ICELAND CRISIS:ICELAND WAS scrambling to help its banks secure access to foreign currency yesterday as investor nervousness drove the krona to new lows.
International confidence in the country's highly leveraged banking system plunged after the government nationalised Glitnir, the third-largest bank, on Monday after it ran into liquidity problems.
Rating agencies have downgraded Iceland and the three biggest banks. The cost of insuring the bonds of the top two, Kaupthing and Landsbanki, against default has soared to new records of 2,950 basis points and 3,625bp respectively.
The krona has fallen 13 per cent this week amid fears the state might have to bail out one of the other big banks.
This would strain its finances, given that the combined assets of the three big banks is nine times Iceland's gross domestic product. Bjorgvin Sigurdsson, the commerce and banking minister, said the government was considering seeking "a large loan" from abroad to shore up the krona.
Tryggvi Herbertsson, a special adviser to the prime minister, said that measures to "restart" the foreign exchange market would be drawn up over the weekend.
"What is needed is foreign exchange liquidity," he said, adding that "there's no reason to believe there's any immediate danger but we're worried especially about how the foreign exchange market behaves".
According to Iceland's central bank, the krona stood at IKr156.18 to the euro yesterday.
However, offshore traders said it had dropped to IKr170, down more than 23 per cent on the week.
- (Financial Times service)
