October 8, 2008 / 7:07 AM / 10 years ago

Crisis-hit Iceland's top bank gets help from Sweden

STOCKHOLM/REYKJAVIK, Oct 7 (Reuters) - Iceland’s biggest bank received an emergency loan from Sweden on Wednesday as the country’s financial crisis showed no sign of abating.

Iceland has been forced to prop up its ailing currency, take over the country’s second-biggest bank and ask Russia for a loan of 4 billion euros ($5.4 billion) as the country’s financial system has been plunged into chaos.

Iceland’s government was due to send a delegation to Moscow to negotiate terms of a 4 billion euro 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. It was unclear whether Icelandic officials by Wednesday had already left for Russia.

The Swedish central bank said it would grant liquidity assistance to the Swedish arm of Icelandic bank Kaupthing KAUP.IC with a loan of up to 5 billion crowns ($702 million). The central bank said it had judged the unit, Kaupthing Bank Sverige, was solvent, but conditions in the Icelandic banking industry made it difficult for it to meet its payment obligations.

“In the situation that has arisen there is an imminent risk that the bank may suffer liquidity problems,” the central bank said in a statement.

“To safeguard financial stability in Sweden and ensure the smooth functioning of the financial markets, the Riksbank has therefore decided to grant liquidity assistance to Kaupthing Sverige.”

Late on Tuesday, the head of Iceland’s central bank said the country would emerge in strong shape but he also raised the possibility that the once third-largest bank Glitnir GLB.IC 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.

But with asset values around the world plunging, markets remain worried that Iceland could suffer what its prime minister has called a national bankruptcy.

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

EYES ON KAUPTHING

Kaupthing said on Wednesday it was talking to authorities in Iceland about being involved in a reoganisation 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.

Home to just 300,000 people, Iceland has become a focal point in the global markets crisis as its entire banking system teeeters.

Oddsson late on Tuesday raised the prospect that the goverment 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.

Iceland adopted sweeping powers over banks late on Monday as its financial system tottered and its currency plunged.

The ruling alliance and opposition parties united to pass 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. (Writing by Adam Cox; Editing by Greg Mahlich)

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