Sweden, Britain intervene in Iceland bank crisis

[October 08, 2008]  REYKJAVIK, Iceland (AP) -- Iceland's biggest bank received an emergency loan from Sweden on Wednesday, and Britain said it would guarantee deposits in an Icelandic bank's online unit as the financial crisis engulfing this tiny Nordic nation showed no sign of easing.

In recent days, Iceland 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 ($5.47 billion) loan as it scrambled to stop the collapse of its economy.

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 criticized 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 ($702 million).

The Swedish central bank said it believed that Kaupthing was solvent but 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 deposits of British savers with Icesave, the online arm of Landsbanki, the bank nationalized 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 it is likely to file for bankruptcy.

Bolstering the British support, savings bank ING Direct UK said it is buying more than 3 billion pounds ($5.3 billion) of deposits held by around 180,000 British savers with two other Icelandic-owned banks, Kaupthing Edge and Heritable Bank, which is owned by Landsbanki.

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, where it owns a handful of stores such as the famous toy store Hamley's.

Kaupthing has also invested in European retail groups, and racked up debts of more than $5.25 billion in five years to help fund British deals.

The Icelandic government said Tuesday that it had extended its own $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 it hopes will 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 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 percent in half a decade and gross domestic product rose at around 5 percent 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 $100 billion, debts that dwarf Iceland's gross domestic product of $14 billion.

Against this tumultuous backdrop, Haarde vowed 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 $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," he wrote.

[Associated Press; By JANE WARDELL]

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