October 7, 2008 / 9:16 AM / 9 years ago

UPDATE 1-Iceland crown surges on news of Russian loan

3 Min Read

(Recasts with detail, background)

REYKJAVIK, Oct 7 (Reuters) - Iceland's crown currency surged after news on Tuesday that Russia would give the country 4 billion euros in loans to help it through a financial crisis that threatened to overwhelm the national economy.

The Icelandic crown had dropped 35 percent earlier EURISK=D3 on the news the state was taking over the country's second-biggest bank. But it staged a huge recovery to 220 per euro after Iceland's central bank said in a statement that Russia had agreed to lend the money.

Using emergency powers adopted on Monday, Iceland dismissed the board of directors of Landsbanki LAIS.IC and put the bank in receivership, a minister told state radio on Tuesday.

Commerce and banking minister Bjorgvin Sigurdsson said the bank would be open and run as normal while the changes were taking place. Iceland's Financial Supervisory Authority had put its own people in place of the bank's board.

Threatened with national bankruptcy, Iceland adopted sweeping powers over banks late on Monday as its financial system tottered and its currency plunged 30 percent.

The ruling alliance and opposition parties united on 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.

Parliament passed the bill and its provisions took effect immediately.

Investment firm Exista kicked off on Tuesday what is expected to be a string of Icelandic asset sales, saying it will sell its near 20 percent stake in Finnish insurer Sampo to reduce liabilities.

But Straumur-Burdaras STRB.IC, another large Icelandic financial firm, said it saw no sign that it needed state intervention.

Kaupthing, the island's biggest bank, said Iceland's central bank had lent it 500 million euros. It said it had not been approached by the state's financial regulator.

Small Nation, Big Problems

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

"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 told the nation late on Monday.

Iceland is an island in the middle of the North Atlantic, home to just 300,000 people.

But its financial significance has 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. (Reporting by Omar Valdimarsson via Stockholm Newsroom, writing by Anna Ringstrom and Adam Cox; Editing by Mark Trevelyan, Ruth Pitchford)

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