Iceland Seeks Loan From Russia, Pegs Currency (Update1)
By Tasneem Brogger
Oct. 7 (Bloomberg) -- Iceland sought a 4 billion-euro ($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 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 nation's current account gap swelled to the equivalent of 34 percent of gross domestic product in the second quarter, mainly because of the cost of debt payments.
``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.''
About 90 percent 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 nationalization of Glitnir on Sept. 29. It also loaned 500 million euros 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.''
International Monetary Fund 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.''
Currency Peg
The central bank said it pegged the krona against a basket of currencies at a rate equivalent to 130 per euro. According to Nordea Bank AB, the krona traded at 200 to the euro as of 11:39 a.m. in Reykjavik. That's 53 percent weaker than the peg implies.
``I'm deeply surprised -- this peg is not credible at all,'' said Christensen. ``A credible peg needs a credible set of measures to stabilize the economy and we haven't seen that yet.''
The yield on the 7 percent note due March 2010 dropped 50 basis points, or 0.5 of a percentage point, to 8.56 percent, its lowest in at least a year, as investors sold off other assets to seek the security of government-backed notes.
The credit crunch intensified across the world today. In Europe, U.K. lenders held talks with the government on emergency funding, and in Asia, Japan and Australia's central banks pumped more than $11 billion into markets to revive lending. The Reserve Bank of Australia also slashed its benchmark interest rate by a percentage point, twice as much as economists forecast.
`Worst Position'
Iceland's oversized bank industry means it's ``probably in the worst position in the developed world to cope with the ongoing credit crisis,'' Deutsche Bank AB economist Henrik Gullberg said before today's announcements.
The Financial Supervisory Authority said earlier today it had taken control of Landsbanki, a move that reflected the ``risk of default'' at the lender, according to Chamber of Commerce spokesman, Finnur Oddson.
Kaupthing said today it received a 500 million-euro loan from the central bank and that it hasn't been approached by the FSA.
``It seems they'll allow some banks to go bankrupt but that they've chosen Kaupthing to survive,'' Kapadia said.
The seizure in global credit markets is deepening on speculation central bank attempts to revive lending between financial institutions won't work, resulting in more bank failures.
The London interbank offered rate, or Libor, that banks charge each other for such loans rose 157 basis points to 3.94 percent today, the British Bankers' Association said.
To contact the reporters on this story: Tasneem Brogger in Copenhagen at [email protected];
Last Updated: October 7, 2008 10:21 EDT
By Tasneem Brogger
Oct. 7 (Bloomberg) -- Iceland sought a 4 billion-euro ($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 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 nation's current account gap swelled to the equivalent of 34 percent of gross domestic product in the second quarter, mainly because of the cost of debt payments.
``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.''
About 90 percent 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 nationalization of Glitnir on Sept. 29. It also loaned 500 million euros 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.''
International Monetary Fund 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.''
Currency Peg
The central bank said it pegged the krona against a basket of currencies at a rate equivalent to 130 per euro. According to Nordea Bank AB, the krona traded at 200 to the euro as of 11:39 a.m. in Reykjavik. That's 53 percent weaker than the peg implies.
``I'm deeply surprised -- this peg is not credible at all,'' said Christensen. ``A credible peg needs a credible set of measures to stabilize the economy and we haven't seen that yet.''
The yield on the 7 percent note due March 2010 dropped 50 basis points, or 0.5 of a percentage point, to 8.56 percent, its lowest in at least a year, as investors sold off other assets to seek the security of government-backed notes.
The credit crunch intensified across the world today. In Europe, U.K. lenders held talks with the government on emergency funding, and in Asia, Japan and Australia's central banks pumped more than $11 billion into markets to revive lending. The Reserve Bank of Australia also slashed its benchmark interest rate by a percentage point, twice as much as economists forecast.
`Worst Position'
Iceland's oversized bank industry means it's ``probably in the worst position in the developed world to cope with the ongoing credit crisis,'' Deutsche Bank AB economist Henrik Gullberg said before today's announcements.
The Financial Supervisory Authority said earlier today it had taken control of Landsbanki, a move that reflected the ``risk of default'' at the lender, according to Chamber of Commerce spokesman, Finnur Oddson.
Kaupthing said today it received a 500 million-euro loan from the central bank and that it hasn't been approached by the FSA.
``It seems they'll allow some banks to go bankrupt but that they've chosen Kaupthing to survive,'' Kapadia said.
The seizure in global credit markets is deepening on speculation central bank attempts to revive lending between financial institutions won't work, resulting in more bank failures.
The London interbank offered rate, or Libor, that banks charge each other for such loans rose 157 basis points to 3.94 percent today, the British Bankers' Association said.
To contact the reporters on this story: Tasneem Brogger in Copenhagen at [email protected];
Last Updated: October 7, 2008 10:21 EDT
