Iceland Guarantees Domestic Deposits, Denies Banks a `Lifeline'
Icelandic Prime Minister Geir Haarde guaranteed domestic bank deposits and gave regulators the power to take over bank assets and obtain funds from lenders that may become “inoperable.''
“It is every country for itself,'' Haarde told a press conference in Reykjavik late yesterday. “We want to save what can be saved.''
His government aims to ensure that deposits at Kaupthing Bank hf and Landsbanki Island hf are protected from bank debts that have spiraled to about 12 times the size of the island's economy. The Atlantic island's currency, the krona, has plunged 31 percent against the dollar in the past 30 days on concern the global credit crisis would cripple the banks and bankrupt the country.
“It is too risky for the Icelandic nation as a whole to secure a lifeline for the banks,'' Haarde said in a television address. “The danger is real that the Icelandic economy would be sucked, along with banks, under the waves and the nation would become bankrupt.''
A bill presented to parliament authorizes the financial supervisory authority to take control of commercial banks' assets and appoint boards, Haarde said. It also allows the state-backed Housing Financing Fund to take over banks' mortgage operations.
“I would like to defuse all doubts that deposits by Icelanders and private pension savings in all Icelandic banks are not secure,'' Haarde said in a television address. “No-one need be in any doubt about that.'' He didn't mention deposits held at Icelandic banks' foreign subsidiaries.
Shareholders Suffer
“The interests of the nation are greater than the interests of the individual banks,'' Haarde said. “We in the government are only acting with the interests of the nation in mind, even if it means that harsh measures have to be taken against those with a vested interest. When a situation like this comes up the shareholders suffer damage, in this situation it is to be expected that some lenders' claims will not be met.''
In an early version of the bill obtained by local radio, the government said it would lend money to Kaupthing, using the company's Danish corporate banking unit, FIH Erhvervsbank A/S, as collateral for the loan (fast cash loan). That clause was not included in the bill presented to parliament.
“It is not correct that the government will take over FIH,'' as was originally reported, said Jonas Sigurgeirsson, a spokesman for Kaupthing, indicating the loan would go ahead. “Collateral is one thing, taking over is another.''
Tailspin
The liquidity crisis has sent Iceland's currency into a tailspin as a shortage of credit batters economies reliant on debt. Iceland had a current account deficit equal to 34 percent of gross domestic product in the second quarter, according to combined central bank and statistics office data, with most of the shortfall coming from the cost of sustaining foreign debt payments.
On Oct. 5, Haarde said Kaupthing and Landsbanki, Iceland's biggest banks, and the country's pension funds would sell overseas assets and repatriate the proceeds in a bid to bolster the krona and alleviate the credit crunch.
Today, though, that proposal had faded.
“It looked like the banks could manage,'' Haarde said. “This situation deteriorated rapidly today as credit lines closed. If Icelandic banks become inoperable to some extent, it is of great importance to remain calm and composed.''
Iceland's three biggest banks had total assets worth 14.4 trillion kronur ($126 billion) at the end of June, more than nine times the size of the economy. The government last week took a 75 percent stake in Glitnir Bank hf after the third-biggest lender failed to secure funding.
Kaupthing's foreign assets make up about 90 percent of its holdings, while the central bank's foreign reserves were 308 billion kronur in August, making any bailout hard to finance. The bank owns FIH Erhvervsbank and Singer & Friedlander Group in the U.K.
Filed under: business by Forest