Iceland takes over banks

Iceland’s government seized control of Kaupthing Bank, the nation’s biggest, completing the takeover of a financial industry that collapsed under the weight of foreign debt.

Iceland is guaranteeing Kaupthing’s domestic deposits and helping manage the banks to provide a “functioning domestic banking system,” the country’s Financial Supervisory Authority said Thursday.

Glitnir Bank, Landsbanki Island and Kaupthing are unable to finance about $61 billion of debt, 12 times the size of the economy, data compiled by Bloomberg show. Their collapse has affected 420,000 British and Dutch customers and has frozen assets held by universities, hospitals, councils and even London’s police force. The government is seeking a loan from Russia and may ask for aid from the International Monetary Fund to help guarantee deposits.

“This looks like a total collapse,” said Thomas Haugaard Jensen, an economist at Svenska Handelsbanken in Copenhagen. “It’ll take several years before the economy can start to return to growth.”

All trading in Iceland’s equity markets was suspended until Monday because of “unusual market conditions,” the country’s exchange said. The FSA said it planned to form a new bank with Landsbanki’s domestic operations, keeping branches, call centers and automated teller machines open.

Trading in the krona ground to a halt Thursday, after the central bank ditched an attempt to fix the exchange rate at 131 krona to the euro. Nordea Bank, the biggest Scandinavian lender, said the krona hadn’t been traded on the spot market, while the last quoted price was 340 per euro, compared with 122 a month ago.

Assets at Iceland’s three biggest banks had grown fivefold since 2004 as the companies looked to expand beyond the confines of an island with a population of 320,000, half that of Las Vegas. Much of that growth was debt-financed, helping send gross external debt to 9.55 trillion kronur at the end of the second quarter, equivalent to $276,622 for every person on the island.

The cost of borrowing in dollars for three months in London soared to the highest level this year as coordinated interest-rate reductions worldwide failed to revive lending among banks for any longer than a day, partly on concern over who holds Icelandic debt.

British taxpayers will probably face a bill of at least 2.4 billion pounds, or $4.1 billion, to compensate about 300,000 British holders of accounts at Icesave, a unit of Landsbanki, the Financial Times reported, citing unidentified British officials.