REYKJAVIK (AFP) — Iceland on Tuesday nationalised the second of its three largest banks, locked its currency into a fixed exchange system and sought a large loan from Russia to fend off potential national bankruptcy.
"The Icelandic Financial Supervisory Authority (IFSA) has, under powers granted by the Icelandic parliament, proceeded to take control of Landsbanki," Iceland's second-biggest bank, the government agency said in a statement.
The announcement came a day after Prime Minister Geir Haarde unveiled emergency laws to save the country's economy, including allowing the government to take control of all banks and financial institutions, take over assets, merge institutions and force institutions to declare bankruptcy.
"There is a very real danger ... that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy," Haarde said in a televised address.
The nationalisation of Landsbanki came just a week after the government took 75 percent of the country's third-largest bank, Glitnir, and as the biggest bank Kaupthing said it had received a 500-million-euro loan from the central bank "to facilitate operations."
Iceland, long dependent on its fishing industry, is a nation of just 313,000 people whose banks have invested aggressively abroad in recent years, enabling it to experience ballooning prosperity and become one of the world's wealthiest nations.
Soaring growth in Iceland's finance sector, whose assets represent eight times the country's gross domestic product, however made the icy island particularly vulnerable to the current global financial turmoil.
Banks and investment funds are interlinked through cross share dealings so any damage to one side has an automatic knock-on effect on other institutions.
As the country boomed, the economy has overheated, with inflation soaring to 14.5 percent and the central bank increasing its main interest rate sharply to 15.5 percent as a result.
The IFSA on Tuesday stressed that its takeover of Landsbanki was "a necessary first step in achieving the objectives of the Icelandic government and parliament to ensure the continued orderly operation of domestic banking and the safety of domestic deposits.
"Landsbanki's domestic branches, call centres, cash machines and Internet operations will be open for business as usual," it said.
The bank meanwhile insisted it had "not been put into liquidation but is in receivership which gives it a temporary protection from payment of debts and obligations as they fall due.
"The objective ... is to ensure the continued operations of the commercial banking operations of Landsbanki ... in Iceland," the bank said, adding that "a public notice to debtors will not be issued."
The central bank also said Tuesday it was negotiating a loan from Russia of four billion euros (5.4 billion dollars).
"This loan significantly bolsters the foreign exchange reserves of the central bank of Iceland and thus underpins the stability of the exchange rate of the krona," it said.
The central bank also pegged the plunging krona Tuesday to a basket of currencies, weighted to reflect their importance in the country's trading profile, in an attempt to stabilise the unit and peg back inflation.
"The exchange rate of the krona has depreciated sharply in recent weeks and is now lower than is compatible with a balanced economy," the bank said in a statement, adding that the one euro would now buy 131 krona.
Since the beginning of the year, Iceland's currency has plunged 33 percent, losing 12.3 percent since Monday alone.
In yet another move to stabilise the markets, the IFSA said Tuesday it would with immediate effect ban short selling of shares on the Reykjavik stock exchange.
Short selling occurs when investors sell stock they do not yet own in order to profit later from an anticipated fall in prices, something critics say can be used to manipulate share prices.
Trading in nearly all financial shares, including all the major banks, meanwhile remained suspended on the Reykjavik stock exchange Tuesday after a full day of non-trading Monday.
Haarde tried to prepare Icelanders for the worst in his speech Monday, saying the authorities' task in coming days was to "make sure that chaos does not ensue if the Icelandic banks become to some extent non-operational."
He also tried to put the crisis into perspective.
"We need to explain to our children that the world is not on the edge of a precipice and we all need to find an inner courage to look to the future."
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