Iceland turmoil deepens, top bank gets Swedish loan

STOCKHOLM/REYKJAVIK, Oct 8 (Reuters) - Iceland’s fast-moving financial crisis deepened on Wednesday as its biggest bank was forced to take an emergency loan from Sweden and the government seized control of a large bank it had planned to prop up.

Shares in Kaupthing KAUP.IC, the island's top bank, plunged on the Stockholm stock exchange by 34 percent before trading was suspended and it put its Swedish unit up for sale.

Facing financial meltdown, Iceland has taken over two of its largest banks -- first Landsbanki LAIS.IC on Tuesday and now Glitnir GLB.IC -- and is seeking a 4 billion euros ($5.4 billion) loan from Russia.

The financial regulator said in a statement Glitnir’s operations in Iceland would be open for business as usual and that domestic deposits were fully guaranteed.

The Icelandic crown, already battered in recent days, lost a further 23 percent versus the euro, a day after the central bank said it would peg the currency in an attempt to shore it up.

The central bank said it would intervene again at 131 crowns per euro having sold six million euros on Tuesday. The currency was last trading at 260.

Home to just 300,000 people, Iceland has become central to the global markets crisis as its entire banking system teeters.

Its government was due to send a delegation to Moscow to negotiate terms of a lifeline from Russia, funds the country desperately needs to bolster its foreign exchange reserves.

Russian Finance Minister Alexei Kudrin has said Moscow viewed the request positively.

The Swedish central bank said it would grant liquidity assistance to the Swedish arm of Kaupthing with a loan of up to 5 billion crowns ($702 million) and said the unit had been put up for sale.

“The Riksbank has been informed that a process of selling Kaupthing Bank Sverige AB has been started,” the central bank said in a document describing the details of its loan.

In a growing string of asset sales, Glitnir's Finnish arm said it had been put up for sale while ING Group's ING.AS British arm of its ING Direct online and phone bank said it had bought retail deposits of internet banking operation Kaupthing Edge worth 2.5 billion pounds.

The Riksbank said it was acting to safeguard Sweden’s financial stability -- an indication of how interconnected a small country such as Iceland has become -- and ensure the smooth functioning of financial markets.

Riksbank Governor Stefan Ingves told a news conference that the central bank and Swedish financial regulator both believed Kaupthing in Sweden and in Iceland were solvent.


Iceland’s central bank chief said late on Tuesday the island would emerge in strong shape but he also raised the possibility that the once third-largest bank Glitnir would not survive.

“As soon as the ratings firms and foreign lenders realise that we will not indebt the nation, the standing of Iceland will turn around, the currency will strengthen,” Central Bank Governor David Oddsson said in a television interview.

He raised the prospect that the government might not pump money into Glitnir after all.

“The state will not inject new capital into the bank unless there is actually a bank,” Oddsson said, referring to a shareholders’ meeting which is slated for Saturday.

Kaupthing said it was talking to authorities in Iceland about being involved in a reorganisation of Glitnir.

The government stunned markets last week when it announced it would buy up to 75 percent in Glitnir, kicking off what has been a tumultuous 10 days for the small island nation.

With asset values around the world plunging, markets fear Iceland could suffer what its prime minister has called a national bankruptcy.

Iceland has rejected a call to use an International Monetary Fund facility to help it tackle its crisis, according to an official from one of the Group of Seven industrial governments.

It adopted sweeping powers over banks via emergency legislation late on Monday that gave the state the ability to dictate banking operations and allow it to push through mergers or even force a bank to declare bankruptcy.

The government swiftly used them to dismiss the board of directors of Landsbanki and put the bank in receivership.

As nerves were stretched, savers were seen lining up outside a Kaupthing office in Stockholm and Britain threatened action over the deposits of more than 50,000 savers with Landsbanki’s Internet bank Icesave, which has frozen its accounts.

“We are taking legal action against the Icelandic authorities to recover the money lost to people who deposited in UK branches of its bank,” UK Prime Minister Gordon Brown told a news conference, as he announced the UK’s own bank bailout.

Writing by Mike Peacock; Editing by Ruth Pitchford