Iceland pleads for calm as bank crisis deepens

• Government seizes control of country's largest bank
• Savers urged not to make large cash withdrawals

The Icelandic government seized control of the country's largest bank, Kaupthing, yesterday as its prime minister urged savers not to stampede to withdraw cash.

In a further sign of the financial storm battering the country, the stock market has been closed until Monday.

Talks are expected to begin next week over an estimated €4bn (£3.1bn) loan from Russia, while the prospect of an appeal to the International Monetary Fund remains an option, according to the prime minister, Geir Haarde.

This week Iceland took control of two other leading banks, Landsbanki and Glitnir, as Haarde warned of the risk of national bankruptcy. Yesterday the government invoked the same emergency powers to take control of Kaupthing, insisting its domestic branches, cash machines and internet operations were open for business as usual.

The news from Reykjavik appeared to vindicate the Treasury's decision on Wednesday to take control of all UK savings deposits held in its internet savings bank, Kaupthing Edge.

As soon as news of Landsbanki and Icesave's collapse emerged on Tuesday, Kaupthing struggled to stem the flow of cash out of its savings accounts as worried consumers sought to move their money.

The UK Financial Services Authority quickly decided that the investment banking arm, Kaupthing Singer & Friedlander, could no longer meet its obligations, so was in effect in default.

As a result, the Treasury used its emergency powers to transfer all but 3,000 of 160,000 savings accounts to the UK arm of the Dutch bank ING Direct. A further 22,000 Heritable Bank account holders - formerly part of Landsbanki - also had their accounts transferred.

In total, some £3bn was moved to ING....#65279; Unlike Icesave's former customers, who now face a two-month wait while their compensation claims are processed, Kaupthing savers continue to have access to their money.

At a press conference last night, Haarde asked Iceland's savers not to make attempts to battle the crisis by withdrawing large sums. "I want to emphasise ... people [should] remain calm and understand that the transaction system is fully functioning and deposits are safe," he said. "I also ask the public not to withdraw large sums of money from the banks."

Announcing the decision to take control of Kaupthing, Iceland's financial supervisory authority said the bank's domestic deposits were guaranteed and that all domestic branches, call centres, cash machines and internet operations would be open for business as usual.

"The action taken by the [authority] 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 said.

In a statement, Kaupthing said creditors had pointed out that Kaupthing Singer & Friedlander's situation put the parent bank in technical default of its loan agreements.

"It did not matter that the parent company had sufficient liquidity and its position was solid," Kaupthing said, adding that the entire board had resigned.

Haarde clarified at the news conference that although the state had taken control of the banks, it had not assumed responsibility for their assets and obligations. He added that the government had full confidence in the board of the central bank, responding to a politician's call for it to be dismissed over its handling of the crisis.

The retailer Baugur, which has its roots in Iceland but which has built a British empire including the toy shop Hamleys and the department store group House of Fraser, said its operations would be unaffected by the banking crisis.


Mark Milner and Miles Brignall

The GuardianTramp

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