Russian loan to bolster Iceland's economy

Russia today pledged a €4bn loan to bolster Iceland’s foreign exchange reserves.

Iceland’s government is trying to wrest control of an increasingly dire economic situation and restore some confidence in the country’s hard-hit banking sector.

The move comes a day after trading in shares of major banks was suspended. The Icelandic krona fell a quarter against the euro.

The central banks says the maturity of the loan from Russia is three to four years. The bank says discussions about the loan had begun some months ago.

It said the money would significantly bolster its foreign exchange reserves and would support its falling currency.

The Central Bank of Iceland then moved to fix the exchange rate of the krona, to try to stabilise the domestic economy.

The central bank’s decision follows huge falls in the value of the Icelandic currency amid a financial meltdown in the tiny Nordic country.

It said the krona exchange rate for interbanking business will be fixed at 175 - a level equal to 131 krona against the euro.

The exchange rate index had jumped around 25% earlier today to 257.8.

News of Russian financial help came hours after Iceland’s government took control of the Landsbanki bank.

“As declared by the government, all domestic deposits are fully guaranteed. Landsbanki’s domestic branches, call centres, cash machines (ATMs) and internet operations will be open for business as usual,” the Financial Supervisory Authority said in a statement.

The government has introduced emergency legislation giving it sweeping new powers over the collapsing financial sector.

Prime Minister Geir Haarde warned late last night that the heavy exposure of the tiny country’s banking sector to the global financial turmoil was raising the spectre of “national bankruptcy”.

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 €13.9bn.

“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.”

Earlier yesterday, the Icelandic Financial Supervisory Authority suspended trading in financial instruments issued by Kaupthing, Landsbanki, Glitnir, Straumur-Burdaras, Exista and Spron, saying that “uncertainties regarding the issuers are likely to disrupt normal price formation, and as such, any trading could be detrimental for investors”.

The government also put 100% guarantees on savers’ deposits, following in the footsteps of Ireland, Germany, Austria, Greece and Denmark.