Iceland May Ask for IMF Loan as Well as Borrowing From Russia

By Tasneem Brogger and Helga Kristin Einarsdottir

Oct. 9 (Bloomberg) -- Iceland may ask for a loan from the International Monetary Fund in addition to opening formal talks on Oct. 14 to borrow as much as 4 billion euros ($5.49 billion) from Russia, Prime Minister Geir Haarde suggested.

Loans from the IMF and Russia ``are not mutually exclusive,'' Haarde said at a press conference in Reykjavik late yesterday. Iceland has ``discussed several things'' with the IMF, he said, ``but we have not, at this point at least, asked the IMF for a standby facility or an economic program.''

Iceland's banking system is buckling under the weight of debts equal to 12 times the size of the economy, with financial regulators now in charge of the second and third largest lenders, Glitnir Bank hf and Landsbanki Islands hf. As the crisis mounts, the central bank yesterday gave up an attempt to fix the exchange rate, indicating it is powerless to halt the slump in the krona.

Iceland may ask for money from the IMF after failing to get ``the response that we felt that we should be able to get'' from European governments and central banks, Haarde said.

The central bank ditched a currency peg equivalent to 131 krona per euro after failing to convince investors it could maintain it. Earlier, the government said it canceled the purchase of a 75 percent stake in Glitnir and handed the lender over to regulators, saying it was in bigger trouble than previously estimated.

`Need Help'

``They need to come up with a long-term solution to stabilize their economy,'' said Lars Christensen, a senior strategist at Danske Bank A/S in Copenhagen. ``This isn't something they can do on their own, they need outside help and frankly I can only see them achieving this with the help of the IMF.''

IMF spokesman William Murray confirmed a mission had been sent to Iceland, declining to say how long it has been there or what it was discussing. The Washington-based lender sends missions at the request of host countries.

The central bank had tried to fix the trade-weighted krona index at 175, corresponding to 131 against the euro. Nordea Bank AB, the biggest Scandinavian lender, said the price suggested by bid/ask spreads in pre-market trading was 255 per euro, 49 percent below the rate targeted by the bank.

The failure to fix the currency ``is hardly surprising,'' Christensen said.

The Financial Supervisory Authority took over Glitnir after the government realized that the ``difficulties of the bank were much greater'' than previously estimated, central bank Governor David Oddsson told television broadcaster RUV late yesterday.

No Way

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'' the banks have built up, Haarde said.

Other countries are in a better position. U.K. 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. All five cut benchmark rates by 0.5 percentage point.

Iceland's government on Oct. 6 announced a bill to protect domestic bank deposits as the credit crisis strangled banks' access to funding.

Moody's Investors Service yesterday cut its rating to A1 from Aa1, adding the ratings remained under review.

`Filter Through'

``The attempt of the authorities to effectively `ring-fence' public finances from the fallout of the banking crisis may only provide some needed short-term respite,'' Moody's Vice President Kenneth Orchard said in the statement. ``Some of the banks' external liabilities will eventually filter through to the government's balance sheet.''

Glitnir is temporarily protected from its debt obligations, the bank said in a statement on its Web site yesterday.

Kaupthing Bank hf, Iceland's largest bank, said it's in talks regarding its ``involvement in the reorganization of Glitnir,'' according to a statement. ``Further talks will be held over the next several days,'' the bank said.

U.K. Prime Minister Gordon Brown said yesterday the U.K. will sue Iceland over deposits belonging to 300,000 U.K. account holders with Landsbanki's Icesave Internet banking unit.

Landsbanki's Dutch Icesave unit ``can no longer meet obligations,'' according to a statement on its Web site. The unit canceled transactions conducted since noon Oct. 6.

The U.K. Treasury transferred Kaupthing unit Singer & Friedlander's deposit business to ING Groep NV and put the rest of the business under administration after the unit went into default, the Treasury said in a statement.

Iceland's government will ``immediately review'' the matter with a view to finding ``a mutually satisfactory solution,'' the foreign ministry said in a statement distributed by the Iceland stock exchange.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;