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Iceland gives up currency defence, seizes 2nd bank

(Agencies)
Updated: 2008-10-09 10:26

STOCKHOLM/REYKJAVIK -- The Icelandic central bank abandoned efforts to defend the country's currency on Wednesday and the government seized control of a second big bank as the global financial storm battered the island's economy.

Iceland's Prime Minister Geir H. Haarde (R) answers questions during a news conference with Minister of Business Affairs Bjorgvin Sigurdsson in Reykjavik October 8, 2008. Iceland's fast-moving financial crisis deepened on Wednesday. [Agencies]

Prime Minister Geir Haarde said Iceland had not asked for help from the International Monetary Fund, which has sent a delegation to Reykjavik on a fact-finding mission.

But he said assistance from the Fund was "definitely an option" and separately said negotiations to secure a 4 billion euro ($5.45 billion) loan from Russia would begin next Tuesday.

"I'd like to underline that we have not, at this point at least, asked the IMF for a standby facility or an economic programme," Haarde told a news conference.

Related readings:  Iceland teeters on the brink of bankruptcy

With two of the island's biggest banks now under state control, the market is focused on top bank Kaupthing to see if it can weather a crisis that threatens Iceland's entire banking system.

Kaupthing was forced to take an emergency loan from Sweden on Wednesday for its Swedish unit, which has been put up for sale. The bank's shares dived in Stockholm by 34 percent before they were suspended.

The Swedish central bank said it would lend the Swedish arm of Kaupthing up to 5 billion Swedish crowns ($702 million).

The Icelandic crown, hammered in recent days, plunged again and the central bank abandoned a two-day attempt to hold it at 131 per euro, what Commerzbank called "the shortest peg in history".

"It has become clear that this rate has insufficient support. The bank will therefore make no further attempts in this regard for the time being," the central bank said.

In late European trade, the crown recovered and was being quoted by Icelandic banks back around 131.60, up 14 percent from the US close. But traders said the market was barely functioning and no real business was being done.

Boom And Bust

Home to just 300,000 people, the North Atlantic island epitomised the global credit boom that went bust 15 months ago. Its banks expanded dramatically overseas, investors took large positions in its high-yielding currency and foreign firms poured money into local projects.

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