Iceland reaches out to Russia as banks collapse

by Gill Montia

Story link: Iceland reaches out to Russia as banks collapse

Having today nationalised its second-largest bank, the government of Iceland has turned to Russia to negotiate a €4 billion loan to halt a fast-moving collapse of the country’s finance sector.

According to press reports, Iceland’s Russian ambassador has informed the country’s central bank that Russian Prime Minister, Vladimir Putin, has confirmed the bail out.

However, Russia’s deputy finance minister, Dmitry Pankin, is reported as saying that no decision on the loan has yet been made.

Following the suspension of trading in banking shares in Reykjavik yesterday, Landsbanki was today formally taken into state ownership under emergency legislation.

At the same time, Kaupthing, Iceland’s second largest lender received an injection of cash in the form of a government loan.

Landsbanki has since been placed in administration leaving around 300,000 UK-based savers with its online deposits business, Icesave, unable to withdraw their cash, although a 100% government guarantee does exists for savers’ deposits.

Late last week, the Icelandic government rescued Glitnir, the country’s third-largest bank, acquiring a 75% stake in the business for €600 million, and yesterday, Prime Minister Geir Haarde spoke of the prospect of national bankruptcy, as the krona plummeted against the euro.

The fierce pace of growth in Iceland’s financial sector has left it extremely vulnerable in the credit crisis.

Recent events have precipitated a failure on a Titanic scale for a country with a population of just over 300,000.

Hopefully any analogy with other events in frozen waters ends here.