Iceland stability plan in works, Kaupthing says sound

By Omar Valdimarsson

REYKJAVIK (Reuters) - Iceland's biggest bank said on Sunday there was no need for the government to rescue it as officials and central bankers worked on a financial stability plan to address a crisis that has sent the country's currency spiraling lower and threatened its financial sector.

Kaupthing Chief Executive Hreidar Mar Sigurdsson, speaking on state television, said he held discussions with Prime Minister Geir Haarde on how the bank could participate in the rescue package.

Sigurdsson told Channel 2 discussions included the possibility of Icelandic banks selling off foreign assets to strengthen the country's currency reserves.

Sigurdsson said there had been no talk of the government coming to Kaupthing's aid and there was no need for such a move.

Sigurdsson's comments came as local media reported that Icelandic authorities had held talks with employers, unions and pension funds on a crisis plan.

As part of a package, Icelandic state radio said the country's association of pension funds had agreed to transfer 200 billion crowns ($1.8 billion) to the state.

The transfer will have to be OK'd by member pension funds and the money must be guaranteed by the state.

Daily Morgunbladid said labor unions had called on the government to join the European Union and the euro as part of stability measures.

In the past, the government has been wary because EU requirements on issues such as fishing have historically been unpalatable in Iceland.

BANKING STRAINS

As in the United States and Europe, the international financial crisis has Iceland's heavily leveraged banks under strain. Worries have centered on whether they can refinance their foreign debts given the freeze in credit markets.

A slide in the crown has added to the banks' funding woes.

On Friday, offshore trading in the crown almost dried up over concerns about the state of Iceland's financial system.

Credit agencies had already cut ratings on the island's banks and Iceland's sovereign debt after the state was forced to step in and prop up financial group Glitnir.

A report in Britain's Sunday Telegraph said the crisis package could involve an injection of 10 billion euros ($13.86 billion) into the banking sector. The newspaper said an announcement on the plans is expected on Monday morning.