Iceland seeks loan from Russia

Iceland sought a ¤4 billion ($5.43 billion) loan from Russia, pegged the slumping krona to a basket of currencies and took control of its second-biggest bank to stem a collapse of the financial system.

Central bank Governor David Oddsson said an announcement earlier today in Reykjavik that the Russian loan had been agreed upon was incorrect and talks were “ongoing”. Russian Finance Minister Alexei Kudrin confirmed that “we have a request from the Icelandic government” and said Russia's reaction is “positive”.

The global credit crunch has crippled Iceland’s biggest banks, which have racked up foreign debts equivalent to as much as 12 times the size of the economy. The disintegration of the country's banking system compounds investor gloom worldwide following the collapse of firms ranging from Lehman Brothers Inc to Germany’s Hypo Real Estate Holding AG.

 

“The commercial bank model there has failed,” said Sunil Kapadia, an economist at UBS Ltd in London. “For such a leveraged economy as Iceland, it was clear this was going to happen, but the pace has been surprising.”

Iceland’s current account gap swelled to the equivalent of 34 per cent of gross domestic product in the second quarter, mainly because of the cost of debt payments.

About 90 per cent of the external debt was generated by the three biggest banks, Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf. The government took control of Landsbanki today, following the nationalisation of Glitnir on September 29. It also loaned ¤500 million to Kaupthing and guaranteed domestic deposits.

‘Disappointed’: Prime Minister Geir Haarde said at a press conference he was “disappointed” that “we have not received the kind of support we requested from our friends”. He declined to name countries Iceland may have approached for a loan, adding that the nation “will absolutely not default on its foreign debt.”

IMF spokesman William Murray confirmed that a mission had been sent to Iceland, declining to say how long it has been there or the substance of its discussions.

The Washington-based lender sends missions at the request of host countries.

“We are increasingly convinced that the Icelandic authorities cannot resolve the situation without outside help,” said Lars Christensen, senior currency strategist at Danske Bank A/S in Copenhagen. “We therefore find it most likely that the crisis will have to be solved with the support of the IMF and perhaps some contribution from the Nordic governments.”