Icelandic Regulator Takes Control of Kaupthing Bank

By Tasneem Brogger

Oct. 9 (Bloomberg) -- Iceland's government seized control of Kaupthing Bank hf, the nation's biggest bank, completing the takeover of a banking industry that has collapsed under the weight of its foreign debt.

Kaupthing's domestic deposits are fully guaranteed and the aim of the takeover is to provide a ``functioning domestic banking system,'' the country's Financial Supervisory Authority said in a statement on its Web site today.

The banks are saddled with about $61 billion of debt, Bloomberg data show, and the government is seeking a loan from Russia and may ask for aid from the International Monetary Fund. Regulators this week took over the second- and third-largest lenders, Glitnir Bank hf and Landsbanki Islands hf, while the central bank ditched an attempt to fix the krona as investors fled.

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

The central bank had tried to fix the trade-weighted krona index at 175, corresponding to 131 against the euro. Nordea Bank AB, the biggest Scandinavian lender, said yesterday the price suggested by bid/ask spreads in pre-market trading was 255 per euro, 49 percent below the rate targeted by the bank.

Russia, IMF

Iceland will start talks with Russia on Tuesday to secure a loan of as much as 4 billion euros ($5.48 billion), Prime Minister Geir Haarde said late yesterday. He added that loans from the IMF and Russia ``are not mutually exclusive,'' though said the government hadn't, ``at this point at least,'' asked the IMF for a standby loan or an economic program.

Fitch Ratings Ltd. cut Iceland's long-term foreign currency issuer default rating to BBB- from A-. The rating remains on negative watch, Fitch said.

``Iceland faces a very severe recession which will result in a further deterioration in banks' domestic assets,'' Fitch said in a statement. ``It remains uncertain as to the extent that the sovereign can distance itself from the foreign liabilities of failing Icelandic banks.''

Kaupthing's entire board of directors has resigned and the FSA has appointed a committee to wind up the lender's business, the bank said in a statement today.

No Parallel

``While the winding-up committee is in control of the bank, the bank may not be made subject to enforcement, preliminary seizure or insolvency proceedings,'' Kaupthing said.

``It's difficult to find any parallels to what's happening in Iceland in the industrialized world,'' Jensen said. ``You'd have to look to emerging markets, and after the Asian crisis, for example, those economies contracted about 10 percent.''

Iceland's oversized and overly debt-reliant bank industry put it ``probably in the worst position in the developed world to cope with the ongoing credit crisis,'' Deutsche Bank AB economist Henrik Gullberg said on Oct. 7.

The debts of the Icelandic banking system are too big for the government to repay.

``There is no way that the Icelandic population can assume responsibility for the private debt'' that the banks have built up, Haarde said yesterday.

Other countries are in a better situation. The U.K.'s banks will get a 50 billion-pound ($87 billion) government lifeline and emergency loans from the central bank after the freeze in credit markets threatened to bring down the financial system.

Rate Cuts

The Federal Reserve, the European Central Bank and four other central banks lowered interest rates yesterday in a coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression. All five cut benchmark rates by 0.5 percentage point.

This year and next, Kaupthing has 5 billion euros of debt obligations maturing, according to Bloomberg data. Glitnir's debt obligations over the same period are about 4 billion euros and Landsbanki has about 2 billion euros to finance.

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

At least 20 local authorities across the U.K. stand to lose 10s of millions of pounds as the British government refused to guarantee wholesale deposits in Icelandic banks.

Kent County Council has 50 million pounds in Landsbanki and its U.K. unit Heritable as well as in Glitnir, the Guardian reported today. Transport for London has a 40 million-pound deposit with Kaupthing, the newspaper said.