October 9, 2008 / 5:13 PM / 10 years ago

Iceland takes over biggest bank

REYKJAVIK (Reuters) - Iceland seized control of its biggest bank on Thursday and halted all trade on its stock market as the prime minister urged people to remain calm in the face of a financial meltdown.

Iceland's Prime Minister Geir Haarde answers questions from foreign journalists during a news conference in Reykjavik October 8, 2008. REUTERS/Bob Strong

By taking hold of Kaupthing, the government of the north Atlantic island has now grabbed three of its biggest banks this week with Landsbanki and Glitnir also put in state hands.

As the crisis deepened, the stock exchange suspended trading in all shares and said business would not resume until Monday.

Prime Minister Geir Haarde told a news conference the country had not decided on whether to seek help from the International Monetary Fund (IMF).

Negotiations to secure a 4 billion euro (3.17 billion pounds) loan from Russia will begin next Tuesday. Use of swap lines set up with Nordic central banks was a last resort, Haarde said.

He urged savers not to withdraw large sums of money from banks, saying it would make the situation more difficult.

“I want to emphasise...that people remain calm and understand that the transaction system is fully functioning and deposits are safe,” he said.

The prime minister said he had spoken to British finance minister Alistair Darling, who had assured him that transactions between the two countries would return to normal.

British investors were keen clients of Icelandic banks before the storm hit and Iceland was outraged when Britain used an anti-terrorism law to freeze assets in Landsbanki.

Home to just 300,000 people, Iceland epitomised the global credit boom that turned to bust. Its banks expanded dramatically overseas, investors took large positions in its high-yielding currency and foreign money poured into local projects.

Ordinary Icelanders were coming to grips with the fact that the once-gleaming economy that had given them a comfortable lifestyle had virtually imploded in a matter of days

“You hear people all over saying ‘we have to change our way of life’. Now they will have to go to their mother’s kitchen to learn a fish recipe,” said pastor Birgir Asgeirsson of Reykjavik’s Hallgrimur’s Church.

“I can feel much anxiety in the people I talk to because they don’t know what’s next,” he said.

The Financial Supervisory Authority said Kaupthing’s domestic deposits were guaranteed and that all its domestic branches, call centres, cash machines and Internet operations would be open for business as usual.

“The action taken by the FME is 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,” it said.

Haarde clarified at the news conference that although the state has taken control of the banks, it has not assumed responsibility for their assets and obligations.

PAYING THE PRICE

Iceland adopted sweeping powers late on Monday that gave the state the ability to dictate banking operations and allow it to push through mergers or even force a bank to declare bankruptcy.

The government swiftly used them to dismiss the board of directors of Landsbanki and put it into receivership. Glitnir, and now Kaupthing, rapidly followed into the state’s clutches.

Employees going into Kaupthing’s main offices were tight-lipped but one said: “We’ve been told that we should work like it’s business as usual. We’ve got to keep our heads up high.”

Kaupthing said its board had resigned and that it had requested the authorities take control.

In a demonstration of how fast Iceland’s crisis is moving, Kaupthing said that as late as September 26, directors believed it was performing well and third quarter results would be good.

The final straw came when Britain transferred control of the business of Kaupthing Edge, its Internet bank, to ING Direct and put Kaupthing’s British operations into administration.

The crisis also hit several British local authorities who had deposits with the failed banks. They include Transport for London, which runs the capitals’ buses and underground trains and has 40 million pounds ($69 million) in Kaupthing.

Finland’s financial watchdog said it would investigate whether it can guarantee deposits made by clients in Kaupthing’s Finnish branch. That unit, with 10,500 Finnish customers, had total deposits of 111 million euros ($152.3 million), including from retail clients and municipalities, it said.

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In London, retailer Baugur, which from its origins in Iceland has built a British empire spanning toy shop Hamleys and department store group House of Fraser, said its operations would be unaffected by the banking crisis.

Its companies’ loans with Icelandic and other banks could only be changed in accordance with their original terms, it said in a statement. It did not expect any immediate change in its investments in listed companies which include British fashion chains Moss Bros and French Connection.

Iceland’s banking assets amounted to about nine times its gross domestic product and its current account deficit billowed to 16 percent of GDP last year.

Additional reporting by Omar Valdimarsson, Agnieszka Flak and Mark Potter; writing by Angus MacSwan

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