Iceland plunges deeper into crisis amid budding row with London
2008-10-08

Category Bankruptcy Nations Iceland U.K. Sweden Finland Category Regions Regions Europe Source (AFP)

Iceland's recovery from the financial crisis will take years, Prime Minister Geir Haarde said Wednesday, as the country's economy threatened to collapse.

Haarde, who earlier this week warned of a possible national bankruptcy as the country's financial sector teetered on the verge of complete failure, told reporters it would take "years, but probably not very many" before the economy was back to strength.

"We're optimistic, we have a positive attitude," he said.

His comments, however, came amid a flood of ominous news from the Atlantic island nation.

Iceland's central bank announced it was abandoning efforts to shore up the national currency, a diplomatic row erupted with longtime ally London over British savings in frozen Icelandic banks, and several Icelandic banks began selling off foreign subsidiaries.

More than a thousand worried Icelanders gathered in central Reykjavik to express their anxiety about the crisis holding their country in an iron grip and which has led the Icelandic krona to lose half its value against the euro since the beginning of the year.

The central bank said it would no longer try to prop up the krona, citing "insufficient support" for the exchange rate it had locked in at 131 kronur to the euro on Tuesday.

The announcement came two days after the prime minister presented emergency laws to save the island's giant financial sector and ward off national bankruptcy.

The measures allowed the government to take control of all banks and financial institutions, take over assets, merge institutions and force institutions to declare bankruptcy.

The government has since Tuesday nationalised two of the country's three biggest banks, Glitnir and Landsbanki.

Glitnir's subsidiaries in Sweden and Finland were put up for sale on Wednesday, while the Swedish subsidiary of Iceland's biggest bank Kaupthing was also put up for sale after receiving a 514-million-euro (701-million-dollar) loan from the Swedish central bank.

Kaupthing's parent company in Reykjavik announced a day earlier it had received a 500-million-euro loan from Iceland's central bank to facilitate operations.

The nationalisation of Landsbanki meant that accounts in two British subsidiaries, Icesave and Heritable, were frozen, prompting Britain to take legal action against Iceland Wednesday in a bid to recover money belonging to British customers threatened with losing their savings.

"The Icelandic government have told me, believe it or not, they have no intention of honouring their obligations there," finance minister Alistair Darling told BBC radio, adding that London would compensate savers due to "extraordinary circumstances."

Haarde later said in a statement the Icelandic and British governments would "immediately review" the matter to try to find a solution and safeguard the "long-standing friendship" between the two countries.

Iceland, a country of just 313,000 people, long dependent on its fishing industry, has seen its banks invest aggressively abroad in recent years, enabling it to experience ballooning prosperity and become one of the world's wealthiest nations.

The International Monetary Fund said Monday it had sent a team to Iceland to examine the situation although Haarde said Reykjavik had not asked for any economic aid from the organisation.

Icelanders expressed concerns Wednesday about the situation, but there was no general panic.

"The most difficult thing, the most scary thing today is the uncertainty. We don't know what's going on," Sif Heida Gudmundsdottir, a woman in her 30s, told AFP.