Iceland Seeks Russian Loan to Save Economy

The moves came a day after trading in shares of major banks was suspended, the Icelandic krona lost a quarter of its value against the euro, and the government rushed through emergency legislation giving it new powers to deal with the financial meltdown.

"As declared by the government, all domestic deposits are fully guaranteed," the Financial Supervisory Authority said. "Landsbanki's domestic branches, call centers, cash machines (ATMs) and Internet operations will be open for business as usual."

The Russian loan supports the government's efforts to gain control of an increasingly dire financial situation. Landsbanki is the country's second bank to be nationalized in less than two weeks. Last week, Iceland effectively nationalized the country's third-largest bank, Glitnir Bank hf, taking a 75% stake for €600 million ($811.1 million), while Landsbanki sold the majority of its foreign operations to Icelandic investment bank Straumur-Burdaras hf.

The country's biggest bank, Kaupthing Bank hf, said Tuesday it hadn't been approached by the regulator regarding any intervention in its operations. Kaupthing added that Iceland's central bank has provided it with a €500 million loan to assist operations.

Iceland is paying the price for an economic boom of recent years that saw its newly affluent companies go on an acquisition spree across Europe and its banking sector grow to dwarf the rest of the economy. Bank assets are nine times annual gross domestic product of €14 billion. Investors are now punishing the whole country for the banking sector's heavy exposure to the global credit squeeze -- its currency has gone through the floor, imports have fallen and inflation is soaring.

A person familiar with the situation said that Iceland's central bank will peg its currency to a basket of currencies, which will then give a euro-Icelandic krona exchange rate of 131. Euro/krona exchange rates have been quoted in recent days at around 200, according to unofficial accounts from currency traders, as official trading in the currency has all but broken down with Iceland fighting for financial survival.

Prime Minister Geir H. Haarde warned late Monday that the heavy exposure of the tiny country's banking sector to the global financial turmoil raised the specter of national bankruptcy. "In the perilous situation which exists now on the world's financial markets, providing the banks with a secure life line poses a great risk for the Icelandic nation," Mr. Haarde said in a televised address to the nation. "There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy." (See related article.)

Just hours earlier, Mr. Haarde had said that no special measures were necessary -- but credit lines to banks then seized up on speculation about the solvency of the country's major banks. The new laws gave the Central Bank of Iceland and the Icelandic Financial Supervisory Authority detailed and vast authority to intervene in the control and operation of Icelandic financial institutions, including the ability to take over or create new institutions, call shareholder meetings and limit the authority of boards.

Earlier Monday, the Icelandic Financial Supervisory Authority suspended trading in financial instruments issued by Kaupthing, Landsbanki, Glitnir, Straumur-Burdaras, Exista and Spron. The government also put 100% guarantees on savers' deposits, following in the footsteps of Ireland, Germany, Austria, Greece and Denmark.

Tuesday, Icelandic insurer Exista hf said it was selling its 20% stake in Finnish insurer Sampo Oyj through a bookbuilding process. Exista also holds a 4.7% stake in Norwegian insurer Storebrand as well as a 24.7% stake in Kaupthing. Exista and Kaupthing, in turn, own around 29% in Storebrand directly and indirectly, and analysts say a stake sale in Storebrand could be next. Exista Chairman Lydur Gudmundsson said in a statement that Exista has no plans to sell other assets.

A collapse of the Icelandic financial system could reverberate across Europe, given the heavy investment by Icelandic banks and companies across the continent.

One of the country'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 well-known stores such as the famous toy store Hamley's.