Iceland says will meet obligations despite meltdown

By Omar Valdimarsson and Brett Young

REYKJAVIK (Reuters) - Iceland sought on Friday to reassure international investors caught in its banking meltdown, saying it aimed to meet its obligations despite the turmoil which has ravaged a once-vibrant financial sector.

British officials were due to hold talks on Saturday with Icelandic authorities on dealing with the estimated 1 billion pounds of British deposits trapped in Iceland's collapsed banks.

Banks and investors in several other European countries were also assessing the cost of their involvement in the north Atlantic island, which has become the most pronounced victim of the global financial crisis.

"The Icelandic government of course intends to honor its obligations," Prime Minister Geir Haarde told a news conference in Reykjavik, without giving details.

Haarde said sharp criticism this week from British Prime Minister Gordon Brown, who said Iceland's failure to guarantee British deposits was unacceptable, had been "disconcerting ... and not very helpful."

"To say that our country is virtually, as such, in default is not a true description of the situation here," Haarde said.

But more criticism came on Friday from the Dutch government, which accused Iceland of insufficiently supervising Icelandic bank Landsbanki's Icesave business in the Netherlands.

The Dutch finance ministry said the central bank was holding Iceland's supervisor liable for any resulting damages.

In Vienna, Austria's Erste Group Bank said it had 300 million euros ($411.7 million) exposure to Icelandic banks.

Austrian cooperative bank Raiffeisen Zentralbank (RZB), the parent of listed Raiffeisen International, said it holds Icelandic bank debt but declined to say how much.

The Finnish financial watchdog said Finnish banks' total Icelandic bank exposure was 210 million euros and it was too early to estimate possible losses from that.

Iceland's government seized control this week of most of Iceland's banking system -- taking over Kaupthing, Landsbanki and Glitnir. Financial markets ground to a halt as traders reported hardly any trades in the crown currency and money markets while its stock exchange remains shut until next week.

A deal to sell most of Landsbanki's overseas corporate finance and brokerage business to Iceland's Straumur-Burdaras investment bank for 380 million euros fell through on Friday.

SWEEPING POWERS

Home to just 300,000 people and previously best known for its geysers and other natural splendors, Iceland turned from a fishing-based economy into an international financial haven.