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REYKJAVIK : Iceland's government announced it was taking control of the country's second-biggest bank on Tuesday as Russia said it would lend it four billion euros (5.4 billion dollars) to fend off the engulfing financial turmoil.
But all savings deposited by Icelanders were protected, officials reassured.
"The Icelandic Financial Supervisory Authority (IFSA) has, under powers granted by the Icelandic parliament, proceeded to take control of Landsbanki," Iceland's second-biggest bank, the government agency said in a statement.
The IFSA stressed that a complete guarantee for all domestic accounts announced by the government in Reykjavik on Monday would cover Landsbanki's customers.
"Landsbanki's domestic branches, call centres, cash machines and Internet operations will be open for business as usual," it said.
"The action taken by the IFSA is a necessary first step in achieving the objectives of the Icelandic government and parliament to ensure the continued orderly operation of domestic banking and the safety of domestic deposits," it added.
However, the British arm of Iceland's Landsbanki stopped British customers withdrawing or depositing money on Tuesday, it announced.
The IFSA announcement came a week after the Icelandic government said it would take control of 75 percent of the country's third-largest bank, Glitnir, and as the country's biggest bank Kaupthing said it had received a 500-million-euro loan from the central bank.
And on Monday, Prime Minister Geir Haarde said his government was ready to take control of all the island's banks to ward off the prospect of national bankruptcy.
"There is a very real danger ... that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy," Haarde said in an ominous televised speech.
A new law passed by parliament Monday enables the government to take control of financial institutions and shareholders' meetings, fire board members, take over assets, merge institutions, block the movement of funds and force institutions to declare bankruptcy.
The country's central bank meanwhile said on Tuesday that Russia had agreed to grant it a loan of four billion euros.
"Russia (will) grant the central bank a loan in the amount of four billion euros," the bank said in a statement.
"The maturity (loan duration) is three to four years," it said, adding that Russian Prime Minister Vladimir Putin had confirmed Moscow's decision.
"This loan significantly bolsters the foreign exchange reserves of the central bank of Iceland and thus underpins the stability of the exchange rate of the krona," it added.
Trading in all financial shares, including all the major banks, remained suspended on the Reykjavik stock exchange Tuesday after a full day of non-trading Monday.
Iceland, long dependent on its fishing industry, is a nation of just 313,000 people whose banks have invested aggressively abroad in recent years, enabling it to experience ballooning prosperity and become one of the world's wealthiest nations.
The growth of the finance sector -- which Haarde described on Monday as "something akin to a fairytale" -- has however made Iceland particularly vulnerable to the current global turmoil.
Its finance sector represents a huge part of the island's economy -- eight times its gross domestic product.
Banks and investment funds are interlinked through cross share dealings so any damage to one side has an automatic knock-on effect on other institutions.
Because of its prosperity in recent years, there has been an overheating of the Icelandic economy with inflation soaring to 14.5 percent and the central bank increasing its main interest rate sharply to 15.5 percent as a result.
Growth has largely been built on the meteoric rise of the banking and financial sector, which today represents two-thirds of the market capitalisation of Reykjavik's OMX 15 stock exchange index.
Its currency, the krona, has tumbled since the start of the US financial woes last year, losing 45.9 percent of its value against the euro since July 2007 as foreign investors lost confidence.
- AFP /ls
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