Iceland says will meet obligations despite meltdown

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.

Its citizens enjoyed the trappings of prosperity as its banks expanded dramatically overseas, investors took large positions in its high-yielding currency and foreign money poured in to local projects over the last decade.

All that changed this week and the government was forced to adopt sweeping powers that gave the state the ability to dictate banking operations.

The International Monetary Fund has sent a mission to Reykjavik and said it was ready to lend to countries hit by the global credit crunch.

Iceland will also start negotiations with Russia on Tuesday to secure a 4-billion euro loan.

In Reykjavik on Friday, about 200 angry Icelanders protested outside the central bank over the way the economy has been run and called on the bank's governor, David Oddsson, to resign.

They chanted "David Out" and two women held a sign reading "Stay Calm While We Rob You."

Kaupthing and Glitnir banks said the situation was calm with no run on deposits. Landsbanki was not available for comment.

"There is a (100 pct) state guarantee for deposits, so there is no reason for people to run to banks and take out money," Kaupthing spokesman Benedikt Sigurdsson said.

The crisis led to tense exchanges between Britain and Iceland. Haarde had expressed outrage when Britain used an anti-terrorism law to freeze assets in Landsbanki.

A British spokesman said London considered the Icelandic authorities' behavior unacceptable and it had been difficult to get information from them. Britain acted after Iceland indicated it would give preference to domestic depositors, he said.

"We've asked the Icelandic authorities to return money that should have been left in Britain," British Prime Minister Brown told reporters. In a letter distributed by the Icelandic government, Brown said he hoped the dispute could be resolved rapidly and amicably.

Britain's Local Government Association estimated 108 British local authorities have 750 million pounds invested in Icelandic banks. London's police force, its transport network and charities across Britain also have investments with them.

An Icelandic businessman summed up the mood on the island.

"It looks like we are being left out in the cold by everybody else. It is grim. Everybody is taking care of themselves. The only people who are supporting us are the Russians," Kari Stefansson of the Decode Genetics biotech company told Reuters.

(Additional reporting by Michael Kahn, Adrian Croft, David Clarke and Carolyn Kohn in London, Boris Groendahl in Vienna; Writing by Dominic Evans)

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