Iceland adopts sweeping bank powers to stem crisis

By Omar Valdimarsson

REYKJAVIK (Reuters) - Threatened with national bankruptcy, Iceland agreed to adopt sweeping powers over banks on Monday as its financial system tottered, its currency plunged 30 percent and a leading agency cut its credit ratings.

The ruling alliance and opposition parties united on a bill that gave the state the ability to intervene at will in the country's battered banks. Parliament passed the bill and its provisions took effect immediately.

"We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy," said Prime Minister Geir Haarde.

In an address to the nation, he said Iceland's top financial regulator would have wide-ranging authority to dictate a bank's operations and could even force it to merge with another firm or declare bankruptcy.

Standard and Poor's agency downgraded Iceland's credit rating by two notches to "BBB" from "A-," saying the authorities' actions would help to limit the risks to the budget but would also cut banks' access to international markets, causing the economy to contract much more sharply than foreseen.

"This economic contraction, combined with the depreciation of the krona, will hurt the asset quality of the banks, depress the fiscal revenues of the state and markedly alter what had been low government debt levels," it said.

Iceland is an island in the middle of the North Atlantic, home to just 300,000 people. But it has found itself on the fault line of the global financial crisis.

The country's financial stature had swelled in recent years as its banks expanded overseas, investors took large positions in its high-yielding currency and foreign firms poured money into local projects.