Meanwhile, Iceland is now negotiating a EUR 4B loan from Russia to help with its balance of payments difficulties. That it is approaching Russia instead of other NATO member countries is suggestive of the depth of its troubles as traditional friends no longer want to help. The FT says Iceland is not necessarily shifting its geopolitical alignment eastwards. Still, some questions:
- Is Iceland embarrassed to become the first developed IMF borrower since the UK in 1976?
- Is Iceland fearful of seeking IMF help after seeing what happened to Asian financial crisis borrowers?
- Is Russia trying to buy regional influence if it loans Iceland?
Iceland sought a 4 billion-euro ($5.43 billion) loan from Russia, pegged the slumping krona to a basket of currencies and took control of its second-biggest bank to stem a collapse of the financial system. Central bank Governor David Oddsson said an announcement earlier today in Reykjavik that the Russian loan had been agreed upon was incorrect and talks were ``ongoing.'' Russian Finance Minister Alexei Kudrin confirmed that ``we have a request from the Icelandic government'' and said Russia's reaction is ``positive...''UPDATE 10/9: Iceland's largest bank, Kaupthing, has been nationalized as well. Thus, all three of the country's banks are now owned by the state.
About 90 percent of the external debt was generated by the three biggest banks, Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf. The government took control of Landsbanki today, following the nationalization of Glitnir on Sept. 29. It also loaned 500 million euros to Kaupthing and guaranteed domestic deposits.
Prime Minister Geir Haarde said at a press conference he was ``disappointed'' that ``we have not received the kind of support we requested from our friends.'' He declined to name countries Iceland may have approached for a loan [cue the NATO countries], adding that the nation ``will absolutely not default on its foreign debt.''
International Monetary Fund spokesman William Murray confirmed that a mission had been sent to Iceland, declining to say how long it has been there or the substance of its discussions. The Washington-based lender sends missions at the request of host countries.
``We are increasingly convinced that the Icelandic authorities cannot resolve the situation without outside help,'' said Lars Christensen, senior currency strategist at Danske Bank A/S in Copenhagen. ``We therefore find it most likely that the crisis will have to be solved with the support of the IMF and perhaps some contribution from the Nordic governments.''
The central bank said it pegged the krona against a basket of currencies at a rate equivalent to 130 per euro. According to Nordea Bank AB, the krona traded at 200 to the euro as of 11:39 a.m. in Reykjavik. That's 53 percent weaker than the peg implies.
``I'm deeply surprised -- this peg is not credible at all,'' said Christensen. ``A credible peg needs a credible set of measures to stabilize the economy and we haven't seen that yet.''