Iceland's fast-moving financial crisis deepened on Wednesday as the government seized control of a large bank it had planned to prop up and the central bank failed to defend the country's currency.
Kaupthing, the island's top bank, was forced to take an emergency loan from Sweden and put its Swedish unit up for sale. Its shares dived on the Stockholm stock exchange by 34 percent before they were suspended.
The Icelandic crown, battered in recent days, plunged again and the central bank abandoned its attempt to peg the currency at 131 per euro. It was last trading at 165.
"It has become clear that this rate has insufficient support. The bank will therefore make no further attempts in this regard for the time being," the central bank said.
Home to just 300,000 people, the North Atlantic island epitomised the global credit boom that went bust 15 months ago. Its banks expanded dramatically overseas, investors took large positions in its high-yielding currency and foreign firms poured money into local projects.
Now facing financial meltdown, Iceland has taken over two of its largest banks — first Landsbanki on Tuesday and now Glitnir — and is seeking a 4 billion euros ($5.4 billion) loan from Russia.
The financial regulator said in a statement Glitnir's operations in Iceland would be open for business as usual and that domestic deposits were fully guaranteed.
Its government was due to send a delegation to Moscow to negotiate terms of a lifeline from Russia, funds the country desperately needs to bolster its foreign exchange reserves.
Russian Finance Minister Alexei Kudrin has said Moscow viewed the request positively.
The Swedish central bank said it would lend the Swedish arm of Kaupthing up to 5 billion crowns ($702 million) and said the unit had been put up for sale.
"The Riksbank has been informed that a process of selling Kaupthing Bank Sverige AB has been started," the central bank said in a document describing the details of its loan.
Prime Minister Geir Haarde will hold a news conference at 1600 GMT.
In a growing string of asset sales, Glitnir said it would sell its Swedish unit and its Finnish arm was also up for grabs.
Meanwhile, ING Direct, the online banking arm of ING Group, said it was acquiring more than 3 billion pounds ($5.3 billion) worth of British deposits from Icelandic online savings providers icesave, owned by Landsbanki, and Kaupthing Edge.
The Riksbank said it was acting to safeguard Sweden's financial stability — an indication of how interconnected a small country such as Iceland has become.
Riksbank Governor Stefan Ingves told a news conference that the central bank believed Kaupthing was solvent.
GLITNIR FATE UNCERTAIN
Iceland's central bank chief said late on Tuesday the island would emerge in strong shape but he also raised the possibility that the once third-largest bank Glitnir would not survive.
"As soon as the ratings firms and foreign lenders realise that we will not indebt the nation, the standing of Iceland will turn around, the currency will strengthen," Central Bank Governor David Oddsson said in a television interview.
Kaupthing said it was talking to authorities in Iceland about being involved in a reorganisation of Glitnir.
But Oddsson raised the prospect that the government might not pump money into Glitnir after all. "The state will not inject new capital into the bank unless there is actually a bank," he said.
The government stunned markets last week when it announced it would buy up to 75 percent in Glitnir, kicking off what has been a tumultuous 10 days for the small island nation.
With asset values around the world plunging, markets fear Iceland could suffer what its prime minister has called a national bankruptcy.
It adopted sweeping powers late on Monday that gave the state the ability to dictate banking operations and allow it to push through mergers or even force a bank to declare bankruptcy.
The government swiftly used them to dismiss the board of directors of Landsbanki and put the bank in receivership.
As nerves stretched, savers lined up outside a Kaupthing office in Stockholm and Britain threatened action on behalf of more than 50,000 savers with icesave, which has frozen its accounts.
"We are taking legal action against the Icelandic authorities," UK Prime Minister Gordon Brown told a news conference, as he announced the UK's own bank bailout.
Iceland's social affairs minister, Johanna Sigurdardottir, told local television that the government's housing fund would take over all housing loans held by banks that go under.
