Iceland acts to guarantee deposits

By Tom Braithwaite in Reykjavik

Published: October 6 2008 11:01 | Last updated: October 7 2008 07:21

Iceland on Monday drew up sweeping powers allowing it to nationalise banks and sack executives as the government said it would not flirt with national bankruptcy by taking on debt to prop up the ailing financial sector.

Geir Haarde, prime minister, said in a national address that the financial regulator would be given authority to dictate a bank’s operations and could force mergers and bankruptcies.

”We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy,” he said. It would not be responsible for the country to take on debt to shore up banks in their current form.

The krona fell as much as 45 per cent against the euro in advance of Mr Haarde’s speech and shares in Iceland’s banks were suspended from trading.

”We’re taking the interests of the population as a whole ahead of the interest of the banks and their shareholders and providing the economy with a functioning payments and liquidity system,” Mr Haarde said.

Bankers at Kaupthing and Landsbanki, the country’s two biggest banks, reacted with shock. ”At the moment we are just trying to evaluate what it all means,” Sigurjon Arnason, joint chief executive of Landsbanki, told the Financial Times. He said he did not know if Landsbanki would be nationalised.

”It’s conceivable that some [banks] will not be able to function without our... intervening,” Mr Haarde said. The government last week took a 75 per cent stake in Glitnir, the third largest bank, in what may be a template for further part-nationalisations.

However, Kaupthing said on Monday night that it had been granted a loan by the central bank – believed to be about €500m – suggesting that it may continue as the only Icelandic bank with significant international operations.

Mr Haarde had approached other world leaders for help – among them Gordon Brown, UK prime minister – to solve a liquidity emergency in Iceland’s banking system, but the global problems meant no feasible proposals were forthcoming.

”In a situation like this it’s turning out that it’s every man for himself, every country for itself... That’s what we’re doing,” he said.

As the currency plummeted, Antje Praefcke, analyst at Commerzbank, said Iceland faced a ”balance of payments crisis”. ”We would also not be surprised to see the Icelandic krona lose its function as a medium of payment,” she said.

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As of Oct 07 2008 17:00 BST. Quotes are delayed by at least 20 minutes.