Iceland forced to seek Russian capital injection

By Tom Braithwaite in Reykjavik and Catherine Belton in Moscow

Iceland expressed disappointment on Tuesday that western allies had failed to provide support to help ease the country’s financial crisis, forcing it to turn to Russia for a €4bn loan.

“We have not received the kind of support that we were requesting from our friends,” said Geir Haarde, prime minister. “So in a situation like that one has to look for new friends.”

EDITOR’S CHOICE
Full coverage: Icelandic economy - Sep-17Lex: Iceland - Oct-07Q&A: Are my Icelandic savings safe? - Oct-07Tentative interest in Kaupthing’s London unit - Oct-07Bakkavör begins Icelandic retreat - Oct-07Falling krona exposes consumer debt - Oct-06In spite of the new friendship, Mr Haarde said it did not extend to military co-operation, refuting the suggestion that Russia might be given access to an airbase vacated by the US air force in 2006. “We are a founder member of Nato,” noted an official, “categorically denying” any such deal.

There was confusion over the status of the Russian loan, with the central bank first saying it had secured €4bn ($5.4bn, £3bn) on a four-year deal, at between 30 and 50 basis points above the London interbank offered rate, before acknowledging that the pact had yet to be finalised.

Alexei Kudrin, Russia’s finance minister, confirmed Russia had received a request from the Icelandic government for credit. “We will examine it,” he said. ”Iceland is well known as a country with tough budgetary discipline and a high rating of reliability. We see such an application ­positively.”

Iceland needs to bolster its foreign exchange reserves in an attempt to shore up the krona, whose depreciation has caused sharp price rises in imported goods such as fuel. The central bank said on Tuesday that it had begun intervening in currency markets to try to strengthen the krona, helping it to rise 13 per cent against the euro at IKr150.

Mr Haarde refused to say which countries had refused to offer help. He said the Nordic central banks were the only ones to come forward before Russia; they agreed a €1.5bn facility in the spring but the Icelandic government decided it needed more funds to shore up the currency. “In a situation like this it’s turning out that it’s every man for himself, every country for itself, everybody’s taking care of their best interest and that’s what we are doing,” the prime minister added.

Chris Weafer, chief strategist at Uralsib investment bank, said, “Lending money to Iceland is a very strong and clear statement from Russia that it is solvent and it has spare cash.”

“This is going to make a big difference to the Icelandic economy and it’s a very clear statement. It builds up political goodwill which could be helpful when it gets into difficult negotiations over territorial rights in the Arctic,” said Mr Weafer.

Iceland is continuing to look abroad for other funds but, if finalised, the Russian package will almost double its foreign currency reserves. Mr Haarde said the funding would be used to support the krona but would not be extended to commercial banks. He said despite ratings downgrades and a near-record price to ensure government debt from default, there would be no such move from the country. “Iceland has never defaulted on its sovereign debt and will not,” said Mr Haarde.
Copyright The Financial Times Limited 2008