Iceland's government seized control of Kaupthing Bank hf, the nation's biggest bank, completing the takeover of a financial industry that collapsed under the weight of foreign debt.
Iceland is guaranteeing Kaupthing's domestic deposits and taking control of banks in an attempt to provide a ``functioning domestic banking system,'' the country's Financial Supervisory Authority said in a statement on its Web site today.
The banks are unable to finance about $61 billion of debt, 12 times the size of the economy, according to data compiled by Bloomberg. The collapses have affected 420,000 British and Dutch customers, and frozen assets held by universities, hospitals, councils and even London's police force. The government is seeking a loan from Russia and may ask for aid from the International Monetary Fund to help guarantee deposits.
``This looks like a total collapse,'' said Thomas Haugaard Jensen, an economist at Svenska Handelsbanken AB in Copenhagen. ``It'll take several years before the economy can start to return to growth.''
Trading in the krona ground to a halt today after the central bank yesterday ditched an attempt to fix the exchange rate at 131 krona to the euro. Nordea Bank AB, the biggest Scandinavian lender, said the krona hadn't been traded on the spot market today, while the last quoted price was 340 per euro, compared with 122 a month ago.
Banking Boom
The collapse of Kaupthing was an ``immense disappointment,'' said the minister for banking affairs, Bjorgvin Sigurdsson, adding that the position of the bank until recently had been ``strong.'' He said the failure of the bank was due to a run on Iceland and Icelandic businesses in the U.K.
Assets at Iceland's three biggest banks, Glitnir Bank hf, Landsbanki Island hf and Kaupthing, had grown five-fold since 2004 as the companies looked to expand beyond the confines of an island with a population of 320,000, half that of the city of Las Vegas. Much of that expansion was debt financed.
The cost of borrowing in dollars for three months in London soared to the highest level this year today as coordinated interest-rate reductions worldwide failed to revive lending among banks for any longer than a day, partly on concern over who holds Icelandic debt.
U.K. taxpayers will probably face a bill of at least 2.4 billion pounds ($4.1 billion) to compensate about 300,000 U.K. holders of accounts at Icesave, a unit of Landsbanki, the Financial Times reported, citing unidentified U.K. officials.
`Severe Recession'
All trading in Iceland's equity markets is suspended until Oct. 13 due to ``unusual market conditions,'' the country's exchange said today.
``The economy may well contract more than 10 percent between now and the end of this crisis,'' said Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. ``Inflation will jump to at least 50 percent to 75 percent in the coming months.''
To avert the collapse, Iceland will start talks with Russia on Tuesday to secure a loan of as much as 4 billion euros ($5.48 billion), Prime Minister Geir Haarde said late yesterday. He added that loans from the IMF and Russia ``are not mutually exclusive,'' though the government hadn't, ``at this point at least,'' asked the IMF for a standby loan or an economic program.
Fitch Ratings Ltd. cut Iceland's long-term foreign currency issuer default rating to BBB- from A-. The rating remains on negative watch, Fitch said.
``Iceland faces a very severe recession which will result in a further deterioration in banks' domestic assets,'' Fitch said in a statement. ``It remains uncertain as to the extent that the sovereign can distance itself from the foreign liabilities of failing Icelandic banks.''
Kaupthing's entire board of directors has resigned and the FSA has appointed a committee to wind up the lender's business, the bank said in a statement today.
No Parallel
``It's difficult to find any parallels to what's happening in Iceland in the industrialized world,'' Jensen said. ``You'd have to look to emerging markets, and after the Asian crisis, for example, those economies contracted about 10 percent.''
The debts of the Icelandic banking system are too big for the government to repay.
``There is no way that the Icelandic population can assume responsibility for the private debt'' that the banks have built up, Haarde said yesterday.
Other countries are in a better situation. The U.K.'s banks will get a 50 billion-pound ($87 billion) government lifeline and emergency loans from the central bank after the freeze in credit markets threatened to bring down the financial system.
The Federal Reserve, the European Central Bank and four other central banks lowered interest rates yesterday in a coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.
This year and next, Kaupthing has 5 billion euros of debt obligations maturing, according to Bloomberg data. Glitnir's debt obligations over the same period are about 4 billion euros and Landsbanki has about 2 billion euros to finance.
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