Iceland joins countries hit by banking crisis

The Icelandic government was today reported to be in crisis talks with the country's central bank over moves to prop up the banking sector.

The talks are understood to centre on a plan to inject up to €10bn into Iceland's banking system from Nordic central banks and Icelandic pension funds, according to the Sunday Telegraph newspaper.

The talks were triggered following a loss of confidence in Icelandic institutions and a steep devaluation of the country's currency.

There have also been concerns about the financial health of Iceland's biggest bank Kaupthing, although it today continued to stress that it remained financially strong.

The Icelandic government is expected to make an announcement about the outcome of the talks before European stock markets open tomorrow.

Any problems in the Icelandic banking system could have serious implications for the UK as the country has provided significant financial backing for businesses and entrepreneurs.

Kaupthing has invested in companies ranging from pubs group Mitchells & Butlers to department store chain Debenhams, while its clients include entrepreneurs such as Robert Tchenguiz and property investors the Candy brothers.

It also works with retail group Baugur, which owns UK stores such as Iceland, Hamleys, Oasis and House of Fraser, although Baugur has stressed that it is unaffected by the current situation in Iceland.

Broking clients at Kaupthing were last week reportedly asked to put up more cash or close their leveraged positions.

But Kaupthing chairman Sigurdur Einarsson today stressed that the bank remained financially sound.

He said: "Over the years we have built a strong and well-diversified bank - Kaupthing has a great franchise.

"We have some of the strongest capital ratios in European bank sector and a good liquidity position and a loan to deposit ratio of around 50%. We've got good asset quality and a highly diversified loan portfolio. In fact, 70% of our business is outside Iceland.

"Kaupthing has and continues to manage its business prudently and, with our strong fundamentals, we are naturally concerned when we hear malicious rumours and sensationalism about Kaupthing being reflected irresponsibly. We ask people to look at the facts, not rumour and innuendo."

Meanwhile, it emerged that credit insurer Euler Hermes had notified Baugur that it was withdrawing cover for its suppliers in the wake of the problems at Iceland's third largest bank Glitnir, which was bailed out by the Government last week.

Trade credit insurance covers businesses against the risk of bad debt due to the insolvency of their buyers.

A Baugur spokesman said: "We are surprised by this decision and believe the action has been taken due a misunderstanding of the impact of economic situation in Iceland.

"We have stated clearly that Baugur's portfolio companies have no exposure to the Icelandic economy, the vast majority are funded by international banks and are performing well in the current market conditions.

"Euler Hermes is not the main supplier of credit insurance to our portfolio companies. Other credit insurance providers remain supportive of Baugur and our portfolio companies. We are currently in discussions with Euler Hermes and remain confident that a solution will be found."