Iceland shares suspended, biggest bank taken over
Yahoo News/Reuters
By Brett Young
October 9, 2008

REYKJAVIK (Reuters) - Iceland seized control of its biggest bank, Kaupthing (KAUP.IC), on Thursday to try to shore up its banking system and halted all trade on its stock market.

The state has now taken over three of the nation's major banks after Landsbanki (LAIS.IC) and Glitnir (GLB.IC) were put under state control earlier this week.

The stock exchange suspended trading in all shares, citing unusual market conditions. The exchange, part of the Nasdaq OMX Group (NDAQ.O), said trade would not resume until Monday.

At the center of a financial hurricane which has claimed several of the world's biggest banks, Iceland's prime minister has warned of the risk of national bankruptcy.

Home to just 300,000 people, Iceland epitomized 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.

The central bank has tried then abandoned attempts to prop up its battered currency and it is seeking an emergency loan from Russia.

Iceland's Financial Supervisory Authority (FME) said Kaupthing's domestic deposits were fully guaranteed and that all its domestic branches, call centers, 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," the authority said.

Adding to a string of asset sales by Icelandic firms scrambling to raise funds, Norwegian mutual insurance company Gjensidige Forsikring BA agreed to buy Icelandic investment firm Exista's (EXISTA.IC) 8.7 percent stake in Norwegian insurer Storebrand (STB.OL) for an undisclosed sum.

IMF OPTION

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 in Reykjavik were generally 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."

Prime Minister Geir Haarde said Iceland was probably paying the price for punching above its weight.

"What we have learned from this whole exercise over the last few years is that it is not wise for a small country to try to take a leading role in international banking," he said in a joint interview with news agencies late on Wednesday.

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

Haarde said he had not asked for help from the International Monetary Fund, which has sent a delegation to Reykjavik. But he said assistance from the Fund was "definitely an option." Separate negotiations to secure a 4 billion euro ($5.45 billion) loan from Russia would begin next Tuesday.

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 UK operations into administration. That put Kaupthing in technical default according to loan agreements.

"It did not matter that the parent company had sufficient liquidity and its position was solid," Kaupthing said in a statement.

(Writing by Mike Peacock; editing by Keith Weir)

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