Icelanders Begin Loan Negotiations

ReutersIcelandic central bank official Sigurdur Sturla Palsson, center, leaving the Finance Ministry in Moscow on Tuesday.
A delegation from Iceland began loan negotiations at the Finance Ministry on Tuesday as the Nordic country's stock market plummeted 77 percent in its first day of trading since last week.

Iceland's financial sector, a mainstay of its economy, collapsed under the pressure of the global liquidity crisis, forcing the government to take over its three biggest banks. Its central bank prematurely said last week that Russia had granted it a 4 billion euro ($5.5 billion) loan, only to backtrack and say it would begin talks for the funds.

"We had an excellent reception here," Sigurdur Sturla Palsson, director of international and market operations at Iceland's central bank, said during a break in Tuesday's proceedings, Reuters reported.

"We haven't actually discussed an amount yet. ... We are just discussing the general financial affairs in Iceland," said Palssson, who led the delegation along with Steinar Thor Sveinsson, director of the Finance Ministry's financial management department.

Palsson said Deputy Finance Minister Dmitry Pankin chaired the talks on the Russian side.

The negotiations are planned to last a few more days this week, Iceland's central bank said in a statement. Other members of the delegation include Daniel Svavarsson, a central bank economist, and Ambassador Benedikt Asgeirsson, who will assist the committee as needed, the statement said.

Finance Minister Alexei Kudrin said last week that Russia favorably viewed Iceland's request. A ministry spokesman declined to comment Tuesday.

A spokesman for Iceland's central bank said he would have no comment in the next two days. Government officials have also expressed interest in help from the International Monetary Fund, although no figure has yet been agreed on.

If Russia were to approve a $5.5 billion loan, it would more than double Iceland's foreign currency reserves, which measured $3.6 billion at the end of August, according to the latest information available on the IMF's web site.

Russia's Central Bank said last week that its reserves stood at $546.1 billion as of Oct. 3.

Separately, Iceland's central bank said Tuesday that it drew a total of 400 million euros in exchange for its devalued krona from the central banks of Denmark and Norway under an agreement signed in May.

But even $5.5 billion from Russia would not reduce the severe burden on Iceland's national finances, said Venla Sipila, senior economist at consultancy Global Insight in London.

"It would provide crucial liquidity support in the short term ... but would not be enough to prevent further deterioration in Iceland's sovereign creditworthiness," she said in e-mailed comments. "The pressure on external reserves is immense."

In a worst-case scenario, Iceland may need more than $16 billion to pay off its banks' liabilities, Sipila said.

Iceland's benchmark OMX ICEX 15 Index crashed 77 percent on Tuesday after the government last week took control of operations at banks Kaupthing, Landsbanki and Glitnir and was forced to abandon attempts to defend the free-falling kronor. It was the first day of trading since Thursday.