UPDATE 8-Iceland adopts sweeping bank powers to stem crisis
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REYKJAVIK, Oct 6 (Reuters) - Threatened with national bankruptcy, Iceland agreed to adopt sweeping powers over banks on Monday as its financial system tottered, its currency plunged 30 percent and a leading agency cut its credit ratings.
The ruling alliance and opposition parties united on a bill that gives the state the ability to intervene at will in the country's battered banks. Parliament, in session late on Monday, was expected to pass the bill imminently.
"We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy," Prime Minister Geir Haarde said.
In an address to the nation, he said Iceland's top financial regulator would have wide-ranging authority to dictate a bank's operations and could even force it to merge with another firm or declare bankruptcy.
Standard and Poor's agency downgraded Iceland's credit rating by two notches to "BBB" from "A-", saying the authorities' actions would help to limit the risks to the budget but would also cut banks' access to international markets, causing the economy to contract much more sharply than foreseen.
"This economic contraction, combined with the depreciation of the krona, will hurt the asset quality of the banks, depress the fiscal revenues of the state and markedly alter what had been low government debt levels," it said.
Iceland is an island in the middle of the North Atlantic, home to just 300,000 people. But it has found itself on the fault line of the global financial crisis.
The country's financial stature had swelled in recent years as its banks expanded overseas, investors took large positions in its high-yielding currency and foreign firms poured money into local projects.
But by Monday, the prime minister raised the spectre of a complete financial collapse had the bill not been agreed.
"The legislation is necessary to avoid that fate," Haarde said.
The bill will also allow the government to take over housing loans held by the banks and put them in a government housing fund, an effort to help thousands of islanders who faced the loss of their homes amid an ever-widening credit crunch.
The bill's provisions are due to take effect immediately.
BORROWING SPREE
The government held marathon talks through the weekend, with Haarde holding out hope such drastic measures would not be needed. Continued...
