REYKJAVIK (Iceland) - ICELAND'S biggest bank got an emergency loan from Sweden and Britain said it would guarantee deposits in an online unit of another of its banks as the financial crisis engulfing the tiny Nordic nation showed no sign of easing up.
In recent days, Iceland's government has taken over the country's second-biggest bank, fixed the exchange rate of its plummeting currency, and asked Russia for a 4 billion euro (S$8 billion) loan as it scrambles to stop the collapse of its economy.
Icelandic state nationalises third largest bank
REYKJAVIK - THE Icelandic state has officially taken control of the country's third largest bank, Glitnir, the Financial Supervisory Authority (IFSA) said on Wednesday.
The IFSA 'has under powers granted by the Icelandic parliament proceeded to take control of Glitnir', it said in a statement, a day after announcing that it had also nationalised Iceland's second largest bank, Landsbanki.
It has also introduced emergency laws that give the government sweeping new powers to take over companies, limit the authority of boards, and call shareholder meetings.
A day after Prime Minister Geir H. Haarde publicly criticised the lack of assistance Iceland has received from Europe, Sweden said it would grant liquidity assistance to the Swedish arm of Icelandic bank Kaupthing with a loan of up to 5 billion crowns (S$1.03 billion).
The central bank said that it believed that Kaupthing was solvent, but was suffering temporary liquidity problems that could have wider repercussions.
'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,' it said in a statement.
In Britain, Treasury chief Alistair Darling said the government would guarantee deposits of British savers with Icesave, the online arm of Landsbanki, the bank nationalised by the Icelandic government on Tuesday.
Icesave had stopped customers, including thousands in Britain, from withdrawing money from their accounts and British regulators have said that it is likely to file for bankruptcy.
The intervention of the British and Swedish authorities underscores the effect that a full-blown collapse of Iceland's financial system would have on the rest of Europe, given the heavy investment by Icelandic banks and companies across the continent.
One of Iceland's biggest companies, retailing investment group Baugur, owns or has stakes in dozens of major European retailers - including enough to make it the largest private company in Britain.
Kaupthing has also invested in European retail groups, and racked up debts of more than US$5.25 billion racked up by Kaupthing in five years to help fund British deals.
The Icelandic government said on Tuesday that it had extended its own US$680 million loan to Kaupthing to tide it over.
The government is also due to send a delegation to Moscow this week to negotiate the terms of a loan that it hopes with bolster its depleted foreign exchange reserves.
After watching the currency free-fall for several days, the Central Bank of Iceland stepped in Tuesday to fix the exchange rate of the krona at 175 - a level equal to 131 krona against the euro.
The speed of Iceland's downfall in the week since it announced it was nationalizing Glitnir bank, the country's third largest, caught many by surprise despite warnings that it was the 'canary in the coal mine' of the global credit squeeze.
With the deregulation of its financial market in the mid-1990s and subsequent stock market boom, Iceland had transformed itself from the poor cousin in Europe to one of the region's wealthiest countries.
Icelandic banks and companies made acquisitions across Europe, including the iconic Hamley's toy store and the West Ham soccer team.
Back home, the average family's wealth soared 45 per cent in half a decade and gross domestic product rose at around 5 per cent a year.
But the new wealth was built on a shaky foundation of foreign debt - the country's top four banks now hold foreign liabilities in excess of US$100 billion, debts that dwarf Iceland's gross domestic product of US$14 billion.
Against this tumultuous backdrop, Mr Haarde vowed on Tuesday that ordinary Icelanders would not pay the price for this spending spree and that his country will not default on its debt.
'Iceland has never defaulted on sovereign debt and won't,' he said.
Some analysts, however, are not convinced by measures such as the fixing of the exchange rate.
'Given the fact that the Icelandic FX (foreign-exchange) reserve is less than US$3 billion, the peg does not look very credible, and we do not expect it to be maintained,' said Lars Christensen, chief analyst at Danske Bank, in a research report. 'To maintain a credible FX peg, the government would have to put forward a credible stabilization package, and there is still no news of such a package.' -- AP
