Iceland's Krona Pegged; Government Takes Over Lender Landsbanki

By Bo Nielsen

Oct. 7 (Bloomberg) -- Iceland pegged the krona to the euro at a rate 24 percent stronger than yesterday's close in an effort to stabilize the currency and forestall possible bank defaults.

The krona was fixed at a rate of 131 per euro, according to the Icelandic central bank's Web site. It traded at 200 per euro as of about 11:45 a.m. in Reykjavik, according to Nordea Bank AB, Scandinavia's biggest lender. The currency slid earlier against the euro as a government regulator took control of lender Landsbanki Islands hf. The central bank said talks with Russia about receiving a 4 billion-euro ($5.4 billion) loan were ongoing.

``This means the central bank will try to intervene if the price of the krona rises above 131 per euro,' said Carl Hammer, an emerging-markets strategist in Stockholm at SEB AB. ``It's going to be tough to make that successful in the long run. Everything is going so fast that nobody knows what's true.''

The krona traded at about 150 per euro, according to Kaupthing Bank hf and Glitnir Bank prices. The krona yesterday was at 172.89 per euro.

Iceland's central bank Governor David Oddsson said an announcement the government had agreed on the loan from Russia was ``overstated'' and that talks were still ``ongoing.''

Kaupthing, Iceland's largest bank, said today the central bank agreed to lend it 500 million euros.

``The actions of the authorities over the last 24 hours suggest that this may in fact be a solvency crisis and that liquidity injections would not have helped,'' Beat Siegenthaler, chief strategist for emerging markets at TD Securities Ltd. in London, wrote in a research report today.

`Danger Real'

``The danger is real that the Icelandic economy would be sucked, along with banks, under the waves and the nation would become bankrupt,'' Icelandic Prime Minister Geir Haarde said at a press conference yesterday in Reykjavik.

Standard & Poor's cut Iceland's long-term credit rating to BBB+ from A+ and the foreign-currency rating to BBB from A- yesterday. The rating company now predicts an economic contraction ``much sharper than we had foreseen,'' which is likely to result in lower government revenue.

Icelandic banks including Kaupthing and Landsbanki were suspended from trading in Reykjavik because of concern about the pricing of their shares.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net