Iceland moves to calm bank fears after krona comes under attack

Published on Saturday 4 October 2008 13:42

ICELANDIC authorities will produce a financial stability plan this week to calm growing anxiety over the country's free-falling currency and its banking sector.

The head of Sedlabanki, the central bank, said the situation was grave but not a cause for despair.

The latest developments arose as Iceland's currency came under fresh attack and nervous investors awaited further news about the island's jittery banking sector.

International market turmoil has worsened Iceland's crisis but at its core lie worries about the nation's banks, which in recent years have taken on massive foreign debts.

Despite repeated assurances to investors that they were able to meet their debt obligations, one of the country's big three banks had to be rescued last week as the government bought up to 75% of Glitnir.

Concern spread to Landsbanki, which had to sell assets, and to Kaupthing, Iceland's biggest bank, which has provided funds for a number of high-profile deals in Britain, including the buyout of Matalan.

It has supported Sir Tom Hunter and advised Mike Ashley on his acquisition of Newcastle United Football Club.

Kaupthing was subject to rumours that it was liquidating positions, causing a fall in the shares of the British brewers Marston's and Greene King amid talk that it wanted to sell two million shares in each.

The Icelandic krona has hit record lows against the euro almost daily but Friday produced a new twist, with offshore trade almost drying up.

Foreign banks were quoting the krona in small amounts at levels some 8% weaker than banks on the island, a sign that they had no desire to part with euros or dollars for a currency that has lost about 15% of its value last week.

Tryggvi Thor Herbertsson, an adviser to Prime Minister Geir Haarde, said the authorities would be working through the weekend on a package to calm the markets.

"What we are working on is how to start the foreign exchange market here in Iceland and secure financial stability," Herbertsson said. "We are not rescuing the banks. The banks are in perfect order."

The plan would come as quickly as possible. "Whether it's Monday, Tuesday or Wednesday I can't say," he said.

Sedlabanki governor David Oddsson was cautious about revealing what authorities would do, saying various solutions were being studied. "We do not want to issue statements on possible action until we have something tangible in our hands," he told state radio.

Oddsson said the central bank had enough reserves to cover the cost of all imports for eight to nine months, a stronger buffer than it had had in the past.

Commerce and banking minister Bjorgvin Sigurdsson said on Thursday night that the government was seeking "a large loan" from abroad to strengthen the krona.

Doubts over the long-term future of Iceland's banking sector grew after the government moved on Monday to take a 75% stake in Glitnir to save it from failure.

BNP Paribas estimated that the ratio of Iceland's guaranteed bank liabilities to its GDP is probably more than 860%, based on 2007 GDP figures.

Credit ratings agencies Fitch and Standard & Poor's have cut their foreign currency ratings on the country.