that allow it to push through mergers or even force a bank to declare bankruptcy.

"We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy," Haarde told the nation late on Monday.

Iceland's biggest bank, Kaupthing KAUP.IC, said on Sunday it was in healthy shape but only last week the number three bank, Glitnir GLB.IC, had to be rescued.

Landsbanki said it would restructure and rise again.

"The bank has not been put into liquidation but is in receivership which gives it a temporary protection from payment of debts and obligations," it said in a statement.

Investment firm Exista kicked off what is expected to be a string of asset sales, saying it had sold its near 20 percent stake in Finnish insurer Sampo to cut liabilities.

Iceland has found itself perched on a faultline in the global financial turmoil.

The North Atlantic island has punched far above its weight in financial terms as its banks expanded overseas, investors took large positions in its high-yielding currency and foreign firms poured money into local projects.

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