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12th Apr 2024

Iceland turns to Russia to avoid bankruptcy

  • Iceland's traditional "friends" decided not to help (Photo: Johannes Jansson/norden.org)

The Icelandic government, fighting hard to prevent a collapse of its financial system, took control of the country's second biggest bank, Landsbanki, on Tuesday (7 October) and has had to run to Russia for cash to support its currency.

The country's central bank has also pegged the krona to the euro.

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Reykvjavik said it had had no choice but to turn to Russia to secure a €4 billion loan lasting for up to four years - something necessary to strengthen its foreign exchange reserves and support the krona.

"We have not received the kind of support that we were requesting from our friends. So in a situation like that one has to look for new friends," Prime Minister Geir Haarde was cited as saying by the Financial Times on Tuesday.

"In a situation like this, it's turning out that it's every man for himself, every country for itself, everybody's taking care of their best interest and that's what we are doing," he added, stopping short of revealing which countries refused to assist in the rescue operation.

Moscow has confirmed it is assessing Iceland's application and views the request "positively."

"Iceland is well known as a country with tough budgetary discipline and a high rating of reliability," Russian finance minister Alexei Kudrin said, the Financial Times reports.

The volatility of the country's currency, the krona, was so extreme that Iceland's central bank had to peg the currency to the euro at a rate of 131 krona per euro.

A spokesperson for the International Monetary Fund said that a staff team from the IMF was in Reykjavik.

Iceland has been pummelled by the ongoing financial crisis, with the prime minister earlier saying his country risks facing "national bankruptcy".

"What we are doing here is saving the domestic banking system and making sure that it can function properly," he was cited as saying by the BBC, referring to the rescue plan of Landsbanki.

The institution owns British internet bank Icesave, home to some 350,000 savers in the UK and Netherlands. Its UK operation announced yesterday it had stopped customers from withdrawing or depositing money.

In separate moves, the country's central bank injected a loan of €500 million to the largest bank Kaupthing "to facilitate operations." The government has also stepped in to nationalise the third-largest bank, Glitnir, to avert its bankruptcy.

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