Iceland headed for bankruptcy; PM seeks $5.44-billion Russian loan

It is very rare that a prime minister of a country goes on national television to say that his country is on the brink of bankruptcy. Well, Iceland's Prime Minister Geir Haarde did just that on Monday night and sought a €4 billion- ($5.44 billion) bailout loan from Russia to help tide over the economic crisis that, observers say, could invite the wrath of NATO countries.

Haarde said that ''certain countries'' had not met requests for aid in accepting currency swaps. ''The Nordic countries have stood by us, but other friends had not'', Haarde said, without naming names. ''So we now have to find new friends''. A delegation was being sent to Russia to facilitate details of a bailout loan.

Iceland tried to lift the North Pole with its bare hands, far greater than its weight in financial terms as its banks extended and expanded overseas with investors taking risky and stocky positions in its high return currency exchange that that eventually led to its Prime Minister Haarde admitting on national television, "We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy."

Iceland has formidable global reach because of its huge banking sector -  its financial services sector has asets approximately nine times Iceland's GDP of $19 billion.

Russian Prime Minister Vladimir Putin has come forward by extending the NATO country with the loan at an interest rate of 0.5 percentage point above the interbank lending rate for three to four years. Iceland's officials are travelling to Moscow to finalise the terms.

Officials say the loan would help bolster Iceland's foreign exchange reserves  and help the stability of the exchange rate of the krona.

On Tuesday, Iceland nationalised the country's second largest bank, Landsbanki, and the central bank propped up the biggest bank Kaupthing with a €500-million ($678 million) loan. The third largest bank, Glitnir, had been nationalised earlier last week.

The government also introduced emergency legislation arming itself with sweeping powers over its financial sector to force mergers or compekl banks to declare bankruptcy, aimed at restoring confidence in the sector after trading in shares of major banks was suspended and the Icelandic krona fell a quarter against the euro on Monday.

With its currency loosing value, falling imports, inflation at a high of 14 per cent and domestic interest rates at 15 per cent--  Iceland's problems are manifold. The Krona had become so volatile that the central bank was forced to introduce a currency peg at 131 per euro.

With a population of a mere 300,000, Iceland is paying heavily for an economy, which was peaking as its companies went acquiring companies across Europe with financing from its banks flush with funds from the steady deposits and pension schemes, which enabled them to offer extensive credit and overtake the gtrowth rate of the rest of the economy.

However, the huge banking and financial services sector also ended up accumulating debts estimated at over $100 billion, or almost 12 times the size of the country's economy.

A collapse of the country's financial system would have a devastating effect across Europe as most of the Icelandic banks and companies have invested heavily in that region.

The government has guaranteed all deposits, but the collapse of one of its biggest banks will have an impact overseas where many of many of them had enticed customers with high savings rates. Landsbanki, which controls Icesave, a bank in Britain, was inaccessible to customers who wantede to withdraw their funds, nor did its website offer any information.

The International Monetary Fund has sent  a team to Iceland to help, but the government chose to ignore it, given the severe conditionalities it imposes on nations that seek its funding.

The loan from Russia, on the other hand, seemed more practical, but Russia would want something in return for a loan equal in size to almost a third of the country's GDP.  However, this loan may well sound the alarm in in the US, whose relationship with Russia is almost back to the cold-war era because of the Georgian crisis.

Analysts have been pondering Moscow's strategy in the light of its increasingly harsh dealings with the West.

Commentators say that a lot of eyebrows will be raised within NATO if Iceland does accept this loan and the Icelandic government will need to ask itself and the Russians a lot of questions before accepting the loan.