Iceland's biggest bank received an emergency loan from Sweden today 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 ($5.4 billion) as the country's financial system has been plunged into chaos.
Iceland's financial regulator, which has been granted sweeping powers to dictate banking operations in the country, moved to shore up the battered sector by taking over the operations of Glitnir.
Iceland's government was due to send a delegation to Moscow to negotiate terms of a €4 billion 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 had already left for Russia today.
The Swedish central bank 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 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.
The Riksbank said it was acting to safeguard Sweden's financial stability - an indication of how interconnected a small country such as Iceland has become - and ensure the smooth functioning of financial markets.
Riksbank Governor Stefan Ingves told a news conference that the central bank and Swedish financial regulator both believed Kaupthing in Sweden and in Iceland were solvent.
The head of Iceland's central bank said late last night the country would emerge in strong shape but he also raised the possibility that the once third-largest bank Glitnir 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 to 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.
Kaupthing said on Wednesday it was talking to authorities in Iceland about being involved in a reorganisation of Glitnir. The government stunned markets last week when it announced it would buy up to 75 per cent in Glitnir, kicking off what has been a tumultuous 10 days for the small island-nation.
Reuters