Meltdown escalates in Iceland

Meltdown escalates in Iceland
Government seizes control of 3 banks.

Published Thursday, October 9, 2008

REYKJAVIK, Iceland (AP) - Iceland suspended trading on its stock exchange for two days and took control of the country’s largest bank - the third to be placed under its protective umbrella - today as it grappled with a banking crisis that is threatening to engulf the globe.

The Nordic nation’s government also used sweeping new emergency powers to create a new bank that will take over the bulk of the domestic operations of another one of its collapsed banks.

The country is struggling to get a grip on the collapse of its top-heavy banking system, a situation that Prime Minister Geir Haarde has warned is putting Iceland at risk of "national bankruptcy."

Government officials announced that President Olafur Ragnar Grimsson was hospitalized Monday and Tuesday after undergoing coronary angioplasty and coronary dilation. Grimsson has been advised not to return to work for a few days.

A stock market boom in the mid-1990s supported the rapid growth of Iceland’s banking sector, which came to dwarf the rest of the economy and provided financing for deals that ranged across Europe and conquered swaths of the British economy, from fashion retailers to top soccer teams..

The strategy gave Iceland one of the world’s highest per-capita incomes, but when liquidity markets dried up around the world, the banks struggled to refinance those heavy debts.

Now Icelanders are watching helplessly as their economy implodes, causing ripples throughout Europe, where tens of thousands of people have accounts with subsidiaries of the Icelandic banks.

Haarde said yesterday that the banking sector had "become too big" as he acknowledged that it will take the tiny Nordic nation of just 320,000 people several years to recover from the current crisis.

The OMX Nordic Exchange Iceland said that equity trading would remain halted until Monday because of "unusual market conditions."

The government’s decision to take control of Kaupthing, the country’s leading bank, which has assets and debts across the continent, means that the Financial Services Authority now has control of all three of the country’s major banks. The other two, Landsbanki and Glitnir, are in receivership.

The authority said the action was necessary to ensure the "continued orderly operation of domestic banking and the safety of domestic deposits."

It also used emergency powers, rushed in by parliament earlier this week, to hive off most of the domestic assets of Landsbanki into a separate entity to be called "New Landsbanki" that is fully owned by the government.

"The decision means that the new bank takes over all the bank’s deposits in Iceland, and also the bulk of the banks assets that relate to its Icelandic operations, such as loans and other claims," it said in a statement.

"The decision ensures continued banking operations for Icelandic families and businesses," it added.

In an attempt to curb any panic, the regulator stressed that both Kaupthing and Landsbanki were open for business as usual today and that all domestic deposits of the bank were guaranteed under Icelandic law. However, the move leaves the international operations of Landsbanki, which have already caused a diplomatic spat with Britain, open to question.

British Prime Minister Gordon Brown has threatened to sue Iceland to recover the lost deposits of some 300,000 Britons who hold accounts with IceSave, the online arm of Landsbanki.

With local governments also holding accounts worth tens of millions of pounds in Icelandic banks, the British government has also used powers under terrorism laws to freeze Landsbanki’s assets until the status of the deposits is resolved.

Haarde said yesterday that discussions between the two countries had begun between the two countries to find a "mutually satisfactory solution."

Glitnir, the country’s third-largest bank, said today that it had received liquidity support from the Norwegian Banks’ Guarantee Fund of $820,000 for its Norwegian unit. It added that the sale of the unit had begun.