Norway Offers $55.4 Billion Liquidity Boost to Commercial Banks

By Tasneem Brogger and Chris Kirkham

Oct. 13 (Bloomberg) -- Norway offered to swap as much as $55.4 billion in government bonds for commercial banks' mortgage debt, tracking government efforts worldwide to boost liquidity.

Banks will be able to use the notes as collateral to borrow funds, the government said in a statement yesterday. The program will be worth as much as 350 billion kroner and collateral requirements will be eased, it said.

Norway is ``prepared to implement necessary measures to maintain confidence in the banking system,'' the government said. ``Norwegian banks are affected by the turmoil in the international financial markets. Even if the Norwegian banks are fundamentally strong, their funding situation has deteriorated significantly.''

Governments and central banks are struggling to ease the crippling effects of the freeze in credit markets on financial systems and economies. Leaders of the 15 euro countries agreed last evening to guarantee bank borrowing and use government money to prevent big lenders from going under and stave off a recession.

The U.K. has said it will invest as much as 50 billion pounds ($87 billion) in struggling banks and the Bank of England will provide at least 200 billion pounds of loans.

U.S. Treasury Secretary Henry Paulson is also planning government investment in banks and is recruiting asset managers and other staff to carry out a $700 billion rescue plan.

Norway Sell-Off

The lack of a coordinated response in Europe last week contributed to the region's worst stock sell-off in two decades.


Norway's OBX Index, which comprises the largest companies traded in Oslo, declined on Oct. 10 to the lowest in more than three years, falling 8 percent. The index slumped 22 percent last week, the worst weekly drop since at least 2001.

Norwegians with investments in equity funds have lost as much as 100 billion kroner ($15.8 billion) since the end of June, Oslo- based Dagens Naeringsliv reported on Oct. 11, citing Nordea Bank AB Chief Economist Steinar Juel.

Domestic investors are taking their money out of banks or considering sending it abroad amid concern over the safety of deposits, the same paper reported on Oct. 9.

Nordic neighbor Iceland has been hardest hit in the region. The government last week 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.

Central Bank Actions

Glitnir Bank hf, Landsbanki Island hf and Kaupthing are unable to finance about $61 billion of debt, 12 times the size of the economy, according to data compiled by Bloomberg. The local currency plunged in value even after central bank efforts to peg its value to the euro and government is seeking a loan from Russia and may ask for aid from the International Monetary Fund.

Norway's government said the local branch of Kaupthing Bank hf would be placed under public administration, Agence France- Presse reported last night, citing the Finance Ministry.

Central banks have also been acting to counter the impact of the crisis. Norways's central bank last week brought forward an interest rate meeting to Oct. 15 after the U.S. Federal Reserve, the European Central Bank, Sweden's Riksbank and three other banks lowered interest rates last week in an unprecedented coordinated effort to support the global economy. Norway has kept its benchmark rate at a five-and-a-half year high of 5.75 percent since June to limit inflation amid a labor shortage.

The central bank will also issue a fixed-rate loan with a two-year maturity in an effort to help smaller banks, according to the government statement.

The Norwegian krone on Oct. 10 fell to 6.2851 per dollar, from 6.0300 a week earlier, and to 8.4873 per euro, from 8.3030.

Nordic government bonds soared last week as investors sought the safest assets. The yield on Norway's 6 percent security maturing in May 2011 was at 4.12 percent from 4.48 percent at the end of last week, according to Danske Bank A/S prices. Yields move inversely to bond prices.

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